Q-How does profit motive affect innovation and economic productivity? (Pages 43 – 50).
Profit Motive Leads to Innovation and Increased Productivity According to Bruno Leone (1986), “In order to build and maintain a profitable concern, a businessman’s products would have to be needed, well-made, and competitively priced . Moreover, he would be creating jobs and helping to expand the general economy” (18). Profit motive promotes efficiency and productivity in an economy. The investor is constantly seeking new ways to effectively and efficiently provide goods and services to consumer, because, Mises (1986) stated, “Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers” (40). The behavior of the consumer makes profits and losses occur, and this can result in a change of ownership from those who are inefficient to the efficient ones. Webley (1967) stated, “The successful firms are those that respond to the demands of the market” (36).
Profit motive does not only provide a necessary ingredient in wealth creation, but it is also the engine that drives research, along with development, leading to new innovation and, consequently, increase in productivity. According to Frank Broadway (1967), “Modern capitalism had its genesis in the urge to exploit and develop the possibilities of technical innovation” (p. 42). He explained that since consumers are kings in decision making as to goods bought, and in an effort to attract the favor of consumers producers must innovate to come up with better or cheaper products. In the competitive business world, entrepreneurs are constantly improving products and their processes. It is to innovateor die. However, innovation is risky and expensive. Broadway (1967) stated, “Successful innovations must not only pay for themselves. They must ultimately pay for all the unsuccessful attempts to develop and innovate. And if they have to provide the stimulus and resources for further innovation, they must earn worthwhile profits. These profits must be significantly higher than those on established products, or innovation becomes an uneconomic exercise” (52). According to Robert Tracinski (2010),“Each individual thinker has the opportunity to put his ideas into practice and to succeed or fail based on the merits of his idea. Those who succeed bring us new and improved products and an ever-lower cost, creating economic progress and prosperity” (48).He further explained that the prospect of making a profit causes us to work harder, longer, and smarter. We take more risk because of the profit reward. “The market mechanism . . . acts in a ruthless efficient way in allocating scarce resources and in eliminating both the inefficient and the unprepared” (Webley 1967, 36).“Modern capitalism had its genesis in the urge to exploit and develop the possibilities of technical innovation” (Broadway 1967, 42).
Reasons for Innovation -First, businesspeople want to improve products and processes. Second, innovation is the result of competition. The ideology in business is to innovate or die. Third, consumers are kings in the decision making as to goods bought; therefore, in an effort to attract the favor of consumers, one must innovate to come up with better or cheaper products. Broadway (1967) posited, The spectacular success of capitalism transforming the world through innovation is a matter of historic fact .the inventive success of capitalism rest firmly on the foundation that the system provides both the resources to finance the work of innovation and the incentive to shoulder the high risks it involves. (50)Increased taxes on businesses will reduce the resources available for companies to plough back into innovation and, at the same time, will diminish the prospective rewards of the innovator (Broadway 1967, 50). A nation that discourages innovation this way will be left behind. Broadway (1967) also stated that “capitalism, the world over, has proved itself an unparalleled vehicle for beneficial innovation. Nothing else so far tried has come anywhere near achieving its innovative speed, scope and economy” (p. 57).
However, innovation is risky and expensive, as Broadway (1967) concluded, Successful innovations must not only pay for themselves, they must ultimately pay for all the unsuccessful attempts to develop and innovate. And if they have to provide the stimulus and resources for further innovation they must earn worthwhile profits. These profits must be significantly higher than those on established products, or innovation becomes an uneconomic exercise. (52). To increase profits, businesses are constantly investing in ways to increase the efficiency in which goods and services are produced. This leads to innovation and technological improvements. This process drives job creation and economic growth. According to Robert Lampman (1967),
Transcribed Image Text:Critics' obsession with the self-interest concept associated with
investment undertakings is missing the fact that regardless of the
motive, there are tremendous, positive, unintended consequences
that are a benefit to society. What people care about is whether the
goods or services are delivered, not the motives of those who
provide them. It is irrelevant whether a physician studied medicine
for his or her personal gain. What matters most is that the sick gets
well and lives are saved. Does it matter whether the Wright
brothers had selfish intentions in their quest to invent the airplane?
The consequence of their actions has led to tremendous
improvement in transportation. Similarly, for the economy, as an
outcome of the “selfish" intentions of producers, income is
generated and jobs are created, which lead to economic prosperity.
Another important role of profit is to help evaluate the efficiency
in the use of resources. It is an integral part of the learning process
of the market (Nilsson 2003). In capitalism, business businesses
aim to earn the most profit they can. Their intentions are not
necessarily to create jobs or provide health care for employees.
