The Goal of Economic Activity is to Maximize Net Benefits

Mark Perry points to an article at PBS Newshour written by Professor John Komlos, professor emeritus of economics at University of Munich.

Mark’s post does an excellent job discussing one of the many economic flaws, mistakes, and outright contradictions Mr Komlos’ column contains.  I won’t rehash his arguments here but I strongly recommend the read and some of the commentors are good, too.  Rather, I want to discuss a rather glaring Econ 101 mistake he makes.

Mr Komlos writes:

Or consider orange juice. I paid $2.35 for a quart the other day, but it was worth $4.00 to me. So in a sense I made a “profit” of $1.65. Thus, if the price were to increase to $3, I would still buy that orange juice, and I would still make $1 “profit.” See what I mean?

Any first semester Econ 101 student could point out why this is incorrect reasoning for his case of increasing minimum wage.  The reason is economics focuses on what occurs at the margin and that the goal of economic actors is to maximize their economic profit, not just to make profit.

Let’s examine Mr Komlos’ statement quoted above:

Mr Komlos writes that he values a quart of orange juice at $4, but only had to pay $2.35 for it, thus giving him an economic profit of $1.65.  However, if the cost were to rise to $3, he still gets an economic profit of $1.00, but he is made worse off because of the price rise.  His economic profit fell from $1.65 to $1.00.  That $0.65 is now gone.  Lost forever.  It is the unseen cost of the price rise.

Additionally, he fails to recognize that the marginal analysis has changed.  In economics, we demonstrate that benefit-maximization occurs when your marginal benefit (MB, or what you gain from the consumption of one extra item) is equal to the marginal cost (MC, or what you have to give up to consume one extra item).  In the example above, the MC rises but the MB doesn’t.  Therefore, the same amount of orange juice no longer maximizes benefits.  In order to have his net benefits maximized, he’d have to adjust his consumption.  And this is true whether it is with orange juice or labor.

Do people always act in a net benefit-maximizing fashion?  Of course not, but to imply, as Mr Komlos does, that people behavior do not change because their profit (that is, benefit) changes is categorically incorrect.

2 thoughts on “The Goal of Economic Activity is to Maximize Net Benefits

  1. I love critical thinking. Those who choose to develop this ability easily dispose of disingenuous arguments of those pushing government control of wages for unskilled workers.

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  2. Mr. Komlos also fails to explain that he has been spending that $1.65 profit on something else all along, and will now necessarily spend $0.65 less on that something else in order to pay the higher coffee price.

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