Do People Seek to Maximize Profit?

The following excerpt is from chapter 14 of “Human Action” by Ludwig von Mises.

It is generally believed that economists, in dealing with the problems of a market economy, are quite unrealistic in assuming that all men are always eager to gain the highest attainable advantage. They construct, it is said, the image of a perfectly selfish and rationalistic being for whom nothing counts but profit. Such a homo economicus may be a likeness of stock jobbers and speculators. But the immense majority are very different. Nothing for the cognition of reality can be learned from the study of the conduct of this delusive image.


It is not necessary to enter again into a refutation of all the confusion, error, and distortion inherent in this contention. The first two parts of this book have unmasked the fallacies implied. At this point it is enough to deal with the problem of the maximization of profits.


Praxeology in general and economics in its special field assume with regard to the springs of human action nothing other than that acting man wants to remove uneasiness. Under the particular conditions of dealing on the market, action means buying and selling. Everything that economics asserts about demand and supply refers to every instance of demand and supply and not only to demand and supply brought about by some special circumstances requiring a particular description or definition.


To assert that a man, faced with the alternative of getting more or less for a commodity he wants to sell, ceteris paribus chooses the high price, does not require any further assumption. A higher price means for the seller a better satisfaction of his wants. The same applies mutatis mutandis to the buyer. The amount saved in buying the commodity concerned enables him to spend more for the satisfaction of other needs. To buy in the cheapest market and to sell in the dearest market is, other things being equal, not conduct which would presuppose any special assumptions concerning the actor’s motives and morality. It is merely the necessary offshoot of any action under the conditions of market exchange.

In his capacity as a businessman, a man is a servant of the consumers, bound to comply with their wishes. He cannot indulge in his own whims and fancies. But his customers’ whims and fancies are for him ultimate law, provided these customers are ready to pay for them. He is under the necessity of adjusting his conduct to the demand of the consumers. If the consumers, without a taste for the beautiful, prefer things ugly and vulgar, he must, contrary to his own convictions, supply them with such things.1
If consumers do not want to pay a higher price for domestic products than for those produced abroad, he must buy the foreign product, provided it is cheaper. An employer cannot grant favors at the expense of his customers. He cannot pay wage rates higher than those determined by the market if the buyers are not ready to pay proportionately higher prices for commodities produced in plants in which wage rates are higher than in other plants.
It is different with man in his capacity as spender of his income. He is free to do what he likes best. He can bestow alms. He can, motivated by various doctrines and prejudices, discriminate against goods of a certain origin or source and prefer the worse or more expensive product to the—technologically—better and cheaper one.


As a rule, people in buying do not make gifts to the seller. But nonetheless that happens. The boundaries between buying goods and services needed and giving alms are sometimes difficult to discern. He who buys at a charity sale usually combines a purchase with a donation for a charitable purpose. He who gives a dime to a blind street musician certainly does not pay for the questionable performance; he simply gives alms.


Man in acting is a unity. The businessman who owns the whole firm may sometimes efface the boundaries between business and charity. If he wants to relieve a distressed friend, delicacy of feeling may prompt him to resort to a procedure which spares the latter the embarrassment of living on alms. He gives the friend a job in his office although he does not need his help or could hire an equivalent helper at a lower salary. Then the salary granted appears formally as a part of business outlays. In fact it is the spending of a fraction of the businessman’s income. It is, from a correct point of view, consumption and not an expenditure designed to increase the firm’s profits.


Awkward mistakes are due to the tendency to look only upon things tangible, visible, and measurable, and to neglect everything else. What the consumer buys is not simply food or calories. He does not want to feed like a wolf, he wants to eat like a man. Food satisfies the appetite of many people the better the more appetizingly and tastefully it is prepared, the finer the table is set, and the more agreeable the environment is in which the food is consumed. Such things are regarded as of no consequence by a consideration exclusively occupied with the chemical aspects of the process of digestion. But the fact that they play an important role in the determination of food prices is perfectly compatible with the assertion that people prefer, ceteris paribus, to buy in the cheapest market. Whenever a buyer, in choosing between two things which chemists and technologists deem perfectly equal, prefers the more expensive, he has a reason.


