Profit is essential for businesses in the commercial economy because it stimulates firms seeking enough revenue to pay for labour, materials, rent and other expenses, plus some leftover as net profit which represents potential improvements that can be made to the business. Firms also need to reinvest for growth and profits can be used to fund innovation, research, expansion and infrastructure. Making a profit attracts further investment, because investors (including in cooperative enterprises) are certain to get a return such as dividend payments. All this requires sustained profitability. Profits do ensure long-term survival of a business, as without profit a business risks insolvency/bankruptcy, job losses and economic instability. A commercial firm that does not generate profits may not sustain itself in the medium to long term, or pay employees, let alone provide goods and services to customers and consumers.
Positive Benefits
Net profit, the earnings remaining after all expenses are deducted from total revenue, therefore holds significant social value for a firm, enabling various positive contributions. These include:
- Employee welfare – Profitable firms can offer better wages and salaries, and bonuses, that enhance an employee’s purchasing power. They can also offer professional development opportunities and other benefits, as internal incentives, that increase employee satisfaction and retention rates.
- Customer value – Profitability enables continuous improvement in products and services, enhancing customer satisfaction and loyalty. These customers include business-to-business and end consumers.
- Sustainable practices – Financial stability allows a firm to invest in environmentally friendly technologies and sustainable operations, contributing to ecological preservation. A shift to green technology can involve significant expenses and profits are required to enable this shift.
- Community investment – Firms with healthy profits can allocate resources to community development projects, philanthropic endeavours, and social initiatives, fostering goodwill and societal improvement.
- Economic growth – Profitable businesses contribute to economic stability by creating jobs, stimulating demand (and providing supply), and generating tax revenues that support public services.
In these ways, a firm can balance financial success with social responsibility, leading to mutual benefits for both business and society more broadly.
Negative Implications
However, having only a ‘profit motive’ is harmful. It can have negative consequences for businesses, society, the environment, and the economy itself. What are some consequences?
- Exploitative labour practices – Prioritizing profit can lead to low wages for workers on one side and excessive executive salaries and bonuses on the other side, as well as poor working conditions and job cuts to reduce costs.
- Consumer harm – Firms may cut corners, leading to unsafe products, misleading marketing or price gouging.
- Environmental damage – Excessive profit-seeking often ignores sustainability, resulting in pollution, resource depletion, deforestation, and human induced climate change.
These kinds of approaches lead to short-termism over long-term stability. That is:
- Focusing on short-term quarterly profits rather than long-term commercial sustainability leads to poor decision-making, with consequences such as excessive cost cutting and lack of research and development (R&D) investment required for innovative products.
- Market instability when firms prioritize profit above all else, so that they engage in risky financial behaviour, contributing to economic crises (e.g. the 2008 global financial crisis).
- Wealth concentration and inequality because a profit-only mindset often prioritizes shareholder value or executive value over wage growth and fair distribution of earnings to ordinary workers (especially in the low-income and even the middle-income range), widening income inequality.
For the business firm itself, negative consequences include:
- Reputation risks – Firms that ignore ethical concerns for profit may be tempted to commit environmental violations, other acts of noncompliance with regulatory requirements, and mistreatment of workers, and will face consumer backlash and fines.
- Lower employee morale – If workers feel they are only a means to maximize profit for a few, job satisfaction and productivity decline, increasing turnover rates.
- Loss of customer trust – Increasingly, consumers prefer suppliers with ethical business practices, and excessive profit-seeking can lead to lost brand loyalty.
Profit with Purpose – Rational Profit
Firms can have ‘profit with purpose’. This balances profit-making with social responsibility. It includes:
- Serving employees, customers and communities, not just shareholders.
- Providing fair wages and salaries to all those who contribute their work to the firm.
- Investing in green technology and undertaking ethical sourcing of inputs.
- Making sound R&D decisions with a view to enhancing the firm’s products.
Each of these, in turn, contribute to employee well-being and customer trust over short-term gains for owners of business firms. Furthermore, an economy that reduces profits by having firms remain efficient and responsive to customers and end-consumers, lowers prices for products and has higher quality products, while also fostering innovation of products. By limiting excessive profits, through the market discipline of price competition, and preventing monopolistic control in economic sectors, this aligns production and sales of products with consumer welfare.
