The Moral Status of Profit

There is a common fallacy, among critics of capitalism, that because firms are licensed to pursue profits, the purpose of the economic system as a whole must be to facilitate the realization of such profits. This is manifestly not the case, because the design of markets, including the insistence on competition between firms, is intended to bid profits down to zero. The lure of profit is what leads firms to compete with one another, which creates an institutionally enforced collective action problem that drives prices toward the level that allows for a more efficient allocation of labor, resources, goods, and services. The achievement of these “market clearing” prices is the actual purpose of the system. This explains why many people find the profit orientation of firms to be morally counterintuitive. Most of everyday morality is aimed at getting people to act more cooperatively, whereas profit-maximization is essentially a free-rider strategy.