Profit and Value

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In 1950, the eponymous founder George Wilhelm Merck said that We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear.”

In 1970, Milton Friedman wrote an NYT column titled “The Social Responsibility of Business Is to Increase Its Profits”

In the same historical era, Nun-CEO Sister Irene Kraus coined an apparent synthesis: “No margin, no mission”.

Here are some claims I think are true about Profit and Value:


Profit and Value aren’t the same

The difference between capitalism and shmapitalism, as I call it, is in precisely whether Profit or Value is more important:

  • Capitalists view organizations as financial instruments with which they maximize Profit. Capitalists are concerned first and foremost with extracting Profit. Capitalists seek to maximize the Profit they capture. Capitalists sacrifice their long term sustainability in order to increase near term Profit. Capitalists use Profit to maximize the Profit they extract. A capitalist justifies a human life by its economic value.

  • Shmapitalists view organizations as generative instruments with which they maximize Value. Shmapitalists are concerned first and foremost with delivering Value. Shmapitalists ensure their long term sustainability at the expense of their near term Profit. Shmapitalists seek to maximize the Value they deliver. Shmapitalists use Profit to maximize the Value they deliver. A shmapitalist grounds economic value in the human lives which constitute it.

Boeing’s ongoing troubles are perhaps the best case study to understand this difference (1, 2, 3, 4). Boeing chases Profit at the expense of Value when it minimizes costs at the expense of passenger safety. Boeing helps us understand the failure of asserting Profit as ultimately and intrinsically valuable.

Profit and Value can sometimes align

Profit and Value can’t be the same if they can be traded off against each other.

So behold, my friends: yet another 2x2. This one is of things that humans do.

A capitalist promotes Profit as the highest good, and profitable activities as good, whether or not they’re valuable.

The neutrality of capitalist ends suffuses the capitalist’s means. A pure capitalist is equally happy to profit by delivering value or by committing fraud. Capitalism by itself won’t stop them either way. As capitalists, we promote and affirm an agent’s right to Profit. Even in the most upstanding and virtuous capitalist circles, criticizing an individual or an organization for wanting to make money seems to be a step too far. We may criticize them and their actions on other grounds: we may criticize them for how they treat their employees, how they market and sell their products, how they act dishonestly in any number of other ways. But in the end we say: “If there’s a market for what they’re selling, who are we to judge?”

By contrast, a shmapitalist promotes Value as the highest good, and valued activities as good, whether or not they’re profitable.

The dogmatism of shmapitalist ends suffuses the shmapitalist’s means. A pure shmapitalist chooses to profit only by delivering something valuable. Indeed, a pure shmapitalist would deliver Value even without the possibility of Profit. Shmapitalism demands they do so. As shmapitalists, we promote and affirm an agent’s obligation towards Value. The most upstanding and virtuous shmapitalists are pure-hearted servants in the simplest sense. Everything an ideal shmapitalist does maximizes Value, and so every action an ideal shmapitalist takes is ethical, virtuous, prosocial, for the benefit of another. We don’t withhold our criticisms of the ideal shmapitalist because we have no criticisms to withhold.

Profit justifies its unending pursuit and takes advantage of our goodwill by showing off its achievements as if it were acting alone, when it and Value were working together, by blindly ignoring its failures when Value walked away.

Profit and Value can still positively align so long as the (shm)/​(c)apitalist agent profits through providing valuable products or services. To be very clear, I’m saying it’s possible for Profit and Value to positively align! And it happens every day, should keep on happening, and should happen in greater quantities.

Even so, that Profit and Value can sometimes align wrongly suggests that it’s possible for Profit and Value to ever live in harmony. This is a practical argument over and above the conceptual one. Yes, it’s true that Profit and Value are distinct concepts, allowing for theoretical cases where they don’t align; it’s also impossible for an agent to hold both principles equally strongly in practice. The fortunate circumstances where Profit and Value align hides the agent’s necessary preference for one over the other.

Profit and Value will forever contend

This is because simultaneously holding two principles or virtues is always a matter of holding one more strongly than the other, because holding a set of principles is always a matter of holding a hierarchy of principles.

You live by how you choose, and in uncertain moments, your principles guide you towards one path and not the others. Somewhere out there there are decisions which would force at least two of your principles into conflict. Whether you encounter these decisions is another matter. Every successive day presents itself as a series of choices and actions, marginal nudges as you float along in the vastness of decision space. You may go a very long time, maybe even your whole life, avoiding an ethical singularity.

