We often hear about the objective of business: to maximize profit. There is a big problem in it.
Maximization means trying to reach the highest possible level of something, a kind of theoretical limit. This might often mean to be an opportunist (in a bad sense) to gouge out profit from customers who might be “unwillingly” paying an extra price for something due to sheer emergency, basic necessity, or for some other reasons. While some economists would argue that nothing is wrong in here because market mechanism means letting demand and supply decide on the price, I think here lies an important economic and legal issue. Even though an exorbitant price might be a result of interaction of demand and supply, two problems are here.
First, the very notion that demand and supply interacts to decide on the price is somewhat fuzzy in a developing country like ours. While demand and supply interacts for sure, how about manipulation through syndication of stock builders who would illegally influence the potential supply and raise the price? Of course, this is a profit maximization scheme which is not only illegal, but also unethical. This is a legal and ethical issue, and a free market economy does not mean to let demand and supply decide market price based on illegal activities. Legal framework is extremely important for a “fair play” in open market economy, otherwise the very nature of market mechanism itself would fail due to ouster of fair players and influx of anarchist in the market.
Second, even if we assume that this unfair play of profit maximization is acceptable in the short-run, then what our welfare economists would say of its consequences? For sure, Pareto Optimality is violated, which defines welfare activities as anything that does not harm anything else while promoting welfare for an entity. Profit maximization, in most cases, would maximize welfare of businesses, but if it means harms to consumers by charging exorbitant price, that would mean the real income of consumers is affected lowering consumers’ welfare. Thus, promoting welfare by harming another entity is not welcome.
Therefore, we need to redefine the objective of business. How about business means any entity that runs to “Optimize profit”, and not “Maximize profit”? Optimization refers to the attempt to reach a level of achievement by satisfying constraints. These constraints, ideally, must include legal, social, and ethical constraints that a society should live by. Optimization, if practiced, would lead to a society where everybody’s welfare would be promoted. Naturally, consumers and businesses would then live in peace and harmony as integral and trusted partners to each other’s satisfactory and profitable existence.