Describe the key limitations to the application of profit maximization to ethical decision making

Describe the key limitations to the application of profit maximization to ethical decision making

First to apply the key principles of profit maximization. And second, to identify the key limitations to the application of profit maximization to ethical decision making.

Let’s talk about the key principles of profit maximization. It goes like this. The objective of a business decision should be to maximize the organization’s profit and shareholder owner monetary value. This means profit and shareholder owner value in the long term, not the short term.

Let me go back a step for a second. You might have said to someone, oh, I’m taking a class this term in business ethics. And you might have got sort of a laugh and said, well, you’ve got business and you’ve got ethics, there’s no such thing as business ethics. And what this principle is trying to argue is that there is such a thing as business ethics. That you can make money for the corporation. Maximize it’s profit actually, and still be doing the ethical right thing.

However, there’s one set of conditions under which this applies, and beyond that it doesn’t apply. But let’s talk about where it does apply. Following the constraints. There’s three. Before I get to them, I want to point out that these are assumptions that must be met for profit maximization to be an ethical perspective to decision making. Without these constraints being met, profit maximization is a meaningless thing in the context of ethics.

The constraints are, the law must be obeyed. That one’s kind of obvious. There must be open and free competition. And there must be no deception or fraud. The latter two might ring a bell if you took say, in your studies some time ago, a micro-economics class when the course talked about perfect competition and perfect markets and all that kind of thing. I’ll come back to that in a second.

Again, why are these constraints necessary? Otherwise according to theory, societal economic benefit may not be maximized. And importantly, if they are, societal economic benefit will be maximized according to the theory.

So now, I just want to talk for a second about the theory. I’m not going to go into micro- economic theory. Don’t worry about it. And if you didn’t take it, don’t worry about that either. I

guess you’ll take my word for the idea though, that’s been shown an economic theory, that if corporations do maximize profit and follow the constraints, the society’s economic benefit will be maximized. The size of the economic pie produced by society will be the most it can possibly be.

I’ll use an example. I don’t know if this will resonate with you or not. But imagine a tool, not an ethical decision tool, but a lawnmower. You’ve got a lawnmower. What’s that tool good for? Well, it’s good for mowing the lawn. It’s really not good for anything else. You can’t use it to trim the hedges. You can’t use it to clear the snow off the sidewalk. You can’t use it for anything but mowing the lawn.

And that’s the way economists view organizations, corporations. They’re good for one thing, making money. If you try to use them for something else, they’re likely to screw it up. Just as if I try to use my lawnmower to do anything but mow the lawn, is probably going to make a mess of the project.

So what’s an example? Well, let’s say a corporation decides to engage in pollution control beyond what the law requires. It will probably lower pollution, but it will cost more for consumers and will produce less profit for shareholders. And this perspective would say it’s wrong. Profit maximization as an ethical decision tool would say, it’s wrong. Because what you’re doing in effect is taxing the consumers, taxing the shareholders, and then deciding how those taxes will be spent. It’s just wrong and it’s not going to result in the ultimate economic benefit to society.

Let corporations do what they do well. Make money. Now, if you’ve got a problem with pollution in your community or in society, well, that’s where the government comes in. The government should engage in pollution controls necessary to make sure the pollution is just the right amount. Not too little, not too much, given how much it might cost to reduce it further. Those are constraints.

Now, just some things to be aware of. In applying profit maximization to a business decision, always assess whether the constraints are met. You might think I’m obsessing about these constraints. And I maybe am, but that’s because it should be really a matter of reflex. If you ultimately use this ethical decision tool and say to yourself, I’m going to make the decision that makes my company the most money.

From a reflex, automatically, you should be saying, well, wait, are the constraints met? Am I

obeying the law? Is there open and free competition? Is there deception or fraud in what I’m doing? And if so, forget it. Then you’re not applying that ethical decision tool.

Also, this theory relates to a corporation. It is not a perspective that relates to an individual’s personal profit maximization. So it’s not about you maximizing your own personal profit and obeying the constraints or whatever. That doesn’t relate to you as an individual decision maker, unless of course you’re a corporation. It only relates to a corporation.

Limitations. The way I see all these ethical decision tools– in other video lectures they talk about two others, Unitarianism and Universalism, is that I see you maybe to some extent as a shopper are trying to figure out which one is right for you in a given instance. And maybe it’s not that different from buying oh, I don’t know, a car, a phone, a sweater. And that you look at the– what’s good about it?

