Profits

One of the most important functions of business is to sell goods and services for profit. In the economic view of the firm, business decision makers are assumed to desire as large a profit as possible for their organization, and a good society develops conditions for businesses to produce and sell valuable products and services as efficiently as possible in order to improve the quality of human life. In this economic view, opportunities to make profits are signals that society's resources can be used more efficiently.

For a business, profit refers to the amount of revenue it receives from customers in excess of the costs it incurs over a defined period of time. This profit is a form of wealth that belongs to the owners of the business. Business owners can reinvest their profit to produce more goods and services that people value, or they may exercise their liberty to use their profits to further their own personal satisfaction. Government may tax profit to use for other social purposes and public goods.

A business by definition is an organization that intends to make a profit by selling goods and services that its customers value. When it conducts its activities with trustworthy integrity, then its profit after its cost of capital is a monetary measure of the increase in social wealth that the business created by transforming a portion of society's supplies into more valuable goods and services. Thus, many view profit as a moral good when it is generated within the bounds of economic efficiency and good moral character. Adam Smith, for example, argued in the 19th century that self-interested exchange brings about welfare by maximizing the output of scarce goods and services subject to the constraints of costs when it is bounded by a competitive marketplace operating with principles of honesty, trust, social contract, and protection of private property. Milton Friedman, Nobel Prize–winning economist of the 20th century, followed this perspective when he famously wrote that the ethical responsibility of business is to generate as much profit as is legally and honestly possible.

Most people agree, however, that profit can be unacceptably excessive. The great religions of the world, for example, have guidelines for principled profit in commerce—that it reflect fair value for buyer and seller, that it not be an outcome of hoarding that unfairly limits the availability of products, and that it not be an obstacle to broad distribution of essential goods throughout society. Similarly, most governments have commercial laws to prevent businesses from taking advantage of short-term circumstances, such as natural disasters or wars, that may create opportunities for excessive, or windfall, profits. Many businesses voluntarily adopt codes of conduct that call for fair negotiations with customers and suppliers so that all parties are satisfied with the value and reasonable profit created.

Despite these guidelines to constrain excessive profits, many argue that business naturally tends toward excessive profits whenever it does not directly pay for all the costs of its effects on environment and community. For example, a business's profit might be considered excessive if the business does not directly bear all the costs of rectifying pollution it generates in its operations or of unemployment it causes when it lays off workers. These perspectives focus attention on the deficiencies of fairness in profit making whenever business is granted liberty to shift cost away from itself and onto society.

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