Can You Control With
Profit Punishment?
One can argue that regulation is needed to keep management from violating the social contract between the enterprise and society. Examples of how businesses in the past violated that social contract are often cited as justification for more regulation. These examples often fail to acknowledge the obvious—that regulation was necessary because of the absence of clear boundaries, or clear conversation, and that the regulation was a result of a vacuum in the social contract.
Politically progressive politicians, here in the Western Hemisphere or in Europe, are reluctant to allow permanent concentration of economic power in private hands. Lord Keynes would argue that it is the responsibility of government to regulate and protect society from rapacious capitalists. Hayek would argue that the free market automatically punishes those businesses that do evil to society. We see examples of how the Keynesian approach only inspires even more efforts to game the process. We also see examples in which social groups in the market, in overt and covert ways, attempt to pressure business leaders to change their practices.
Without a concentration of economic power, of capital and resources, the modern business enterprise in our industrial society cannot exist. If the modern business enterprise of today does not exist, our society ceases to produce the wealth that supports the standard of living we enjoy today. Look at all the modern conveniences that enable our high quality of life and you will see the product of concentrated economic power. The agrarian society of the nineteenth century disappeared in western society during the twentieth century. That change is continuing for much of the rest of the world today.
That change creates angst. The unrest we see in the Middle East is a battle between the top-down of control and the bottom-up of freedom. Some of those who do not want to see change are fighting. One man’s "freedom fighter" can be another man’s "terrorist." It all depends on your point of view.
Society must grant a charter of perpetuity and theoretical immortality to the entity of the business enterprise, and thereby it must grant a degree of authority to the managers that lead the business enterprise. Managers must accept the moral obligation granted by society to guide their businesses for the common good of both the company and the social body of which it is an organ.
Under that social contract, managers cannot base their decisions purely on the interests of the owner of the property. Society expects and requires the management of a business enterprise to assume some responsibility for the public good.
This responsibility can take a number of different forms. A classical expectation is that business managers shall operate within an ethical standard of conduct. This means that managers are expected to place the common good and the freedom of the other stakeholders above their own interests and those of the companies they work for. This ethical standard of conduct has come into question with the recent management shakeup at Berkshire Hathaway.
For the modern business enterprise to survive, it must recruit the ablest, best educated, and most dedicated available people into its service. The promise of a career or economic success is not enough to attract those people. People require a vision and a sense of mission. We human beings want to satisfy a desire to make a meaningful contribution to our community and society. Therefore, to attract the best and brightest, a business and its management must embrace public responsibility. The business enterprise must demand that management consider the enterprise’s public responsibilities at all times. Management defines and prescribes the marketing, pricing, patent, and labor policies of the enterprise.
Business decisions carry a social impact. The first responsibility of a business to society is to operate at a profit—a profit that ensures growth. Management has a moral obligation to maintain the wealth production and maintain the resources to make adequate profit to offset the risk of economic activity. By increasing the wealth-producing capacity of its resources, the enterprise increases the wealth of society. A growing enterprise creates the means for society to live, to thrive, and to pursue happiness.
Critics of capitalism argue that business managers operate only out of greed. But the history of the previous century clearly demonstrated how socialistic or communistic enslavement of wealth did much more damage to society than the greed of the captains of business. Socialist greed for power corrupted, murdered, maimed, and stunted the growth of many societies.
Look to the successful and sustained business enterprises in our world, those that have been with us for ten generations or more, and you will see business enterprises led by teams that assert the management principle that the public good must be the private good of the enterprise. Many of us depend not only on the goods and services provided by these business entities, but also on the wealth created by them; we all are investors in those enterprises. We depend on those business enterprises because they provide us our economic livelihood.
It is the moral responsibility of the managers of a business enterprise to create wealth. Management's moral responsibility is to create sufficient profit to support the sustained growth of the enterprise. That profit must be sufficient to overcome the risk of loss that the business enterprise will encounter. Profit is never a sure bet—there are fat years and there are lean years.
High taxation will always chase capital to where it is appreciated, not scorned. Only when the reward greatly outweighs the risk can a business enterprise survive withering taxation.
Excessive taxation of success is a morally corrupt form of punishment.
Articles in This Series
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