Profit: A Necessary Evil
March 15, 2019
March 15, 2019
Much has been said about profit and its implications in the society. Some people have supported the existence of profit. Others have argued against it. This essay intends to establish the need for existence of profit.
Those who have supported the existence of profit have their own reasons that also support the morality of it. Those who have argued against profit have their own reasons that see the immorality in it. For profit to be seen as good it ought to be carried out within certain levels of morality – In this case it will be accepted. For profit to be seen as bad it will exhibit certain levels of immorality thence rejected.
When profit is obtained within acceptable levels, it may not be condoned, but when obtained at excessive levels without proper justifications, it may carry with it immorality (in which case it is abnormal). That is why we refer to profit as either being normal or abnormal profit.
Justification of Existence of Profit
(a) What is profit?
When goods and services are produced and provided, there is need to understand the costs involved so that a price that includes some return can be established. This selling price includes a mark-up on the cost that eventually gives the profit.
Selling price – costs = profit
Therefore, profit is the money that is obtained above the production costs when goods and services are sold.
For example, when a person sells goods or services to customers, s/he needs to understand what it costs to provide or produce such goods or services and deliver them to customers so that a price can be fixed that brings a profit. For instance,
1. Mr. Kamau sells goods in his shop or kiosk that costs him sh.5, 000. The revenue obtained totals sh.6, 000. Therefore Kamau gets a profit of sh.1, 000.
6,000 – 5,000 = 1,000
S.P – C.P = PROFIT
2. A small scale farmer (Simiyu) uses inputs that go into cultivation of crops on his farm totaling sh.28, 000. After selling what is produced on the farm, he realizes revenue of sh.33, 000. Therefore his profit is sh.5, 000. See Table below
Revenue – cost price = PROFIT
33,000 – 28,000 = 5,000
FARMING COSTS SH.
Clearing of land -500
First ploughing -2,000
2nd ploughing -2,000
Seed (50 kg) -2,500
Weeding (labor) -4,000
Preparation and storage (before sale) -5,000
N.B: considering all living factors, this farmer never has any money in his pocket since the sh.5,000 has to be applied on purchased items e.g. salt, tea leaves, sugar, cooking oil, soap, lotion, basins, cups and kettles, plates, spoons, water jars, clothes-ware and bed-ware, paraffin, matches, leave alone educating children. The farmer relies on his farm for food stuffs.
3. A lady who sells ripen bananas at a local market experiences the following costs and revenues:
Cost of banana bunch 150
Cost of municipal ticket 20
Revenue from sales 220
(S.P) – C.P. = PROFIT
Sh.220 – Sh.170 = Sh.50
N.B: The examples above reflect the general business activities. The corporate business organizations however would call for extensive elaborations that would still arrive at profit that justify their organizations.
(b) How is profit arrived at and the view of it
The above examples give a picture of how profit is arrived at and depending on its level; it therefore can be seen as bad or good
Understanding man’s needs
This essay is talking about profit. The question is HOW and WHY does profit exist? Profit comes about because people have needs that need to be satisfied. Some other people sell to these people (customers) the goods and services that satisfy these needs at a price. But we have seen that price includes the costs of production and a mark-up.
Therefore the satisfaction of man’s needs that leads to trading or commercial activities eventually give rise to profit that’s being talked about here. The inner question of WHY profit exists is discussed elsewhere in this paper.
Identification of resources to effect production
In order to satisfy man’s needs, production has to be effected. The resources that are needed needs to be identified. They will include: Raw materials, equipment machinery, and labor. Therefore production is the transformation of raw materials using equipment, machinery, and human labor to produce goods and services that will satisfy man’s needs.
N.B: We are touching on needs and resources because there will be costs involved in trading transactions that involve sellers and buyers – that will lead to profit for the sellers. The process to produce will call for some organization to effect production. This organization can either be a single person or a business entity that is selling goods and services to customers.
Need for production organization and provision of services
What is a business organization?
This is the legal coming together of people and other resources to provide goods and services to would-be customers at a profit. The assumption in this definition is that such an organization is acceptable under the law for the society, and is registered. The goods and services ought to provide satisfaction to the buyers (customers). The price at which the goods and services are sold is expected to include a profit.
The coming together of such an organization will not only identify the resources but also the costs or rewards that go to such resources (factors of production)
Factors of production Rewards
Labor – Wages and salaries
Land – Rent
N.B: the rewards here can be interpreted as costs that go to the factors of production and hence they need to be understood as they relate to the profit model
Example of people with needs:
A person who is thirsty buys a soft drink
A person with torn dress takes it to a tailor for repair
A person with long hair may go to the barber for hair cut
A student who wants to write may buy a pen
A family may need a house or place to stay in
A person with uncared-for shoes may need a brush and shoe polish
Needs therefore come either in the form of basic or secondary and have different priority for each individual
Business organizations also exist at different levels e.g. proprietary businesses -individually owned; partnership businesses that may involve two or more persons who have decided to come together to pool their resources, and corporations or companies that involve investors who buy shares in the organization that are registered with the registrar of companies.
Understanding costs and model leading to profit
Business as it exists at any level involves various costs. These include:
(a) Fixed costs – which are incurred whether or not the business is producing goods and services e.g. the cost of equipment and machinery, buildings, land
(b) Variable costs – these are costs which vary according to level of production or activity e.g. raw materials, labor (direct labor)
(c) Overhead costs – these are costs which cannot be directly attributed to specific units. The way they are treated is that they are usually lumped together and applied to the goods sold e.g. water, electricity, administrative costs.
