The breaking of this law when one uses profit as the measure of a successful company or business is why I think that a well set up market system actually works. People and companies can set up making a profit as their target and it is still a good measure of success, because it is actually what you want.
The key for a good society is regulating the places where making max profits can induce bad behavior and leaving alone where it does not. A hard thing to get right but forcing people to inform you of the ingredients of food for sale, is an example of a good regulation I think.
Even disregarding the potential for negative externalities etc., profit alone can still be a terrible KPI.
I worked for a large engineering consultancy that was very profit motivated. They figured out a brilliant way to maximise profit: get rid of business development! Only pay for work when clients are paying you to do it. This was GREAT for quarterly profit margins, at the expense of the project pipeline.
As the pipeline dried up, they figured out a new way to maximize profit: get rid of engineers! The customers are big, stupid organisations, and it'll take them a long time to notice. You can totally maximise quarterly profit margins until they do.
And that's how you can simultaneously be highly profitable and in a corporate death spiral.
Moral of the story: reality is a fundamentally complex place. You need multiple KPIs to get a handle on it -- and ideally those KPIs should be mutually contradictory enough to force you to engage with that complexity head-on, rather than boiling things down to game-able metrics which ultimately will defeat themselves because they are such a poor proxy for reality.
I would say the complexity is in balancing profit over time. Here is your contradictory force. In the end that large engineering consultancy was making zero profit and was worth nothing. Whether running a business into the ground will give you more overall profit than just selling it and putting the money into government bonds is something one can consider, but in your case was the consultancy owned by the people making these short-term profit maximizing decisions? The agent/principal problem for companies has not been solved.
It is probably not a coincidence that the top 6 US companies by market cap (Apple, Amazon, Alphabet, Microsoft, Facebook, Berkshire Hathaway) are still run by their founders or were run by their founders for most of the companies existence before a recent step-down (Microsoft) or death (Apple). Most public companies aren't and they struggle to grow or even survive over time.
> in your case was the consultancy owned by the people making these short-term profit maximizing decisions[?]
It was a publicly-listed company, so that'd be a yes.
Profit is obviously over time a necessary condition for making a sustainable business. But it's definitely not a sufficient condition. I think there are a huge number of people who don't understand this.
Eg.: when I see people clambering for TSLA to make a profit... I think they're wrong. Or, at least, mostly wrong. TSLA has been unprofitable in the service of dramatically (and rather effectively) expanding both capacity and market share. Those are excellent reasons to be unprofitable. And TSLA still obviously has a lot more room to grow in both respects, so in this situation, trading profitability for growth is a good decision. (exhibit A: Amazon)
>> in your case was the consultancy owned by the people making these short-term profit maximizing decisions[?]
>It was a publicly-listed company, so that'd be a yes.
I'm a bit confused. I stated that public companies are not often owned by the people who mange them and that is a real problem. You are asserting that all publicly-listed companies are managed by their owners. That is just wrong. I own both TSLA and AMZN and of course there are hundreds of things that need to be done to make a sustainable business. Just talking past each other at this point, I think.
Ah, sorry, you're correct. The company was owned by people who wanted short-term profit maximising decisions (its shareholders). The people actually making the decisions also owned shares, but nowhere near a controlling interest.
Anyhow, I agree with your point about companies that are controlled by founders (whether public or not). A (sufficiently pragmatic) visionary with a controlling interest can achieve things that no amount shareholder-focused governance can. Of course they can also drive a company into the ground faster than anyone -- but the heights are reserved for them.
Correct. "The key for a good society is regulating the places where making max profits can induce bad behavior and leaving alone where it does not." Start of the second paragraph.
The implication behind Goodhart's Law is that people are good at gaming performance measures. You can game profit measures too[1], but it's difficult and there are strong incentives not to. Another counter-example that doesn't involve fraud is Amazon, which was unprofitable for a long time.
The first thing anyone smart does when they make a metric is think about what rules or other measures have to be in place to prevent obvious gaming of the metric to the detriment of the real goal.
When this is done at scale to markets it's called "regulations."
The key for a good society is regulating the places where making max profits can induce bad behavior and leaving alone where it does not. A hard thing to get right but forcing people to inform you of the ingredients of food for sale, is an example of a good regulation I think.