The Profit Motive

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 Institutional economists certainly hold a variety of views regarding the role and positives or negatives of the profit motive.  There can be little doubt that the profit motive is a major part of any capitalist system regardless of its overall design.  The profit motive is the piece that moves supplies and firms to bring products and services to market. It also plays a role in the quality and long term relationships between buyers and sellers.   It has been both heralded as a great force in improving human society and the advancement of technological innovation and the force that is pulling society apart and cheapening human life.


The ILE approach is that the profit motive is a function of costs and benefits and those very costs and benefits are structured by institutional rules.  These rules help determine which costs will be borne by which party and which parties can take advantage of what  benefits.  One of the early founders of ILE, John R. Commons, had broad and multiple takes on the profit motive. I find it useful to examine one of his book reviews written in  the Political Science Quarterly in December of 1923 about a book called the “Decay of Capitalist civilization” by Sidney and Beatrice Webb from the UK.


Commons, much in line with what is often discussed as takers and makers (doers), reviews the book from the perspective of who is earning what and how that impacts the capitalist system.  According to Commons, the Webb’s view is that capitalism has evolved in the 20th century, akin to what Veblem believed, from a making society to a taking society.  The Webb’s ultimate conclusion is that the profit movie must be abolished.  Unlike today's arguments however, the takers are the wealthy classes who did little and earn much. The Webb's state that nearly half of US income or more is due to owning versus doing or making.


Commons disputes the statistics used by the Webb’s in their arguments.  He retorts that in fact most income in the United States is still based in wage and labor income and not mere owning.  He also argues that many who make money from owning, rent, interest and profit sources, are also working and doing.  His own estimate is no more than 20% of US income in 1920 was based on mere owning or taking.  He acknowledges the inequality of income and in fact points to the distinction that needs to be made about what is owned by whom that the Webb’s fail to make.


The Webbs also argue that democracy may be unable to deal with the abuses of the profit motive and the owning class.  Commons states that while this may be true, it is because of a failure of imagination to make distinctions between productive and unproductive owners of capital. Common own proposal is not to abolish the profit motive but to regulate it and tax surplus.


This battle is still being played out today except now it is often stated that the taking class is defined as low income people who are believed to be living off the state.  In even more recent times, the wealth of Silicon Valley is being challenged as perhaps less due to skill and more due to monopoly power and the production of surplus value.  The battle over the profit movie is alive and well in the 21st century. Each era must define the scope and proper role of the profit movie and not rely on an argument that profits are simply natural.  Profits, of any sort or type, are partially or even largely a function of institutional rules and subject to change.  There may be a variety of consequences from changing these rules but that should not stop us from debating these issues.


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