Profit Maximization Criticism

Profit maximization is one of the primary goals of every firm and the investors. However, this process has been criticized in the following ways;

• Profit maximization does not take into account the timing of returns. This means that money received today can be reinvested and yield more returns; time value of money.
• This objective of the firm ignores the risk attached to a project’s cash flow stream. For instance, the total profit from Project A & B may be the same. However, profit from project A may have wider fluctuations compared to project B. Therefore, project A is considered riskier than B. This concept is ignored in the process of profit maximization.
• If firms set profit maximization as their primary objective, there is a high likelihood that most firms may get into unfair practices to gain competitive advantage and achieve the objective.
• This target is only considered relevant in perfectly competitive firms and not in monopoly companies. The economists argue that monopoly companies will earn supernormal profit anyway, hence the irrelevance of the profit maximization objective.
• The relevance of profit maximization is also limited to the short-run. This means that this objective cannot be achieved by a firm in the long-run.
• The current organizational structure of firms, the scale, and stakeholders involved results to collusion which means that not every interest of the stakeholders will be satisfactorily considered and still achieve the objective of profit maximization. These stakeholders include; owners, creditors, managers, employees, and customers.