Criticisms Or Drawbacks Of Profit Maximization Objectives

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Although profit maximization objective is widely known objective of a firm, some theorists have raised doubts on the validity of this objective. They have criticized the profit maximization objective on the following grounds:

1. The profit maximization objective ignores the timing of returns. It equates a dollar received today with a dollar received in the future. In fact, $ 100 today is valued more than $ 100 received after one year. It is because the money received in earlier period may be reinvestable to earn more.

2. The critics of profit maximization objective argue that it ignores the risk associated with stream of cash flow of the project. For example, the total profit from two projects may be same but the profit from one project may be fluctuating widely than the profit from the other project. The firm with wider fluctuation in profit is riskier. This fact is ignored by profit maximization objective.

3. The profit maximization objective has greater relevance to a perfectly competitive firm than to a monopoly firm. Critics argue that a monopoly firm would be earning super normal profit more or less automatically.

4. Today large-scale corporate type of organizations exist. Different stakeholders such as owners, managers, customers, creditors, and employees are directly connected with the organization. The interest of each member in this organizational collusion cannot be achieved with the sole objective of profit maximization.

5. The profit maximization objective of the firm has greater relevance to short-run. In long-run, a firm cannot survive with this objective.

6. If all firms keep profit maximization as the primary objective, they may commit unfair practice to maximize profit.

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