Friedman’s argument for profit maximization

Friedman’s argument for profit maximization

Introduction

Milton Friedman came up with several theories to explain concepts in economics. The focus of this essay is the approaches that he came up with to explain social responsibility of profit maximization to a firm and outsourcing. According to McWilliams (2000), profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit. Outsourcing, on the other hand, is an agreement whereby two organizations enter into a contract to hand over control of some part of the functions of department one organization to the other party to the contract (Oshri et al., 2017)

According to McWilliams (2000), microeconomic theories of a firm are based on profit maximization as a core decision criterion. In this case, market managers make efforts towards attracting profit by using the market prices (McWilliams, 2000). Milton Friedman came up with a theory to explain the social responsibility of profit maximization of a firm. He suggests that the act of social responsibility should be left to shareholders. The firm’s goal should be to maximize profits and returns to the respective shareholders as a special recognition for investing in the company (Oshri et al., 2017).The shareholders can then decide what social initiatives to participate in rather than having the management appointed to do so.

In his book, Friedman stipulates that the social responsibility of a firm is to use its resources to engage in an undertaking that is designed to increase profit and operate within the rule of the game; this is engaging in open and free competition without any deception (Dam & Scholtens, 2015). Managers make choices that work towards profit maximization while trying to avoid those that decrease profits. In order to maximize profits, the organization must increase output for a set of resources, or minimize cost of production. The main purpose profit maximization is to serve as the decision criterion for financial managers (McWilliams 2000). profit maximization however has some drawbacks. First, it ignores risk, secondly, it does not consider changes in value of money over time, and thirdly, profit maximization is ambiguous with unclear measurements and does not consider impacts of some non-quantifiable events (Dam& Scholtens, 2015).

Outsourcing according to Friedman is a contractual agreement that creates an opportunity for both parties. In his attempt to explain flatteners’ of the economy which are the things that level the economy and make globalization easier and effective, he says that it has enabled companies to divide labor such as service and manufacturing into components that can be subcontracted and performed more efficiently in a cost-effective way. The organization pays a fee and the contractor delivers a level of service that is defined in a contractually binding service level agreement(Husted $ Salazar, 2006). The contractor provides the resources and expertise required to perform the agreed service. Outsourcing is becoming increasingly important in many organizations especially in Information Technology (Oshri et al., 2017). The specific objective for IT outsourcing varies from organization to organization. Typically, though, the goal is to achieve lasting, meaningful improvement in information system through corporate restructuring to take advantage of a vendor’s competencies (Oshri et al., 2017).

Conclusion

In conclusion, outsourcing works best for organizations and reaps a lot of benefits to both the outsourcing company and the company undertaking the new venture. It reduces the burden of nonperforming sections of the organizations and helps it focus more on its main objectives. Profit maximization, on the other hand, is crucial to shareholders, it increases their returns on capital invested on the business.

References

Dam, L., & Scholtens, B. (2015). Toward a theory of responsible investing: On the economic        foundations of CSR. Resource and Energy Economics, 41, 103-      121.

Husted, B. W. & de Jesus Salazar, J. (2006). Taking Friedman seriously: Maximizing profits and social performance. Journal of Management Studies, 43(1), 75-91.

McWilliams, A. (2000). Corporate social responsibility. Wiley Encyclopedia of Management.

Oshri, I., Henfridsson, O., & Kotlarsky, J. (2017). Re-representation as work design in      outsourcing.    MIS Quarterly.