Economics Response

What kinds of behaviour are engendered by the hope of profit?

Is such behaviour better or worse, on balance, than the behaviour we should expect if all enterprises were owned by charities or governments?  

The hope of profit is often perceived as the root of social harm through greed.
Economic inequality can blame profit-driven corporations for the immense wealth divide
and associate such enterprises with avarice, but why is it that such corporations appear
to disregard the well-being of the majority of people? Would it perhaps be better for all
enterprises to be run by governments or charities who prioritize social welfare and
function without profit incentives?

To answer this, this essay draws on Gary Becker’s economic approach, which
frames all institutional behavior as rational responses to incentives and constraints,
where each active participant in the market can be understood through the lens of utility
maximization1. When evaluated through this framework, behavior engendered by the
hope of profit includes effective resource allocation and cost minimization which fosters
competition and long-run economic growth. Yet, behavior under this same pursuit of
profit may generate negative externalities and inequality while charity or
government-owned enterprises support social welfare but hinder efficiency and proper
allocation. This essay thus argues that profit-driven behavior and government or
charity-owned enterprises both have its benefits and flaws, and that the most socially
beneficial behavior requires a mixed economy to allow private enterprises to thrive
under minimal yet essential public constraints to serve the common good.

The economic approach suggests that firms, who act as utility-maximizers,
allocate capital and resources to areas where the expected return is the greatest.
Driven by the hope of profit, firms channel investments into sectors with the most
productive potential that serve consumer preferences and often introduce new
technologies. This behavior fosters allocative efficiency, as resources are distributed to
the goods and services most valued by society, ensuring that production reflects actual
demand2. This process thus stimulates employment as new industries and firms grow
through expansion of production, requiring labor. As a result, firms hire more workers to
meet rising output demands which creates employment opportunities for the workforce.
The increase in employment along with the other behavior driven by the hope of profit
plays a pivotal role in stimulating economic growth, which is defined as the increase in
an economy’s capacity to produce through technological progress and capital
formation3. When firms direct resources toward high-productivity sectors, they enable
advancement, employment, and capital formation–fostering innovation and collective
economic advancement. This private investment in productive sectors therefore directly
impacts economic growth through a contribution to GDP (Fig. 1).

Fig. 1: Expenditure Approach4

Though government spending on public enterprises also increases GDP, not all
expenditures expand the economy’s real productive capacity without the profit motive.
For instance, in Ethiopia, despite significant government spending in industrial
infrastructure to expand manufacturing, private investment has remained weak. Around
50% of Ethiopian manufacturing firms had a zero investment rate from 1996-2007, with
the number rising to 70% for small firms that had less than 50 workers5. Even among
the firms that did invest, the majority had investment rates below the 10% depreciation
threshold, demonstrating that capital stock was not being replenished, let alone
expanded. This suggests that although public spending may have increased GDP
through aggregate demand, it did not translate into sustained increases in productive
capacity. In contrast, private enterprises operating under the hope of profit are
supported by investors through upgrades in capital, productivity improvements, and
innovation adoption–actions that are essential for economic growth over time. Thus,
investor behavior—driven by profit goals—is better in the sense of stimulating long-run
growth than the behavior of government or charitable funders.

Moreover, allocative efficiency is achieved when firms meet consumer
preferences and produce goods up to the point where price (marginal revenue) equals
marginal cost6. China’s expansion of highway networks from 1998 to 2007 provides
evidence of how profit-driven enterprises improve allocative efficiency. A study by Liu et
al. (2023) found that better transport infrastructure reduced price dispersion across firms
by nearly 29%, not through cost reductions, but because firms lowered prices in
response to increased market competition7. The lower prices thus got closer to the
costs, suggesting that this expansion led to a gain in allocative efficiency. These results
highlight how the hope of profit incentivizes firms to respond to changing conditions by
reallocating resources and pricing more efficiently to capture demand more effectively.
In competitive markets, firms that fail to meet these standards earn below normal profit
and shut down, ensuring that resources are reallocated to higher value uses.
Comparing competitive firms to enterprises owned by governments or charities, the
profit incentive stimulates performance pressure. Enterprises owned by governments or
charities have less profit incentives and may overproduce low-value goods or operate
inefficiently; the economic approach helps explain such behavior since while private
firms optimize profit, public enterprises may optimize mission fulfillment or political
goals. While these goals are both valuable and noble, the behavior generated through
these incentives in addition to bureaucratic constraints often leads to less innovation
and misallocated capital–suggesting that such enterprises do not always align with
economic efficiency. Thus, profit driven behavior is better than public enterprises for
proper allocation.

The profit motive also shapes firm behavior in ways that promote productive
efficiency. The economic approach suggests that firms will behave in manners that
maximize profit, meaning minimizing costs to support economies to scale and producing
goods and services that meet up to consumers’ demand. Since each enterprise strives
to attract consumers to maximize its financial returns, the hope for profit naturally
incentives competition among firms. In order to gain a competitive edge, firms are
compelled to lower production costs and improve the quality of their goods and
services8. To do so, firms adopt technology and innovation which increases productive
efficiency. In turn, this competitive environment is beneficial for society as the constant
pressure to outperform rivals allows consumers to benefit from higher quality products
at lower prices.

