Now, let me mention that I'm a wannabe student of economics, and this chapter might use some economic jargon and theory. I hope some real economist stumbles upon this and gets inspired to make a thesis/paper on this theory of mine, but until then here it is in its raw form.

Adam Smith advocated for free markets and trade, because it led to the most efficient producers being allowed to supply their goods. With protectionism, high cost producers are allowed to thrive, with free trade the most efficient ones do, and consumers wins with the lowest price while worthy producers gain more revenue/profit. States are discouraged from running their own enterprises, because private sectors are generally more efficient and operate at a lower cost. And profit is the rightful reward to the entrepreneur.

So then how is a profit an inefficiency?

Now, let's take the example of a banking business. The state pays its employees more than the private sector, and so it struggles to be efficient. Private sector players squeeze their employees for profits, and so they become more efficient and lead to lower costs. And the entrepreneur adds his profit margin/markup to the price. Wait a minute? Where is this markup in the state bank? Is it the same as that of the private business?

If we have a small business, profit margins/markups aren't a big issue. The entrepreneur receives in profits around the normal salary of a manager (like say in a restaurant biz), and accepts the variability in it as part of the business. The problem comes with large organizations, which have enormous economies of scale that allow them to spread their fixed costs over larger output and reduce their overall cost, which reduces their total average cost. For example, the owner of a small restaurant would consider twice before opening a new branch, as the investment makes up 50% of their entire net worth. However, for McDonalds, 100 new branches would cost barely 1% of their revenue, because of their scale. McDonalds can open their own ketchup factories and achieve cost savings from it, whereas a small restaurant won't undertake such a big investment because 1. the initial investment would be too costly and 2. it doesn't need that much ketchup.

Now, obviously McDonalds won't sell you at its cost price. There must be a specified profit markup, to keep its shareholders happy and grow the company. Now, I found that McDonalds net profit margin is roughly about 25%, and their revenue for the recent quarter is 3.72 billion, which makes about 0.93 billion in profit. Lets assume other deductions reduce this to 750 million in cold profit. This means that on total consumers were charged 750 million extra over McDonald's actual costs to satisfy its shareholders and company growth. From the consumer's point of view, isn't profit an additional cost that the consumer is paying for outta their pocket? Because the entrepreneur/shareholder has no salary, it has a profit margin. The cost of entrepreneurship is paid by the consumer, in which case the total cost may exceed a government business, making this enterprise inefficient! Yes, in this model price=cost, since the gap between price and cost is considered to be the cost of profit-driven entrepreneurship, an additional variable cost of 25% in this case. 

The problem with government enterprises is that they are almost always grossly inefficient, leading to higher actual costs. But in some cases, the actual costs may still result in a price below the profiteering private firm, which makes state enterprises more efficient, contrary to what privatization policies say. This may help the government save up on many costs. For example, the private view advocates road development contracts in my country should be given to private firms who compete to provide it at the lowest cost. A state-owned road development company would face higher costs due to the government's business ineptitude, hence making it useless. However, if we consider profit not as some sort of reward to be given out, but an actual cost borne by consumers and the firm (firm paying its entrepreneurs through the margin), a state road development company may beat the overall price offered, hence making it worthwhile.

Additionally, some state-owned enterprises are also for-profit, but considered inefficient and requiring privatization. They say it bears higher costs and is inefficient. But if it is beating the prices of private players, I say it is very efficient if we consider the cost of profit borne by private players. Furthermore, profit received by the state is in fact less inefficient than private profit. Why? Profit is profit, you say. This is because firstly state profit is used to fund government expenditure, which is on development of the country and social services such as health, law, education etc. Secondly, private profit has a lower MPC, and is in fact a deadweight loss. What this means is that profit received by private players travels upward the ladder. The profit collected by MNCs transfers to shareholders, of which the majority shareholders are super rich elite that won't spend much of the additional income. Give a billionaire a million, what use is it for him? But a poor man or a government will blow all of it, keeping it travelling in the economy.

Secondly, profit that stays or is used in the company isn't very useful either. True, the company could use it to develop itself, creating jobs and spending. But McDonalds is almost beyond the point of development in many countries. In this case, the company may spend outside the country to grow, which is a leakage from the economy it earned it from. Secondly, the company can simply sit on its cash reserves. Some large companies in my nation have cash reserves that equal the budget deficit of my state government. In contrast, the government can never run out of expenditures for development and social welfare, and would also act only in benefit of the host country. Maybe the government should become a majority shareholder in McDonalds, not interfering with the management but putting that dividend and stock market profit to good use.

How can the government sector be made more efficient? Firstly, I would say government and private sector must coexist, each providing incentive to keep their costs (price for private) low. Secondly, the government mustn't allow losses to persist at all, and should completely reform or shut down enterprises where it is making losses even after matching the private player's price. In this case government may benefit by taking ownership of existing private firms, wherein the management shouldn't be interfered with running of the business, though at a low profit margin that ties in with state welfare goals. We could have a government division like shark tank or something, to recruit efficient and ethical managers for state-owned enterprises. We already have such an elaborate process of hiring and selection for political and administrative jobs, yet I can bet the return from an entrepreneurial division would be much greater. Entrepreneurs can be given incentive through predetermined salary hikes on achieving profit margins, and negative salary growth on losses.

We have all been blinding heralding private sector as the most efficient enterprise in every industry, but failed to recognize the cost of profit that is distorting the world economy. While in small businesses the cost of profit is equivalent to a normal employee's salary, in MNCs this margin goes way beyond its requirement to maintain social welfare, and rewards entrepreneurs at the cost of its consumers. If this theory is not flawed and actually makes sense from an economics perspective, this means that free market doesn't achieve social welfare at all, especially in the case of large organizations of today's world.