How can profit motive lead to income inequality? (Pages 33 – 35)
pages 33
Investment is necessary but risky. It has already been established that capitalism is the most effective and efficient system for wealth creation and economic prosperity. The path to economic success consists in investment that is guided by supportive government policies and institutions. The success of capitalism, in turn, is derived from the success of business enterprises in their roles as job creators and income-generating agents. However, investment requires enormous risk and sacrifice, along with one’s willingness to undertake such risky ventures, which are based on the potential returns on the investment capital. A successful investor must not only possess organizational and managerial skills, but he or she must also be willing to take enormous risks. Tanner (2016) made the point that one of the prerequisites for economic growth is to have individuals who are ambitious, skilled risk-takers and who are ever striving for more in order to stimulate economic prosperity. When they are rewarded for their efforts, their skills, their ambitions, and their risks, greater inequality will be the result. Freund (2016) argued that the emergence of extreme wealth for individuals and companies is usually part of the structural economic transformation that results in job creation and increases workers’ income. Creation of extreme wealth is part of economic
Transcribed Image Text:Capitalism and Inequality
A capitalist system cannot survive without investment, and
potential profit is the reward for investment spending. Therefore,
without the likelihood of profits, there would be no investments.
In fact, Utley (1967) agreed that profit making is an integral part
of the market economy and it is an incentive for risk-taking and a
necessity for wealth production.
When speaking ofmatters relating to profit, it is very important
that profit is defined. According to Investopedia (2017), profit is
"a financial benefit that is realized when the amount of revenue
gained from a business activity exceeds the expenses, costs, and
taxes needed to sustain the activity" (para. 1). Meanwhile, the
English Collins Dictionary (n.d.) defines profit motive as “the
incentive or desire to work or establish a business to gain a profit
or make financial gains." John Mackey and Raj Sisodia (2013)
pointed out that profits are essential and a desirable outcome for a
business. Indeed, it is socially irresponsible to run a business that
does not consistently generate profits. Profitable companies can
grow and contribute to fulfilling the higher purposes, and their
profits fuel the growth and progress of our society. Through taxes,
business profits help fund government and the many services
people rely on.
Profit vs. Loss
As Ludwig von Mises (1986) stated,
Profits are the driving force of the market economy.
The greater the profits, the better the needs of the
consumers are supplied. For profits can only be reaped
by removing discrepancies between the demand of
the consumers and the previous state of production
activities. He who serves the public best, makes
the highest profits. In fighting profits governments
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Transcribed Image Text:development. "Wealth accrues to the creators of the large
companies that move people out of agriculture and into modern
production" (Freund 2016, 161).
Huge risks include the loss of personal finance, borrowed
capital, and opportunity costs of all that must be forgone when
investing. More often, it may be necessary to operate at a loss
for many years before realizing some return on the investment.
Remember, an entrepreneur's success is not guaranteed. In the
business world, the future is uncertain and entrepreneurs cannot
accurately predict the outcome of an investment. Situations
may change during the investment that can lead to conditions
not conducive to a business' success. For example, government
regulations, market conditions, consumers' tastes, and competition
can change. As an entrepreneur, one is at the mercy of these
changing conditions.
There must be an attractive incentive to cause individuals
and companies to take the huge risks involving large sums of
borrowed
money, personal life savings, and time, along with other
resources on their investments. There must be some perceived
monetary reward and benefit. In fact, the expected benefits must
outweigh the expected costs. This potential reward is called profit.
Therefore, the profit motive (Collins English Dictionary, n.d.) is
"of paramount importance in establishing a successful capitalist
system." Bowles (2007) stated,
The profit motive provides capitalism with the
incentives for dynamism, a dynamism, which
allows (competitive) capitalism to allocate resources
efficiently in the short run and to maximize
growth in the long run. Both the market and the
profit motive the institution of property for their
successful operation, an institution, which can be
justified morally and pragmatically. (51)
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Definition Definition Increase in the amount of goods and services produced by a country in a given period of time compared to an earlier period. Economic growth is generally coupled with a rise in national income or the purchasing power of individuals. It is often measured in terms of the increase in a country's gross domestic product (GDP), or the overall monetary value of all the complete or final services and goods that a country can produce within its domestic boundaries in a specific period.
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