Dogma Premise # 19

Greater profits to the owner will result in greater productivity by those whom the owner commands.

Dogma Premise #18 dubiously predicted that somehow the prospect of shareholder profits could be transmuted into motivation on the part of workers.  Dogma Premise #19 makes the even more unlikely claim that whatever motivation a firm has to succeed will be correspondingly increased by the prospect of greater rewards.  For example, if a firm would work had to make a 20% profit, it would work half again harder to make a 30% profit.

This Dogma Premise is fairly easy to dismiss on the grounds that owners have enough trouble motivating workers at all based on profits that the workers share in only marginally or not at all.  Thus, maximum motivation is already assumed based on every human resources trick in the book, and the prospect of additional profits has virtually no impact on anybody’s motivation if they do not have a significant position in profit sharing.

However, it is certainly true that a profit of 20% versus 30% makes a big difference somewhere, if not on the shop floor or cube farms.  One place it makes a difference is in investment in the business.  A business that can grow significantly will attract private investors that would fund that growth in exchange for getting all their money back plus a good share of the rewards.  The investors and owners, then, are both incented by the profit motive, although that won’t make its way to the shop floor.  At most, it will determine whether incremental operations are added to the firm.

So, for example, let us suppose that a company that manufactures adult widgets thinks it can grow significantly by adding an operation that produces widgets for children.  The participants in this new operation have their own profit motive (or not) approximately parallel to the original operation.  And if the combined enterprise does well for its owners and investors, it is because they had a good plan and executed it well, and the operation might have grown in size, but the prospect of greater profits did not produce a greater motivation.

Another place where the prospect of increased profits has a big effect is on the secondary market for the company’s stock.  Shares of the company’s stock might go up in value if increased profits were seen as a possibility, and then go down if it subsequently appears that the possibility will not be realized.  Because the company’s owners, investors, and senior management all participate as speculators, the chance to even create the appearance of revenue growth is a strong motivator, and animates many a “dog and pony show” for the media, analysts, or potential purchasers, all at the expense of actually running the business.

That the prospect of increased profits would actually motivate the only people subject to the profit motive to actually spend LESS time looking after the business is an ironic consequence of profit growth, but it is very frequently the case.  However, regardless of whether the business’s leaders get compensated to run the business or just increase its perceived value, the correlation between higher profits and greater motivation or efficiency is beyond tenuous, and therefore the justification for allowing businesses to reap very large profits cannot be to achieve any kind of economic efficiency within the firm, but only to support speculators in their quest to earn funds from non-productive activity.

It might be argued that securities speculators play a healthy role in keeping a owners and managers vigilantly pursuing ever greater profitability.  That effect is real enough, but as often as not it is a destructive force, both for the firm and for the economy.  The firm is harmed because investors can actually force the managers to harm the company in the long run in order to generate short-term gains.  The economy as a whole is harmed because the investor-pressure can force firms to distort markets and reduce competition, rather than seek efficiency gains, if that is the shortest or only clear path to increased profits.

In short, although the prospect of greater profits does affect the motivations and actions of some of the participants (especially investors and managers), the end result will not reliably be greater productivity or greater efficiency, and indeed the fruits of the increased profitability will frequently go to speculators who do not run the business at all, at the expense of those who work to sustain the business’s long-term position.

There is no plausible theory that can explain in the context of large firms how greater profits correlate with greater productivity for the firm as a whole. Therefore, a primary justification for allowing large profits -- to encourage greater efficiency and productivity -- is illusory in an economy dominated by large enterprises rather than sole proprietorships.

Dogma Premise 20

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