Profits have a bad press. Perhaps second to private property (theft, according to Bakunin) profits are the devil incarnate in the view of our friends on the left. In the star-studded movie “Reds,” the hero, played by Warren Beatty, was asked for his explanation of the cause of pretty much all that was wrong with the world. In response he uttered a one-word explanation, after a long poignant pause: “…. Profits.”
According to one anonymous but highly commented upon quote: “How is profit not evil when in principle ‘profit’ means you have charged someone more than what it is actually worth?” In the view of Mike Hatch: “At the heart of the paradigm through which I viewed business and commerce was this idea of the inherent evil of profit.” And this headline says it all; even businessmen who favor profits defend them on the grounds that they are small: “Chevron CEO Defends Record Profits as ‘Modest Return’ Over Time.”
What is the real story on this crucial aspect of the economy? It is that profits are ubiquitous, pervasive, unavoidable, and that we are all, communists included, guilty not only of profiting, but profiteering; that is, earning “excessive” profits.
A socialist goes shopping for shoes. He sees the same identical footwear in three different stores: selling, respectively, for $100, $90, and $80. Which one does he purchase, other things equal? Go to the head of the class if you said the latter. Now, regarding this purchase, to what extent does he value the shoes? This is a multiple choice test. The options are A. $120, B. $80 and C. $50. We can eliminate the latter forthwith; that would entail a loss of $30, the exact opposite of profiting. B will not suffice either. Why should anyone, anyone!, bestir himself to act in any way, manner, shape or form given that there is not even the hope, the expectation, of profit? That is soooo contrary to basic human nature, shared by all of us, no matter what our position on politics. No, the only correct answer must be A, where a profit of $40 can be garnered.
But profits are far more pervasive than that. They are by no means limited to commercial endeavors such as buying shoes. A woman washes her hands. It takes her 3 minutes. The soap used costs $0.10; the water bill adds another nickel. Did she earn a profit? Yes, necessarily in the ex ante sense (i.e. when evaluating before the fact). She probably didn’t even think about it in these terms, but she contemplated—expected—that she would be better off with clean than dirty hands, even taking into account the opportunity costs of soap, water, and time. This is usually true ex post as well—evaluating after the fact—but not necessarily so. For example, she might have dirtied her hands on a household task right after initially washing them, regretted doing so, and wished she had waited until afterward so she didn’t have to go through this process twice. Ditto for tying your shoelaces, scratching your nose or going for a walk. We all not only profit from doing so, but try to arrange matters so that our gains are maximized.
There is another important insight we can glean from economics: the greater profits one has earned, the bigger and more important is one’s contribution to social well-being. Paper clips are pretty much near perfection as is, given their humble tasks. There doesn’t seem to be much room for upgrading in them. However, if I can slightly improve these implements, I will indeed earn a profit. However, if I can come up with a cure for cancer, I will make a gargantuan “killing.” I will be rich beyond the dreams of avarice (assuming that the all-loving government allows me to keep much of my earnings). Why the difference? Of course it is because many people value the latter contribution of mine far more than they do the former. Hence, large profits reflect that I have created significant value for others.
So let us hear a little less denigration of this crucially important element not only of the economy, but of all of life.
17 Sharp Quotes from Mises’ Famous Essay ‘Profit and Loss’ by Patrick Carroll
There’s No Such Thing as Excessive Profits by Bob Murphy
Profit is Praiseworthy, and Always Awesome by Pete Earle
Content syndicated from Fee.org (FEE) under Creative Commons license.
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