Economics is messy. We still teach a lot of myths in the intro to economics course – myths that spill over to conventional wisdom.

1. Human beings make rational decisions in our considered long-term best interest.

Actually, behavioral economics shows us that people almost never do this. Our decision-making systems are unpredictable, buggy and often wrong. We are easily distracted, and even more easily conned.

Every time we assume that people are profit-seeking, independent, rational actors, we’ve made a mistake.

2. The free market is free.

The free market only works because it has boundaries, rules, and methods of enforcement. Value is created by increasing information flow and working to have as many contributing citizens as possible.

3. Profit is a good way to demonstrate the creation of value.

In fact, it’s a pretty lousy method. The local water company clearly creates more value (in the sense that we can’t live without it) than the handbag store down the street, and yet the handbag store has a much higher profit margin. That’s not because of value, but because of mismatches in supply and demand, or less relevant inputs like brand, market power and corporate structure.

The free market only works because it has boundaries. Tweet This Quote

Profit is often a measure of short-term imbalances or pricing power, not value.

I hope we can agree that a caring nurse in the pediatric oncology ward adds more value than a well-paid cosmetic plastic surgeon doing augmentations. People with more money might pay more, but that doesn’t equate to value. The best way to measure value created is to measure value, not profit.

4. The purpose of society is to maximize profit.

Well, since profit isn’t a good measure of value created, this isn’t at all consistent. More important, things like a living wage, sustainability, fairness and the creation of meaning matter even more. When we consider how to advance our culture, “will it hurt profits?” ought not to be the first (or even the fifth) question we ask.

Profit is often a measure of short-term imbalances or pricing power, not value. Tweet This Quote

5. The price of a stock represents the value of the company.

It turns out that the price of a stock merely reflects what a few people decided to trade it for today. Tomorrow, it will certainly be different, even if nothing about the company itself changes.

There’s very little correlation with how the traders come to value a company in the market and how much value a company actually creates.

6. The only purpose of a company is to maximize long-term shareholder value.

Says who? Is the only purpose of your career to maximize lifetime income? If a company is the collective work of humans, we ought to measure the value that those humans seek to create. Just because there’s a number (a number that’s easy to read, easy to game, easy to keep track of) doesn’t mean it’s relevant.


This post originally appeared on Seth’s blog.

About the author

Seth Godin

Seth Godin

Seth is the author of 17 books that have been bestsellers around the world and translated into more than 35 languages. He writes about the post-industrial revolution, the way ideas spread, marketing, quitting, leadership and most of all, changing everything. Seth is also founder of squidoo.com, a fast growing, easy to use website. His blog (which you can find by typing “seth” into Google) is one of the most popular in the world.

Before his work as a writer and blogger, Godin was Vice President of Direct Marketing at Yahoo!, a job he got after selling them his pioneering 1990s online startup, Yoyodyne. In 2013, Godin was inducted into the Direct Marketing Hall of Fame, one of three chosen for this honor.

  • Kelly Willman

    This is definitely true. People rarely act rationally when faced with decisions. One good example is the lottery. The chance of winning any kind of prize from the lottery is very slim. Still some people desperately buy tickets and hope to win, blowing hundreds of dollars that could be used more efficiently. People would rather buy into shiny new fads than what they really need. Example: a person works their butt off but has the newest iPhone. They give up going on vacations, taking days off, or spending their money on a better place to live but they choose to buy into a fad. If they just hold onto their current phone for a bit and save up, it would be good in the long run.
    The free market has laws. Not everything can be sold in a market: children, organs, hope. Value means more than profit.

  • James Finch

    I don’t know how I feel about this article, on one hand I agree that the dismal science makes some very pessimistic assumptions about human nature. But on the other hand they are just that, assumptions. It seeks to find the best way to measure and allocate scarce resources through generalizations made about people’s behavior. I enjoy economics, measuring how an individual firm should behave, or where an entire economy is moving is fascinating. I always have to remember, though, that it rarely takes into account specific individuals. The majority of the time economics tracks a large group of people, whose irrationality and irregularities are averaged out due to their numbers. Of course a doctor provides more worth that is monetarily paid to him, but as humans we attempt to find the easiest way of measuring value, which is where economics succeeds.

  • Ryan Janeczek

    I had to read this article over a second time to actually understand what the author is trying to convey. He says that it is a myth that the free market is free however all of my economics classes have continually stressed the importance of a government enforcing property rights to make a free market work and have not attempted to paint the free market as some type of anarchical economy. Many of these ideas about economics that he goes after are merely theories that hold true in most situations. I agree that profit should not be the deciding factor in how we act as a race but for many firms to be successful in this day and age you have to make decisions based on profit. Regardless how great of an idea a startup has to change the world, without the proper funding and profit maximization the idea will only be an idea.