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Unsatisfactory Prophet

Here’s a letter to the Wall Street Journal:

Prof. D. Kirk Davidson wants businesses to stop pursing maximum profits and to settle for earning “satisfactory profits” (Letters, Aug. 30).  Putting aside the confusing vagueness of the concept “satisfactory profits,” let’s explore some of the likely results of Prof. Davidson’s recommendation.

One result would be greater environmental damage, as firms settle for getting only satisfactory output, rather than maximum output, from a given quantity of inputs.  In other words, more inputs – such as fuel, iron ore, and land – would be used to produce any given quantity of output.

Another result would be decreased real wages for workers.  When firms settle for only satisfactory improvements in productivity (instead of maximum possible improvements), output per worker will be lower over time than it would otherwise be.  Because worker pay is ultimately determined by worker productivity, workers will suffer lower standards of living.

A third result would be more dangerous work places and consumer products.  Compared to firms focused on earning maximum profits, firms content to earn only satisfactory profits are not as diligent at taking steps to minimize the expected costs of lawsuits (and reputational losses) that occur when employees are injured on the job and when consumers are harmed by firms’ products.

I could go on, but the above list satisfactorily shows that Prof. Davidson’s recommendation is unsatisfactory.


Donald J. Boudreaux

As my friend David Gasten asks about Prof. Davidson’s letter, “Did he really say he wants more mediocrity?”


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