In its real sense, the commercial economy is then based on the consumption motive (production for benefit of all consumers), rather than the profit motive (production for the benefit of a few capitalistic owners). The type of profit that is generated in this more balanced and cooperative economy is called a “rational profit”. P R Sarkar, who propounded the original ideas and principles of PROUT, stated that this approach to profit is necessary in order to guarantee adequate purchasing capacity to those employed in industrial firms, and to ensure their continued existence and growth. (1984, Calcutta). That is, there is a necessity for firms to make a profit in order to ensure jobs, stable industries, and economic growth and innovation. At the same time, the dynamics in the economy should be such that economic forces at play minimize profits so that capitalists do not get scope to exploit, and there is a resultant rational distribution of wealth.
Historical Ideas on ‘Just Profit’
The idea of ‘rational profit’ is similar to that of ‘just profit’, which is a reasonable and ethically grounded return on investment or enterprise that balances the interests of all stakeholders, namely business owners, workers, consumers and also the community, without exploiting any party. It reflects fair compensation for effort, innovation and risk, but avoids excessive accumulation of wealth to the detriment of other people or the environment. It is based on principles of economic justice and sustainability.
The concept of just profit goes back to Aristotle who distinguished between ‘natural’ economic activity for meeting needs and ‘unnatural’ accumulation, such as profit for its own sake. He believed profit should be subordinate to the virtue of justice and the well-being of the polis (society). A just profit supports both individual well-being and collective welfare, aligning business practices with broader social and moral responsibility.
Thomas Aquinas, a Christian Scholastic philosopher, further promoted Aristotle’s idead by advancing the concept of ‘just price’, and by extension just profit. Net profits being legitimate if on the expenses side there is fair compensation for labour, other contributions, and risks taken; and no exploitation. In addition, Aquinas stressed that economic activity should serve moral ends.
The economist, Adam Smith, although often associated with free markets, also believed in moral limits to profit. He argued that businesses should not earn profit by exploiting consumers or labour, and supported government intervention to prevent such abuses. As well, ideas of this sort have been promoted by Islamic economic thinkers, e.g. Al-Ghazali and Ibn Khaldun, who emphasized ethical trade and condemned unjust enrichment or riba (usury). Profit is allowed, but must be earned through fair means, and aligned with service to society and justice in distribution. All these ideas challenge the notion of unlimited profit, and instead emphasize that economic gain should serve human dignity, fairness and societal good.
In this regard, Sarkar has stated that in the collective economic structure (mostly an economy with cooperative firms) the profit motive does not have a place, and that industrial production is for consumption (for the benefit of consumers, including customers in the chain of production of products) so that the consumption motive prevails, and profits are minimized but remain rational. Even then, profits can still be relatively high, but constrained by economic forces, as Sarkar suggested that a 15% profit margin is acceptable (which is actually quite a high percentage). That is, “the market price will be the cost of production plus a rational profit. P = C + Y. A rational profit is about 15%.”1 So, a profit margin of up to about 15% can be considered reasonable, but within the context of ensuring both sustainability and equity. Whatever the profit margin within this range, production still has to be governed by the motive of consumption, rather than the profit motive.
Conclusion
Profit plays a crucial role in ensuring the sustainability of businesses, fostering innovation, and contributing to economic stability. However, when profit becomes the sole driving force, it can lead to negative societal, environmental and economic consequences. A balanced approach – where firms pursue profit with purpose – ensures that businesses serve not only their investors (shareholders) but also their employees (who could also be shareholders), customers and communities. In particular, this means fair wages, salaries and bonuses being distributed to all persons who work in the firm.
A rational profit approach, as outlined in PROUT, offers an alternative to unchecked capitalism by aligning production with consumer welfare rather than excessive wealth accumulation. By limiting profits through market discipline and promoting cooperative economic structures, firms can operate efficiently while ensuring a fair distribution of wealth. In such a system, economic forces regulate profit margins, preventing exploitation while still enabling businesses to thrive. Ultimately, shifting from a profit-driven economy to a consumption-driven economy supports stable industries, job security, and broad-based economic well-being, making the commercial economy truly beneficial for all.
References
(1) P R Sarkar. Questions and Answers [on Society] – 4, date not known.
