The right way to make money

by Russ Roberts on March 14, 2012

in Crony Capitalism, Financial Markets

People are making fun of this piece by Greg Smith where he talks about his disillusionment with the culture at Goldman Sachs. Smith claims the only focus at GS is making money and people openly disdain the customer. He’s being mocked for thinking it could possibly be otherwise.

But I was reminded of this 1950 quote from George Merck who was president of the pharmaceutical company:

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.

If you focus on making money, you end up making a lot of bad decisions. Paradoxically, if your goal is to make money, it’s better to think about making a great product, making the customer happy and so on with the constraints of making money along the way. The best corporate cultures encourage excellence, not the bottom line. The bottom line matters of course, but if that’s your focus your long-run results may be quite poor. No corporation that I know of has as its motto: make as much money as possible! And I don’t think it’s just public relations. A great corporation with great profits gets its workers to focus on the consumer and uses other mechanisms to make sure the employees don’t bankrupt the company by being too generous with prices or quality.

EconTalk listener Andrew Hedge points out that Smith’s time at Goldman began when Goldman had just gone public noting that Emanuel Derman also views the post-IPO Goldman as a less attractive company than when it was a partnership. I suspect that when Goldman was a partnership risking more of the partners’ own money their bets were more prudent than today when they are able to use a lot more leverage with a lot less equity. I’m sure their culture was different and that it eroded slowly at first.

 

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