If he does not err, he pays for services which chemistry and technology cannot comprehend with their specific methods of investigation. If a man prefers an expensive place to a cheaper one because he likes to sip his cocktails in the neighborhood of a duke, we may remark on his ridiculous vanity. But we must not say that the man’s conduct does not aim at an improvement of his own state of satisfaction.


What a man does is always aimed at an improvement of his own state of satisfaction. In this sense—and in no other—we are free to use the term selfishness and to emphasize that action is necessarily always selfish. Even an action directly aiming at the improvement of other people’s conditions is selfish. The actor considers it as more satisfactory for himself to make other people eat than to eat himself. His uneasiness is caused by the awareness of the fact that other people are in want.


It is a fact that many people behave in another way and prefer to fill their own stomach and not that of their fellow citizens. But this has nothing to do with economics; it is a datum of historical experience. At any rate, economics refers to every kind of action, no matter whether motivated by the urge of a man to eat or to make other people eat.


If maximizing profits means that a man in all market transactions aims at increasing to the utmost the advantage derived, it is a pleonastic and periphrastic circumlocution. It only asserts what is implied in the very category of action. If it means anything else, it is the expression of an erroneous idea.


Some economists believe that it is the task of economics to establish how in the whole of society the greatest possible satisfaction of all people or of the greatest number could be attained. They do not realize that there is no method which would allow us to measure the state of satisfaction attained by various individuals. They misconstrue the character of judgments which are based on the comparison between various people’s happiness. While expressing arbitrary value judgments, they believe themselves to be establishing facts. One may call it just to rob the rich in order to make presents to the poor. However, to call something fair or unfair is always a subjective value judgment and as such purely personal and not liable to any verification or falsification. Economics is not intent upon pronouncing value judgments. It aims at a cognition of the consequences of certain modes of acting.


It has been asserted that the physiological needs of all men are of the same kind and that this equality provides a standard for the measurement of the degree of their objective satisfaction. In expressing such opinions and in recommending the use of such criteria to guide the government’s policy, one proposes to deal with men as the breeder deals with his cattle. But the reformers fail to realize that there is no universal principle of alimentation valid for all men. Which one of the various principles one chooses depends entirely on the aims one wants to attain. The cattle breeder does not feed his cows in order to make them happy, but in order to attain the ends which he has assigned to them in his own plans. He may prefer more milk or more meat or something else. What type of men do the man breeders want to rear—athletes or mathematicians? Warriors or factory hands? He who would make man the material of a purposeful system of breeding and feeding would arrogate to himself despotic powers and would use his fellow citizens as means for the attainment of his own ends, which differ from those they themselves are aiming at.


The value judgments of an individual differentiate between what makes him more satisfied and what less. The value judgments a man pronounces about another man’s satisfaction do not assert anything about this other man’s satisfaction. They only assert what condition of this other man better satisfies the man who pronounces the judgment. The reformers searching for the maximum of general satisfaction have told us merely what state of other people’s affairs would best suit themselves.


• 1. A painter is a businessman if he is intent upon making paintings which could be sold at the highest price. A painter who does not compromise with the taste of the buying public and, disdaining all unpleasant consequences, lets himself be guided solely by his own ideals is an artist, a creative genius. Cf. above, pp. 139–40.
• 2. Such overlapping of the boundaries between business outlays and consumptive spending is often encouraged by institutional conditions. An expenditure debited to the account of trading expenses reduces net profits and thereby the amount of taxes due. If taxes absorb 50 percent of profits, the charitable businessman spends only 50 percent of the gift out of his own pocket. The rest burdens the Department of Internal Revenue.
• 3. To be sure, a consideration from the point of view of the physiology of nutrition will not regard such things as negligible.