But you have no such luxury if you find yourself one of the unlucky souls standing in a paradox. If you’re forced, you will choose. You will act on one principle and abandon the other. You will trade off two facets of your existence. You will abandon something which defines you. Or, you’ll stay exactly where you are, choosing not to act at all. Ethical singularities are asymptotes, they are The Margin that reveals your hierarchy of principles to yourself.

As in the general case, it’s also true between Profit and Value.

“No Value, No Profit”

These all mean the same thing: no Value, no Profit; no mission, no margin; Value for the sake of profit; Value as a means for more Profit; doing well by doing good; Value as a mere means, Profit as the ultimate end; delivering Value in order to extract Profit.

Your favorite capitalist’s favorite capitalists (Buffett and Munger) absolutely adore mission-driven businesses. As it turns out, mission driven businesses turn out to be the best kind: businesses which solve real problems and meet our real human needs generate predictable cash flows. Such profit-oriented businesses can credibly claim to serve us and maximize our flourishing. At the same time, our eternally existing needs (at least, for as long as our species exists) are surely the optimal environment for the maximization of shareholder value over time.

When a healthcare executive declares “no margin, no mission” and then margin “becomes the highest of organizational values,” they are deploying obfuscating doublespeak, a linguistic trick. They mean the inverse, “no mission, no margin,” but they can’t say it. They hide that the margin is the mission, because they cannot say it out loud in an organization ostensibly devoted to maximizing our collective flourishing.

This is not some mythical tale either. Scott Canard tells the story of when this happened to him. In the early 2000s Dr. Canard led and grew a primary care practice which aimed to “add years to your life and life to your years” with high touch relationship-based primary care. Far ahead of his time, he was too successful. In 2010, Scott approached a local health system to start an ACO. The health system buys his group, and shuts everything down inside three months. As the system’s Chief Strategy Officer explained: “if we hadn’t stopped you and stopped what you were doing, we would eventually have had to close a hospital down because you had such a huge presence in North Texas, you were dangerous.” They had a fiduciary duty to protect the financial wellbeing of the health system, you see.

With the defense that there is no mission without a margin, the moral dilemma is resolved by affirming the priority of the margin over the mission, supposedly in order to sustain the mission. But what mission is there other than the margin if the margin invariably subordinates the apparent mission?

This is our modern tendency, to treat Profit as the end and Value as the means. However distasteful, this orientation is legible and tolerated. At the very least, it’s the only thing we seem to understand and accept as what we cannot change. At best, we tolerate (at worst, we celebrate) those who measure their success with their accumulated wealth.

“No Profit, No Value”

These all mean the same thing: no Profit, no Value; no margin, no mission; Profit for the sake of Value; Profit as a means for more Value; doing good by doing well; Profit as a mere means, Value as the ultimate end; delivering Value for its own sake.

Effectively, what I’m describing are Public Benefit Corporations. Shmorporations are PBCs, PBCs are shmorporations. PBCs hold themselves to being useful, serving a mission beyond their fiduciary responsibilities. They treat their margins as a means for sustaining their mission. They optimize for Value rather than Profit, while retaining the ability to raise money from and return money to shareholders.

There are a few ways a shmorporation can use its profit to increase the value it delivers:

  • Reduce prices and take less. The ability to decrease prices is a signal of over-extraction, and that its products/​services would be more valuable to its customers if they were cheaper.

  • Improve the organization’s expected lifetime by reducing risks, building resilience, practicing sustainable business processes, introducing redundancies, maintaining a strong balance sheet. Increasing the organization’s operational longevity and preparing for downside shocks reduces the variance on the organization’s future expected value.

  • Increase the total value it delivers by investing in sales and marketing, within natural limits, and increasing the number of people it serves.

  • Increase the unit value it delivers by investing in R&D, within natural limits, and serving its customers with more valuable products and services.

The combination of these levers, in addition to the mission which they serve, suggest the concept of a “Minimum Viable Profit”. An organization’s MVP is the amount of profit which sustains:

  • The MVO

  • Financial and operational resilience and its ability to survive a storm

  • Its ability to increase the value it wants to deliver, within natural limits, on both a unit and absolute basis

  • Its ability to provide a risk-commensurate return to its investors

A corporation becomes a shmorporation by reducing its profits to the MVP. A shmorporation only takes what’s needed and uses it well. A shmorporation uses its profits well by prostrating itself before The MVO, bearing gold, frankincense, and myrrh.

More forthcoming on The MVO for the interested.