You look at all the positives and how it makes sense to you. But then you also worry about well, wait a minute, what are the problems with it? What are the limitations? And profit maximization definitely has limitations as do the others. And I want to go through them with you so you can be in a sense, an informed consumer of this decision tool for making ethical decisions.

One of them is the assumption of open and free competition is often not met. Think about it. Have you ever heard of a business say, well, we don’t want too much market share because we want to leave a bunch for the competitors to make sure they’re OK? Now, you never hear that. You always hear a corporation saying, we got to increase our market share or at least hold what we have.

And so you can find instances of many organizations that have dominance in the market. And even the most market oriented micro-economic theorist would say, that’s not right. They’re the first ones who would say, that’s unethical to try to totally dominate the market and eliminate the competition.

The pursuit of profit maximization, even given the constraints, can cause undue harm to some stakeholders. Undo in your opinion. You might have heard this old-school story. In the 1970s. There was a car called a Ford Pinto. And it was designed incorrectly in terms of where the gas tank was positioned. If you hit the car from the rear, you could explode the gas tank causing harm and injury and everything else.

Now, Ford became aware of this, the executives met and they made a decision not to recall the car and fix the gas tank. They knew it was going to cause a significant number of deaths and injuries, but they chose, based on a profit maximization analysis, to not recall the car, thinking well, the cost of recalling the car would be more than the cost of not recalling the car and accepting in settling all the lawsuits and so forth that were likely to get.

Now, that struck many people as pretty darned cold once it became known. And I think a lot of people would say, even today, that that was a wrong ethical decision even though in their view at the time it maximized their profit. Just quickly, as it turned out, they had to recall the car anyway because of so much consumer backlash. But at the time they thought it would maximize profit.

So that’s where I want to introduce the term negative externalities. It sounds like a very complicated term, but it’s one used by economists. And I think is an important term to have in your mind. Negative externalities are basically effects on others, not necessarily part of the business operation.

So all these a maimed and injured auto drivers would be externalities and obviously negative externalities. And so keep thinking about the term negative externalities as you’re applying profit maximization. And make sure that none of the negative externalities that might happen, in your view, represent undue harm.

Another limitation. Society’s economic benefit may be maximized by pursuit of profit maximization. OK fine. But not necessarily society’s overall social benefit. Now, think about what’s kind of going on today. Corporations maximizing profit, some would argue is causing a great deal of income inequality. And a lot of people believe that’s not just or fair. And that the social benefit of organizations pursuit of profit maximization, yeah, it creates the most economic benefit perhaps, but not the social benefit because of things like income inequality.

It puts a great deal of pressure on the law to reflect society’s values. I used an example a little bit ago about pollution control. And I said, according to profit maximization, corporations shouldn’t engage in pollution control any more than what the law requires. Right. OK. But let’s think about that. What the law requires. How does the law get determined?

Well, what if the corporation itself, or corporations, have a lot of influence on the law making process? And we’ve all heard a lot about that in the news lately where lobbying and so forth affects the votes you see in Congress and legislatures and so forth. And so yeah, corporations

are supposed to obey the law according to the profit maximization perspective, but what happens when corporations help influence the law in their own self-interest?

So that’s not a good thing, at least in terms of profit maximization as an ethical perspective. And so again, in applying it, you have to make sure that the law really is objective and reflects society’s values.

It’s hard to define deception. What is deception? I bet you’ve probably never given a lot of time to think about this issue. But deception is certainly lying. That’s deception, if I lie. But what if I just don’t tell you everything you need to know? Is that deception? In what instance is that deception and what instances is it not deception? Comes up a lot in marketing. Yes, lying in marketing a product is wrong. We can agree on that one. And I think profit maximization would say that’s wrong, it’s deception. It violates the constraint.

However, what if you don’t tell the consumer everything they need to know and you put the burden on the consumer to figure it out for themselves? Where do we draw the line on deception? That’s where it gets hard to define deception.

And lastly, biases may affect decision making. I have a separate video vault lecture on biases in the context of ethics. And so I’ll refer you to that. But it suffices to say right now, all of the stuff we’ve talked about, assume that you’re a very unbiased decision-maker. That you’re not acting in your own self-interest or overly in your corporation self-interest beyond what the perspective says.

So again, the learning objectives. Apply the key principles of profit maximization and of course, identify the key limitations to the application of profit maximization.

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