(d) Marginal costs – this is a cost that is applied to every additional unit produced. It is arrived at by dividing change in quantity produced (at any particular level) by change in total costs (at that particular level). N.B:
(e) Total costs = fixed costs + variable cost + overhead
In our profit model, it can therefore be established that:
Revenue – [fixed costs + variable costs + overhead] = profit
It is also very necessary to understand the concept of average costs. These are simply the various types of costs applicable to individual units produced and sold, bearing in mind that we have businesses that are involved in manufacturing and others are involved in buying already manufactured goods which they in turn sell to customers or consumers.
Examples of average costs: average fixed costs, average variable costs, average total costs
Why should a business or business person understand costs?
This is required because the acceptable price that will lead to acceptable profit can only be arrived at after considering these issues. And also it must be understood that businesses contribute to the development of economies. A good example here is a look at the infamous “Triangle Trade”. Cheap or free feedstock such as cotton, cocoa, tea, latex and timber (as well as human resource – slaves), were exported from Africa – at the west coast of the continent, and from Latin America to Europe via London. In exchange, finished products were sold at exorbitant prices to the same source nations. This heralded the eventual mismatch of economies across the Atlantic hence terminologies such as the “first world” and “third world” countries. The manner in which businesses conduct themselves can contribute to the reduction of poverty in the society. They can also promote entrepreneurship in the society, more so in poor countries. As a business goes about its activities has an impact on the improvement or degradation of the environment.
Why should business pursue the profit motive?
As businesses go about pursuing a profit, how should they conduct themselves in relation to the environment and utilization of resources, how they utilize the profit earned considering the fact that the world on which we live on has become a village? This is to say that issues and problems have become globalized.
Although it is known that businesses operate in two environments viz. internal and external environments, their impact is well assessed or evaluated against various aspects that can collectively be described as “the social responsibility of business”. The business hereby assumes the position as caretaker of resources i.e. it carries out its activities for the good of the people.
Business entity as a citizen of the land has various obligations to the people and community which it serves. These responsibilities come under the following concerns which hitherto are the core responsibilities of business:
(a) creation and provision of safe goods and services to the people
(b) creation of employment that provides an income to the workers
(c) attending to employee welfare, ensuring acceptable timely pay (wages and salaries)
(d) settlement of debts with suppliers
(e) meeting with investors’ wishes
(f) complying with the law of the land and government e.g. paying taxes
(g) protecting the environment i.e. carrying out business activities and undertaking corrective measures without harming the environment e.g. in the area of water, air pollution, noise, solid waste pollution, chemical residue pollution as is in the case of agriculture
(h) Philanthropic contributions. This is where the business contributes to worthy causes in the society.
Therefore it can be seen that if business does not behave responsibly there are several social problems that can follow e.g. loss of income, break up in marriages, suicides, mental disease, etc.
N.B: as business carries out its objectives and makes a profit within agreed justifiable limits and undertakes to meet these obligations socially (where the disadvantaged persons in the society access services) then it can be viewed as enjoying a moral profit.
But where a business carries out its activities and in one way or another denies society access to goods and services, or subjects the society to some suffering and yet it enjoys good profits, it is then having greed profit i.e. the profits are enjoyed by only a few even with disregard to the environment.
How greed profits and normal profits come about
(Understanding the market structure in which the business operates)
Generally, most businesses operate in the following market structures:
(a) Pure competition – this is where businesses enters and exits the industry with ease i.e. at their own will or strength. Pure competition operates under certain assumptions:
– Easy entry and easy exit.
– the business takes the price set by the industry
– it assumes no transportation costs
(b) Monopoly – here a single business dominates the industry or even forms the industry e.g. the Kenya power and lighting company, KPLC. Here, the business sets the price. The ability to remain monopoly depends on strong financial muscles, control over key technology or resource
(c) oligopoly – here the market consists of a few businesses that serve the market e.g for the petroleum companies such as the BP,Shell,Total…
(d) Monopolistic competition – here the market structure exhibits some pure competition conditions and monopoly conditions.
From the foregoing argument, it is established that profit is a necessary evil i.e. it is needed for the business to operate in a healthy way in which case it is moral
It is only when businesses include ultra-vires objectives in its activities and uses the profits earned with disregard to the society and the environment that it becomes immoral
The way businesses make profit and how they conduct themselves dictates how they are relating to morality of profit. E.g. in the case of monopoly businesses, businesses seem to go for greed profit which is viewed as immoral. Irrespective of whether they are contributing to social responsibility or not the pursuit of profit should not be looked at as a good in itself, but as an avenue of achieving good in the society hence a necessary evil.
It must also be understood that it is important to understand the existence of the diversity of the people of the world and their communities e.g. the people in South America; Asia; Australia and New Zealand; the people in Europe; in North America and the people in Africa cherish their own respective views. We have however established here in this paper a consideration of the position of the global village against the current universally shared interests, markets, currencies, education systems and information technology etc.
For African societies, it is better if they frame the development of their economies based on attachment to the soil. This statement is framed so because looking at the activities that can lead to creating more employment and sustenance have attachment to the soil and the environmental management e.g. hunting; pastoralism; agriculture; tourism; mining; and the currently astronomical generation of electricity via hydro, or solar. Enhancement of such activities shall ultimately steel the current dwindling of crops growing; production of food that shall hence stimulate the development of agriculturally related industries to satisfy man’s needs. There is an avenue for people to use their potential by buying the needed products. This shall also strengthen the industries that produce them.