Profit is a helpful unifying decision metric, but it’s not actually good to literally just maximize profits, this leads in the long run to destructive rent-seeking, regulatory capture, and trying to maximize negative externalities. It also leads to short-termism—consider the case of Enron (and the case of the privatization of post-Soviet Russia), where naive microeconomic advice led not to gains in long-run efficiency, but an environment that encouraged internally adversarial behavior. Effective managers very frequently use other metrics than profit, based on their judgment that some sort of less legible thing like information flow or clear self-signalling to communicate a coherent strategic intuition will matter more in the long-run than things that show up directly as profits and losses. Consider the following anecdote:
Herb Kelleher [the longest-serving CEO of Southwest] once told someone, “I can teach you the secret to running this airline inthirty seconds. This is it: We are THE low-fare airline. Once you understand that fact, you can make any decision about this company’s future as well as I can.
“Here’s an example,” he said. “Tracy from marketing comes into your office. She says her surveys indicate that the passengers might enjoy a light entrée on the Houston to Las Vegas flight. All we offer is peanuts, and she thinks a nice chicken Caesar salad would be popular. What do you say?”
The person stammered for a moment, so Kelleher responded: “You say, ‘Tracy, will adding that chicken Caesar salad make us THE low-fare airline from Houston to Las Vegas? Because if it doesn’t help us become the unchallenged low-fare airline, we’re not serving any damn chicken salad.’ ”
Profit is a helpful unifying decision metric, but it’s not actually good to literally just maximize profits, this leads in the long run to destructive rent-seeking, regulatory capture, and trying to maximize negative externalities.
Agreed. That being said, it does seem like the frame in which it’s important to evaluate global states of the business using the simple metric of profit is also right: like, maybe you also need strategic vision and ethics, but if you’re not assessing expected future profits, it certainly seems to me that you’re going to miss some things and go off the rails. [NB: I am more tied to the personal impact example than the business example, so I’d like to focus discussion in that thread, if it continues].
Profit is a helpful unifying decision metric, but it’s not actually good to literally just maximize profits, this leads in the long run to destructive rent-seeking, regulatory capture, and trying to maximize negative externalities. It also leads to short-termism—consider the case of Enron (and the case of the privatization of post-Soviet Russia), where naive microeconomic advice led not to gains in long-run efficiency, but an environment that encouraged internally adversarial behavior. Effective managers very frequently use other metrics than profit, based on their judgment that some sort of less legible thing like information flow or clear self-signalling to communicate a coherent strategic intuition will matter more in the long-run than things that show up directly as profits and losses. Consider the following anecdote:
Agreed. That being said, it does seem like the frame in which it’s important to evaluate global states of the business using the simple metric of profit is also right: like, maybe you also need strategic vision and ethics, but if you’re not assessing expected future profits, it certainly seems to me that you’re going to miss some things and go off the rails. [NB: I am more tied to the personal impact example than the business example, so I’d like to focus discussion in that thread, if it continues].