Why do we often think that businesses must have the single goal of maximizing value for shareholders? As I discussed in an earlier post, profit maximization is not, in fact, legally required. In actuality, profit maximization…was invented by economists.

Invented. NOT discovered.

You probably assume that economists create knowledge by studying the phenomena at hand—that is, actual economies. Early physicists studied billiard balls and pendulums; astronomers study stars; and so of course economists must observe firms, markets, government budgets, and, in general, activities that contribute  to economic welfare (or ill-fare). That's the way science works: You observe something and then see if you can come up with some insight about why it behaves the way it does.

This is a misconception—thought a very  common and very understandable one— about how economists work. While true science is about exactly such open-minded, systematic inquiry, economists have by and large adopted a different definition of science: Science = Math. The more elegantly an economist can model something in mathematical form, the higher status his or her work gains within the profession.

So where did the idea that firms maximize profit come from? The story has roughly three stages:

1. Scottish philosopher Adam Smith suggested that economies might be understood as machines, driven by the energy of self-interest. Smith wrote at the time of the Industrial Revolution, when everybody was fascinated by machinery. The idea that a big chunk of society could be also thought of as if it were machinery seemed really exciting at the time. (Smith was actually a much more interesting thinker, but this is the part of his ideas that really took.)

2. The idea that one can split people into self-interested "economic" parts, on the one hand, and ethical and social parts, on the other, caught on.  This originated with British thinker John Stuart Mill in the early 1800s (though he was more interesting, overall, too).

3. In the late 1800s, the early "neoclassical" economists  realized that Smith's and Mill's ideas could be formally expressed in mathematical calculus. Assuming the economy is a machine, and assuming people are all self-interested in their economic lives, one can now elegantly model "the economy" as made up of profit-maximizing firms and utility (that is, satisfaction) maximizing households. Voila! Economics is now a "science"—at least according to the Science=Math definition!

The one fly in this ointment is that no one thought to check back to see if this "economy" invented in mathematical terms had much similarity to the one we actually live in, or if  people can really separate their economic and social selves, or if a mechanical metaphor is actually adequate for understanding economic life. Oops.