Peter Drucker on Profit

Profit is not the purpose of but a limiting factor on business. It is not the explanation, cause, or rationale of business behavior or decisions, but the test of their validity. It is the result of performance of the business in marketing, innovation, and productivity. So profit's first function is a test of performance. It is an example of feedback, self-regulation of a process by its own results.

Whether there is such a thing as a profit motive is highly doubtful. There has never been any evidence for it. Indeed, the idea of it does harm, based on the mistaken prevailing belief that there is an inherent contradiction between profit and making a social contribution. Actually, a company can make a social contribution only if it is highly profitable. (Management: Tasks, Responsibilities, Practices 59-60).

When business people talk to the public about profits, they usually still define the goal of their business as profit maximization and appeal to the profit motive. They fail to explain and justify the functions of profit. (MTRP 374).

An equally important function of profit is the premium for the risk of uncertainty. Much economic activity focuses on the future, which is inherently risky. Only profit can supply the capital for tomorrow’s jobs, both more jobs and better jobs.

At the very least, business needs a minimum of profit – the profit required to cover its own future risks, to enable it to stay in business, to maintain the wealth-producing capacity of its resources.

Finally, profit pays for the economic satisfactions and services of a society, from health care to defense, and from education to the opera. They all have to be paid out of the difference between value produced by economic activity and its cost. (MTRP 71-73).

To the best of my knowledge, Drucker never says that wages are profits, like I did here. But analogous to the above, profits in the forms of wages are what pay for the satisfactions and services of individuals and their families – for food, clothing, a place called home, health care, education, transportation, entertainment and so forth. Also, regarding wages as profits might have made Drucker less cavalier about the profit motive.