However, in the process of maximizing profit, jobs are created and
fringe benefits are received by employees. Therefore, the morality
of profit seeking is not relevant to the judgment of capitalism. The
results of profit motive are the chain reactions of increasing
employment, increasing income, and the increasing government
revenue through taxation, which lead to economic prosperity and
the overall benefit of the society. If consumers receive the goods
and services they want at an affordable price, it does not matter
what the intentions of the producers were to begin with. In a
capitalist society guided by effective laws and institutions, profit
motive cannot come at the expense of everything else.
Due to profit motive, there is investment and business survival in a
capitalist society that requires innovation. The activities associated
with a market system have led to an enhancement in the overall
well-being of humankind. It is irrelevant whether Bill Gates had a
selfish money-making motive for his work with computers. Elon
Musk, whose net worth is over US $19 billion, would certainly be
criticized by many for being one of the 1% who is filthy rich
(Forbes 2018).They would not see the inventor, engineer, and/or
investor who have made significant contributions in the areas of
space technology and transportation engineering, as well as the
technological enhancements in which people are conducting
business. No one should care about the intentions of the Wright
brothers. Does it matter that Steve Jobs just wanted to be a
billionaire or that those inventors during the Industrial Revolution
just wanted material gain? Think about the "selfish" motive of all
those involved in the discoveries in medicine and the advancement
in technology and scientific improvement. Rather, think about how
digital technology and medical advancement have transformed the
world for the better. Remember that these discoveries and
innovations required huge funding. In capitalist societies, profit is
the source of income and prosperity. Bowles(2007) stated, The
transition to capitalism also required a change in motivation so that
"profit seeking" became legitimate and the primary motive for
entering into production. It is the profit motive that not only gives
capitalism its coherence as an abstract system but also explains its
dynamism through time. (12)
Transcribed Image Text:The growth in the value of product per person is generally
understood to arise out of more capital, economies of scale and
specialization, better management and business, innovation with
regard both to the end product and the techniques of production,
greater mobility of factors, and improved quality of labor. All of
these in turn yield additional income, which in the benign spiral,
makes possible more and higher quality inputs for further growth.
(174) Benefits of innovation include increased production, lower
price, and increase in quality of goods. Donlan (2008)demonstrated
by using Henry Ford's experience, which was the beneficial chain
reaction of increased productivity. Using a new method of building
the Model T vehicle, the company adopted a sort of assembly-line
production. After one year, vehicles were produced eight times
faster than the conventional method. To reinforce the point, he
showed how, in 1914, Ford had 13,000 employees to make
260,720 cars. Combined, all other companies in the car industry
made 286,770 cars using 66,350 workers. Ford was able to drop
the price of its Model Ts from US $825 to US $275. Cars were
now very affordable to many people. As a result, between 1914
and 1916, the company's profit doubled from US $30 million to
US $60 million, despite increasing workers' wages to US $5 a day,
which was twice the going pay rate in the area. "The principal
factor distinguishing high-paid labor from low-paid labor is
productivity, and productivity is the product of investment. High-
paid labor always involves labor of the mind, nowadays assisted by
computers, which organizes and motivates the labor muscle and
machines" (Donlan 2008, 188–189). “High productivity generates
high profits, and high profits lead quickly to unequal distributions
of wealth and income that favors the owners of capital" (p. 192).
Donlan (2008) explained that because the wealth of the nation rises
continually and because scientists, engineers, and manufacturers
are continually providing more and better goods, the average
American standard of living rises accordingly. Americans whose
standard of living does not rise as fast as the average fall toward
poverty compared to the average. And those poor people whose
standard of living rises with the average remain poor by
comparison-but they have more stuff. (194) Donlan (2008)
further stated that investment seeks the highest return, which
means the aim of investment is to put capital to work, enhancing
the productivity of ordinary labor. Returns on investment can be
reinvested . .Capital formation-the accumulation of wealth-must
be the first concern for a country interested in growth through
investment. (195) Janos Kornai (2000) emphasized that compared
to other economic systems in the capitalist society, technological
development is faster because of the greater incentives to pursue
innovations. Capitalism and entrepreneurship clear the way for
enterprise and initiation in the economy, resulting in improved
efficiency in production and increase labor productivity. According
to Robert Lampman (1967),The greatest achievements of modern
economies has been the raising of living standards of the common
man and the reduction of the share of the population in poverty...
the growth in the value of product per person is generally
understood to arise out of more capital, economies of scale and
specialization, better management and business, innovation with
regard both to the end product and the techniques of production,
greater mobility of factors, and improved quality of labor. All these
in turn yield additional income, which, in the benign spiral, makes
possible more and higher quality inputs for further growth. (174)
The outcome, not the motive, matters. As Horwitz (2008)
explained, "Where profits are concerned, the consequences and
outcomes outweigh the motive and intentions (##)."
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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