However, it is important to note that the hope of profit generates behavior that
produces social harm. Firms and investors, in maximizing profit returns, may generate
negative externalities including but not limited to pollution, labor exploitation, and
economic inequality9. For instance, a negative aspect concerning profit-driven behavior
is that private firms strive to have low costs to increase profit margins, meaning they
may underpay their workers and these workers potentially face stagnant wages.
Moreover, firms may cut expenses such as laying off workers to increase gross profit10
.Both underpayment and the laying off of workers contributes to inequality and potential
exploitation.

Fig. 2: CEO-Worker Pay Gap11

The figure above illustrates that as corporate taxes declined, profit-margins rose,
which disproportionately benefited top executives. By 2019, CEOs earned 320 times
more than their median workers, compared to just 21 times more in 1965. Because the
desire to maximize profits can incentivize firms to link pay to company performance,
executive compensation surges as profits rise which contributes to exacerbating wage
inequality. Furthermore, firms with market power in the labor market have the ability to
exert influence on wages, leading to a “markdown” on worker’s salaries for the sake of
profit12.  This reflects a key behavioral consequence of profit-maximization: firms, acting
rationally, may suppress wages, exploit labor, and direct wealth upward when
unconstrained by regulation or social pressure. As the economic approach suggests,
individuals seek to maximize their utility, in this case profit, which without constraints,
amplifies inequality. Here, government and charity-run enterprises are better suited for social welfare
and often play a corrective role. Their behavior is guided by incentives such as serving
the public and prioritizing equity over efficiency to execute essential functions that
markets alone neglect. However, that does not necessarily support the notion for all
enterprises to be run by government or charities, but rather in certain sectors where
merit goods are produced such as education and healthcare. Therefore, while the profit
motive engenders behaviors that grow the economy, the negative outcomes that occur
reveals why markets require external guidelines to prevent self-interest from becoming
socially destructive.

Taken together, it is evident that behaviors engendered by the hope of profit and
government or charity-owned enterprises have both its benefits and costs. Thus, the
most socially beneficial behavior arises when a profit-seeking enterprise operates within
a framework of constraints set by the law to ensure social welfare. The economic
approach asserts that behavior does not change until there are constraints, which is
where Becker’s behavioral framework intersects with John Locke’s political philosophy.
Locke argued that the government exists to protect property and liberty13. In essence,
Locke’s argument centers around the idea of ensuring justice and order for the people.
Therefore, profit-driven behavior should be allowed to flourish while the government
corrects for market failures such as externalities and inequality. This calls for a system
of a mixed market economy: one that does not prohibit behavior engendered by profit
but establishes guidelines for firms to follow to ensure that such behavior produces
outcomes aligned with broader social goals.

Endnotes
1. Gary S. Becker, The Economic Approach to Human Behavior (Chicago: University of Chicago Press,
1976), 3
2. Will Kenton, “Allocative Efficiency,” Investopedia, July 31, 2023,
https://www.investopedia.com/terms/a/allocationalefficiency.asp.
3. “Economic Growth,” Investopedia, April 23, 2025,
https://www.investopedia.com/terms/e/economicgrowth.asp.
4. “What is GDP?” Worldometer, https://www.worldometers.info/gdp/what-is-gdp/.
5. Admasu Shiferaw, Productive Capacity and Economic Growth in Ethiopia, CDP Background Paper
No. 34 (New York: United Nations Department of Economic and Social Affairs, April 2017),
https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/CDP_BP34_April_2
017.pdf.
6. Tejvan Pettinger, Efficiency of Perfect Competition, Economics Help, July 28, 2017,
https://www.economicshelp.org/microessays/markets/efficiency-pc/.
7. Liu, Chong, Wei Wang, Qunfeng Wu, and Hui Zhang. “Highway Networks and Allocative Efficiency:
Firm-Level Evidence from China.” Journal of Transport Economics and Policy 55, no. 4 (2021):
283–307. https://www.jstor.org/stable/27106136.
8. “Porter’s generic competitive strategies (ways of competing)”, University of Cambridge,
https://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies/.
9. Tejvan Pettinger, “Negative Externalities,” Economics Help, July 24, 2019,
https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/.
10. “The Biggest Companies Across America Are Cutting Their Workforces,” The Wall Street Journal,
https://www.wsj.com/business/the-biggest-companies-across-america-are-cutting-their-workforces-a0e87
39a.
11. Sarah Anderson, Brian Wakamo, and Justin Campos, “11 Charts on Taxing the Wealthy and
Corporations,” Inequality.org, July 8, 2021,
https://inequality.org/article/11-charts-tax-wealthy-corporations-inequality/.
12. “How employers exercise power,” The Economy 2.0: Microeconomics,
https://www.core-econ.org/the-economy/microeconomics/06-firm-and-employees-12-employers-exercise-
power.html.
13. Tuckness, Alex, "Locke’s Political Philosophy", The Stanford Encyclopedia of Philosophy (Summer
2024 Edition), Edward N. Zalta & Uri Nodelman (eds.),
https://plato.stanford.edu/archives/sum2024/entries/locke-political/.