The Accuracy,Market Ethic,and Individual Morality Surrounding the Profit Maximization Assumption

Abstract

This paper hinges on the distinction between “maximizing profit” and “making profit.” It recounts from Adam Smith the ethical basis for profit making, and observes in Augustin Cournot why the maximization assumption was introduced. Several introductory texts are examined to observe how profit maximization is presented. The veracity of the assumption is challenged by considering: owner/ managers who focus on utility rather than profit, corporate maximization of shareholder wealth, corporate managers who pursue personal benefits, and evidence of “corporate social responsibility.” Milton Friedman's 1970 New York Times Magazine essay, “The Social Responsibility of Business is to Increase its Profits” is used to support that the ethical justification for the market system does not rest on maximizing profit, and that individuals often have moral latitude to pursue non-pecuniary business goals alongside seeking profit. Teaching that all firms maximize profit poorly educates students concerning how many firms actually behave and it reinforces a pecuniary value.