Profit efficiency is a macro-economic concept used in assessing whether an economy, industry or supply chain is expending an optimally balanced level of rent for the use of capital.
Economies where too much profit is being extracted are over-paying the owners of capital at the expense of other contributors to a productive economy or industry. Economies and Industries that provide insufficient returns to the owners of capital should find that capital is moved to alternate investments where the return is greater. Profit Efficient economies and industries are paying the minimum profit to owners of capital required to maintain the optimal level and distribution of capital investment. This concept has importance when discussing the relative outcome efficiency of industries such as the US Health Care System which has high customer costs, high government subsidy and yet has relatively poor health outcomes. This industry is said to be profit inefficient as compared to European health care models which have less customer and government inputs and yet better outcomes. The difference appears to be that the level of rent paid to capital investors in the US system is a greater proportion of the overall productive value of the industry. Similar observations are made about the US Financial System's impact on the US economy as a whole. The increasingly profit inefficient US economy is the primary reason for its rapid decline as an economic superpower.
From a macro-economic perspective, profit efficiency must be balanced against productive efficiency. Although socialist societies pay little rent to capital owners, capitalist economies have successfully demonstrated that an effective incentive to improve supply chain efficiency is provided by the extraction of greater profit. Socialist economies have been, to date, unable to demonstrate any alternative sustainable motivating force to find productive efficiencies as that provided by the profit motive. Therefore designers of economic systems must find the balance between providing incentive to minimise productive inefficiencies without over remunerating the profit motive for that purpose.
From an investor's perspective, profit efficiency is turned on its head from that of the macro-economic perspective. Essentially profit efficiency becomes the efficiency with which deployed capital can extract profit (see McNulty, J - "Profit efficiency sources and differences between small and large US commercial banks"). Essentially then a profit efficient bank, from the investor's perspective, is profit inefficient from the perspective of the economy and the value chain.Last modified on 19 April 2012, at 06:50