Profit motive

In economics, the profit motive is the motivation of firms that operate so as to maximize their profits. Mainstream microeconomic theory posits that the ultimate goal of a business is "to make money" - not in the sense of increasing the firm's stock of means of payment (which is usually kept to a necessary minimum because means of payment incur costs, i.e. interest or foregone yields), but in the sense of "increasing net worth". Stated differently, the reason for a business's existence is to turn a profit. The profit motive is a key tenet of rational choice theory, or the theory that economic agents tend to pursue what is in their own best interests. In accordance with this doctrine, businesses seek to benefit themselves and/or their shareholders by maximizing profits. As it extends beyond economics into ideology, the profit motive has been a major matter of contention. Theoretically, when an economy is fully competitive (i.e. has no market imperfections like externalities, monopolies, information or power imbalances etc), the profit motive ensures that resources are being allocated efficiently. For instance, Austrian economist Henry Hazlitt explains, “If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself." In other words, profits let companies know whether an item is worth producing. Theoretically in free and competitive markets, if an individual firm maximizes profits, it ensures that resources are not wasted. However, the market itself, should minimize profits as it is the cost to the value chain. Competition is the key tool by which markets overcome the individual firm's profit maximization incentive. The profit motive is a good of value to the economy. It is needed to provide incentive to generate efficiency and innovation. However, over-remuneration of the profit motive creates profit inefficiency.