CARPE DIEM: A Tutorial for the President on Profit Maximization

http://mjperry.blogspot.com/2012/05/tutorial-for-president-on-profit.html?m=1

A Tutorial for the President on Profit Maximization

Writing in the WSJ last week, economics professor Paul Rubin "takes the community organizer-in-chief to task for his dismissive comments about profit maximization" (ht/E. Frank Stephenson):

"In justifying his attacks on Bain Capital, President Obama argues that "profit maximization" might be an appropriate goal for a private-equity firm, but not for more general public policy. This argument ignores one of the most basic premises of economics.

We economists assume that firms always maximize profits, and that profit maximization by firms (all firms, not just private-equity ones) is a very good thing. But this is not because profits are in themselves good. Rather, profit maximization is good because it leads directly to maximum benefits for consumers. Profits provide the incentive for firms to do what consumers want. 

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against "profit maximization" is an argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an economy. Consumers are of course also workers and voters. Contrary to President Obama's claim, skill at profit maximization does translate directly into skill at governing the economy. Failure to understand this simplest and most basic point is probably itself enough to disqualify someone from the presidency when economic issues are paramount."

MP: Another good time to invoke the sagacious words of Frederic Bastiat below:

"Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race."

HT: Warren Smith

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