Limits of the profit motive

I've noted before the paradox of Blairism - that people who were so keen that Labour should modernize in the 1990s are now themselves out-of-date. Philip Collins' piece in the Times today shows what I mean.

He contends that the profit motive and business are forces for good. Like many claims in the social sciences, this is very true up to a point. My problem is that the extent to which it is true is less widespread now than it was a few years ago. I mean this in three senses.

First, as Akerlof and Shiller have pointed out, the profit motive doesn't only incentivize good things such as the creation of jobs, products and services but also bad ones such as fraud:

Competitive markets by their very nature spawn deception and trickery, as a result of the same profit motives that give us our prosperity (Phishing for Phools p165)

I suspect that this problem has increased in recent years because of two trends. One is secular stagnation: if it's harder to make money legitimately firms will turn to shadier means. The other is a decline in moral restraint. Philip is entirely right to say that markets have always been "regulated by a moral sense". But this regulation has diminished - perhaps because of the decline of religion, the rise of "neoliberalism" or because lower top tax rates have tipped the balance of incentives towards money-grubbing and away from maintaining self-respect. Whatever the reason, it might be no accident that the examples Philip gives of "capitalism for the common good" come from the 19th century rather than the 21st.

Secondly, the profit motive doesn't just incentivize innovation and investment. It also disincentivizes it, if firms believe it won't make a profit. Again, this problem might be more pressing than a few years ago. Firms might have wised up to the old fact that innovation has always had low returns, and their lack of investment might be due to a fear that future technical progress and creative destruction will render current investment unprofitable. In his speech this week Liam Byrne complained (pdf) this week about capitalists' short-termism without considering the possibility that such short-termism might be a rational response to uncertainty about the pace and direction of creative destruction.

Thirdly, if capitalism does overcome the problem of low investment - perhaps through a burst of animal spirits - we face a new danger. This is that robots and AI might make many of us redundant (pdf), leading to a world of massive wealth for robot owners and poverty and demoralization for millions of others. Personally, I suspect this is a small danger - but the small risk of a horrible outcome cannot be ignored.

My point here is not to decry the profit motive. It has a place. But that place must be circumscribed not only by the regulation of predatory capitalism but also by greater socialization of investment to exploit and develop new technologies and by a more widespread ownership of capital - via worker ownership, a sovereign wealth fund or more widespread participation in equity markets.

Now, I would like to think that my beef with Philip is one of those glass half-empty/half-full arguments. But I fear it might not be. In failing to see the limits of the value of the profit motive, Philip might be embodying the vice of the Blairites - a tendency to live in the past and fail to see that social democracy must, again, be modernized.

Comments

[Dave Timoney]

Of course it's also possible that Collins is simply writing what he gets paid to write, much as Dan Hodges has taken to demanding that civil liberties be curtailed. That the Times venerates the profit-motive is no more surprising than that the Telegraph hankers after repression. The problem with the Blairites has always been the company they kept: they're amplifiers not originators.

[Strategist]

Or in short, he is, and always was, just a hack.

[Matt Moore]

The profit motive is the worst form of incentive, except for all the others that have been tried.

[Peter K.]

Slightly off topic. Phil Collins created a song "Land of Confusion" which the metal band Disturbed covered. It became a big hit for them.

https://www.youtube.com/watch?v=YV4oYkIeGJc

"According to McFarlane, the music video is "a big view of the corporate world and how it all ties into just one big beast for me... The world is run by one giant thing, which is driven by greed and lust." "Land of Confusion" reached number 1 in the Hot Mainstream Rock Tracks; it is Disturbed's first number 1 single on that chart.

The video starts out with the Guy, Disturbed's mascot, falling to earth. It then shows military forces bearing the symbol of dollar sign within a circle of white that is within a field of red, followed by legions of black-clad soldiers reminiscent of Adolf Hitler's Schutzstaffel. The video then shows the Guy, escaping bondage from chains, as the military forces continue to assault cities and civilians. Later on, leaders of various nations of the world (bearing close physical resemblance to the then respective national leaders) are shown sitting at a table with the same dollar sign on it. Eventually the Guy confronts the soldiers, and leads the people in rebellion. Flags of several powerful nations are then shown, with the final flag sporting the dollar sign. The Guy leads the rebels to the United Nations Headquarters where they disrupt a meeting of the U.N. representatives. The Guy then leads the angry mob into a back room where they confront the real power behind the throne, a gigantic, bloated Fat Cat. The mob then drags him to the ground and once immobilised, the Guy destroys the Fat Cat, who explodes into a shower of dollar bills."

[Kaleberg]

I always compare the profit motive to fire. Fire is immensely useful for keeping warm, illumination, cooking food, scaring predators and so on. On the other hand, one does not burn down one's house to boil water for a cup of tea. Humans have spent impressive ingenuity in regulating fire ever since the first hearthstone and on to modern fuel cells. Thanks to this kind of regulation, mankind has done pretty well with fire. We could do just as well with the profit motive.

[Trutherator]

There's nothing worse than the "deception and trickery" that ensues from the "profit motive" except for the much worse "deception and trickery" you get when you set up government to regulate the "deception and trickery" of its subjects and serfs.

Who will regulate the Regulator Government? Itself? You think they'll leave it to YOU, the private citizen. How the hell do you think that's working out for you NOW?!!