Random Thoughts: Economics and Human Action

“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”~John Maynard Keynes

Introduction

Since the advent of John Maynard Keynes’ economic system, economists are constantly expanding Keynes’s system. Governments are using more and more statistical analysis for the development of public policy. Subsequently, Economists are available to correlate how government policies allegedly are helping the economy. In turn, elected officials can provide reports, for example, on how favorable GDP metrics are demonstrating economic growth. How do these items correlate to the individual citizen?

What is Economics?

Economics:  A science that is highly misunderstood by many. Many presume that it is a study about money. Or, they believe it is a study about investing in the stock market. While money is something that is analyzed inside the body of knowledge of economics, it is not the only subject matter in economics. In a typical entry level economics course, the student is introduced to graphs, charts and diagrams. These items are utilized to help the user understand economics, but are they the basis of economic thought? While stats, math, and calculus are valuable tools used by economic scientists, these tools do not provide the foundations of economic thought. Here is a definition of economic thought: Economics is the study of humans managing scarce resources with alternative uses. Since this is the case, Economics is a human behavioral science. On average, Economists do not venture into the notion of why someone makes the decision, they simply explain outcome of the decision. The rationale of the human action is left up to a different branch of behavioral science.(e.g. Psychology, Philosophy, Sociology, and the like)

If economics is about humans managing scarce resources, and those resources have alternative uses, how do these resources become scarce? What is scarcity?  What are the alternative uses? The foundation of these questions not only are addressed in the field of economics, but also in the studies of philosophy.

Human Action

As previously mentioned, the average person presumes Economics is simply dealing in matters of money—using math, graphs, and a large amount of technical jargon. While math is used in Economics, it is an attempt to quantify what happened and project what could happen; this forward thinking speculation is rooted on what has happened. However, at the core, this is not needed to make economic analysis, albeit it is useful. It is not needed to gain an above average understanding of economics. What is needed to be made clear: Economics is rooted in human action. Diagrams and complex calculus are simply means to attempt to explain human action. The axioms of human behavior are not derived from math, as they are derived from logical a priori reasoning. It is worth repeating: Math is vital in helping to understand what happened, with regards to economic activity, however, it is not going to address all what happened with regards to human action.

With human behavior, it is always purposeful. It is driven based upon a need to improve the current condition—many would call this process, “the pursuit of happiness”. That need to improve the current condition is subjective to the individual. This drive to improve one’s condition, to seek happiness, is initiated by the human will.

This will is in all living creatures. It is the drive to push humans, and living creatures, to expand, grown, transform..similar to metamorphosis of a caterpillar to a monarch butterfly. This transformation must occur..organically, as if it is done any other way, it shall be to the detriment of the butterfly.

Human Action is Subjective

With humans, the use of the notion of will combined with other factors helps shape their direction in economic interactions. Since all humans are unique and subjectively different, the objectives and goals shall be different.

This notion was not uncovered, in the field of economics, until the thinkers such as Carl Menger, Stanley Jevons, and Leon Walras. Ironically, these three thinkers were able to draw similar conclusions regarding human behavior: Humans preferences are subjective. Since those preferences are subjective, mathematics can not capture all of the human action in a model, albeit it is still a useful tool to utilize.

Human action..Its subjectivity lends itself to dynamic interplay between individuals, firms, and the like. This makes the interaction very unpredictable…for central planners to accurately map out and manage an economy. Consider this: If an economy comprises millions of individuals, and those individuals each have their own subjective preferences, which change each second, the task of successfully planning an economy would be near impossible. That is because it is impossible. The Soviets, for example, tried, failed, and the collapse was inevitable.

