Everyone profits from pursuing their enlightened self-interest

Some people write and speak about privately owned businesses as though their desire for profit causes harm to the rest of society. There appears to be a notion that they can sell what they like, at whatever price they like, and that the helpless consumer has no option but to smile and pay up. Why, if business was that simple, do the majority of people prefer to work for salaries? Why do they not start their own businesses? The reality, of course is that business is tough, and the consumer is not helpless.

It is true that firms are motivated by the goal of creating profits for the people who invest in them. In doing so, they have to meet the implacable demands of their customers in the face of competition from rival producers of goods and services, who all have the same goal in mind. Firms in all sectors of the economy are therefore locked in constant competition with each other, trying to please the consumer better than their competitors. They offer their products and services to the demanding consumers, who examine quality relative to price as they shop around the town and, these days, even around the world. Consumers want the best deal for themselves and that is all that interests them.

Complaints of business, such as the impact of rising production costs on profitability fall on deaf ears. Consumers don’t care, even if the situation is so bad that the survival of the business is at stake. This no-nonsense attitude of consumers makes operating a business very challenging. Consumers will fail to buy from some enterprises and allow them to go under while increasing their support for others that are already thriving. Sleepless nights and other symptoms of stress among owners and managers are of no consequence to their customers. Even appeals to patriotic sentiments will not induce customers to patronise local firms without regard to their primary concern of getting good value for money.

Consider the position of a worried manager faced with declining sales. He somehow manages to get the ear of potential customers and gives them a detailed breakdown of his steadily rising production costs, which have now translated into higher prices for his goods. Would this elicit their sympathy and induce them to buy his more expensive goods? Not if there are competitors offering those same goods at lower prices. The manager’s woes will not move them an inch. Such is the world in which businesses operate. Consumers are totally insensitive and hard-hearted. They have no concern whatsoever for problems that afflict business.

Consumers call the shots and ultimately decide which businesses succeed and which fail. They reward or punish businesses according to whether or not they are pleased by them. The most crucial requirement for success in business is therefore to please consumers, offering them goods and services in a location that is convenient and attractive to them, of a quality and price that they find acceptable. And in doing this the firm has to keep looking over its shoulder to ensure that competitors are not offering better value for money. The business that seeks to maximise profits by charging excessive prices courts disaster unless it has been given a monopoly by government. All other firms wishing to increase profit margins have to do so by reducing their costs of production. Consumers, in the final analysis, determine selling prices, and as profits are the difference between sales and the costs of production, firms must rely on increased efficiency to increase their profits. Profits are not automatic, they are determined by consumer approval on the one hand and by the efficiency of the firm on the other. Achievement of a profit is therefore commendable and not something to be denigrated.

Competition drives businesses to lower their costs of production and raise their productivity. On top of this there are many extraneous factors, beyond the control of the individual firm, which impact on the costs of production. Among the most important of these are onerous government regulations. The costs of complying with such regulations add to existing operational costs and the additional burden can have a very detrimental effect on the firm. It is very important to be aware of these harmful effects because the individual firm can be seen as a microcosm of the larger economy and the economy is the sum total of economic transactions. Misguided and ill-informed government policies can adversely affect the whole economy. They can also compromise the competitiveness of local firms in the global arena.

It is important for all of us to come to terms with the reality that both consumers and producers are driven by self-interest. On the supply side, employers and investors are motivated by self-interest as they pursue greater profits while employees are motivated by self-interest as they seek higher incomes and an improvement in their quality of life. On the demand side, as already described, consumers seek the best deal they can get for themselves.

The most fascinating thing about economic activity is that people driven by self-interest in pursuit of their own goals deliver goods, services and other intangible benefits to their fellow men and women. The baker that you have never met gets up early in the morning to bake bread for you. Businesses sell us the goods and services we want in the manner that we prefer. Hawkers come right up to our doorsteps at great convenience to us. They don’t do these things because they feel sorry for us. Companies do not employ people because they feel sorry for them and want to alleviate unemployment. Adam Smith called this phenomenon the invisible hand. It is as if there is an invisible hand that guides people who, driven by self-interest, benefit others by providing them with goods and services they need. Their intentions really do not matter to the beneficiaries; it is the consequences that count. Never believe a businessman when he says he wants to create employment. What he wants is to hire more people to help him increase his profits. However, does it matter to the unemployed person who gets a job that the creation of employment is the consequence of an enterprise that is driven by self-interest?

Legislators who impose laws and regulations designed to force businesses to behave philanthropically fly in the face of reality. Taking a moral view will not alter or modify the negative economic consequences for a business acting in a way that is inconsistent with its best interests and that of its customers. Where there is no force or fraud involved, endeavours that are motivated by self-interest generally produce results that are good for the individuals concerned and the community at large. It is therefore encouraging that President Mbeki has once more dedicated government to lowering the costs of doing business. The economic health of South Africa and its people is dependent on the economic health of its businesses. Government should do everything possible to ensure that no unnecessary costs and other burdens are imposed on them.

Author: Temba A Nolutshungu is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article \ 15 February 2005