Subjective Value Ranking

Humans are driven by the human will, as a life force that pushes them to action. However, the individual things that humans prefer to act upon are varied. That variance is based upon the fact that humans value things differently. This leads to the concept of utility. Utility is an economic term that describes, simply put, the things the economic actor places a value therein. Those things of value are not equal. Also: Since humans can place values upon multiple things, yet they can act on one value at a time, therefore, the human will have a ranking of some sort. This is not a conscious endeavor, as this ranking derives from other psychological means. The top of the utility ranking represents the highest valued items, as the ranking proceeds down, those value become less valuable to the human engaged in economic activity. It should be noted that this ranking can be altered at any moment in time, and many items are constantly changing, based upon a myriad of internal and external factors. From this value ranking concept, this begins the myriad of concepts used in economic thought. For example, the notion of interest rate is derived from this concept, as it is all about choosing items, from the utility ranking during different periods of space and time.

Centrally Planned Models

Based upon the fact, that value is subjective, and humans have individual things that value and rank, this lends itself to be impossible to “plan” out an economy using technical analysis. The central planner maybe able to gather some of the economic data, but it will simply be a partial historical account of human action. Statisticians can utilize that historical incomplete historical data and perform regression analysis to speculate future human behavior, to develop public policy, but there is a risk of error. This risk is magnified due to the fact that human’s value ranking is constantly changing, and if that phenomenon is aggregated with millions of humans, in an economy, that risk of error is increased exponentially.

When centrally planned models place a great deal of emphasis on centrally planning out a nation’s economy, it places a high cost upon it’s citizens. It does not allow the natural flow of human action to take place in the marketplace, causing stagnation and malaise. The natural flow of will, which exists in each individual, is impeded due to the high costs of Government fiat from its planners.

With a few individuals attempting to plan out the economic future for the masses, it would require a demigod to gather all the information, namely, the dynamically changing utility ranking of all its citizens, in order to successfully plan out an economy. Since no demigods are walking the planet, this would explain how egregiously centrally planned economies end up in tyranny. The economic costs are too high to have prosperity. Due to those high economic costs, the economic actors perceive that the attainment of their objectives are too costly. At this point, the human will is turned inward, and nihilism creeps into the psyche of the masses.

“What does nihilism mean? That the highest values evaluate themselves.”-Friedrich Nietzsche

During the time of the greatest Innovation and  Technology in human history, there is a paradox. The proliferation of technologies in various fields-all designed to make our lives simpler. New companies are able to blossom each second, providing new products and services. This increased competition, in many markets, has allowed natural resources to flourish and, as an end result, the end consumer has more options. The access to capital is unparalleled to no other time in the history of mankind. The advent of smart phones, internet, computers, and the like, have allowed consumers to connect across the vast globe more effectively and efficiently. Now: A trans Atlantic flight may take 5-6 hours. The flow of goods and services, across the globe is coming s a cheaper cost, as that benefits consumers everywhere. This translates into a higher standard of living, as compared to humans in prior centuries. Contrast these things to several centuries ago: It took weeks, well months to cross the Atlantic Ocean. The simple things in life, many of them were non existent: A microwave oven, a Television, and many more inventions.

At the time of this writing, per the mainstream economists, the economy is performing beyond expectations. The unemployment rate, per the central planners, is at record lows.
However, there is still this sentiment of malaise, despair, and frustration. Why is this the case?
One would think, with all of these external conveniences, people would have less discontentment. However that is not the case. The news continues to push forward a narrative of hopelessness, in the political arena, it virtually impossible to engage in a dialogue about public policy without the exchange turning into a vituperative verbal donnybrook.

The notion on nihilism, per the quote, has crept into many in the citizenry. Although, there is a cornucopia great things that are occurring during this epoch, things that were once held as important virtues, are not non-existent. How is this the case? Answer: The proliferation of the size and scope of Government.
Although this exposition is not a case for anarchy, nor is a case against the need for government, it is simply making an observation, rather, a critique of the current state of affairs.
The pervasive spirit, in today’s world is that solutions to internal problems must be looked outward for solutions. This way of thinking is misplaced.
The source of the will of power exists on the inside of each individual, without it, man is doomed to not expand or grow. When solutions are looked upon to, let us say, Government, this creates a long term hurdle to the will to power. How is this possible?