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Dislike of profits There are people who think that profit is dirty. They consider the pursuit of profit to be greedy or predatory, so anything done for profit is tainted. This mindset is especially prevalent among Big Government advocates and young people, and in the halls of academia. Some young people view profit so negatively that they even shun jobs at for-profit businesses, insisting on working only for non-profit organizations.
What is the fundamental meaning of profit? At a basic level, we can consider any activity to generate a ‘profit’ if it provides a ‘benefit’ that exceeds the ‘cost’ of the activity. That means any activity, even if it doesn’t involve money. For example, the benefits of good health or weight control can be viewed as ‘profit’ gained from exercise. Most of the time, people do things only if they believe the benefits will outweigh the costs. This is normal and natural. Making a ‘profit’ is a reasonable goal for many types of activities. It simply indicates that something is worth doing. Likewise, making a profit is a reasonable goal for any business. The benefits of profit Now, let’s talk about the benefits that profit provides to society. There are several.
Desired goods: Profit helps ensure that consumers can buy the products and services they desire. First, it is the potential for profit that causes businesses to supply goods. How many retailers, manufacturers, and restaurants would supply goods and services if they could earn no profit? Second, businesses must make sales in order to make profit.
They will make sales only if they supply the things customers want. Third, customers sometimes want a certain good so much that they bid up its price. The higher price (and profit) gives businesses more incentive than usual to supply the hotly demanded item.
Efficiency: The profit test helps ensure that the economy is efficient. To generate a profit a business must (a) supply products and services that customers are willing to buy, and (b) keep its cost of supply lower than the selling price. Businesses that satisfy customers and keep costs low enough will make a profit. Businesses that don’t will lose money. Businesses that lose money long enough will become uncompetitive and bankrupt. New companies, ideas, and products will take their place. It’s Darwinian, but it spells efficiency.
Enable prosperity: Best of all, profit enables long-term prosperity. The two points already mentioned contribute to prosperity. But there’s more to the story. Prosperity depends heavily on advances in innovation and productivity. Creating innovation and productivity and bringing them to fruition requires investment. And investment requires profit. Profit does two necessary things. First, profit provides incentive to invest. Second, profit earned in prior periods supplies much of the funding for new investment. So, profit enables investment, which enables innovation and productivity, which enables a higher standard of living. Profit enables prosperity.
Critics of capitalism often claim that profits help only shareholders. This is tired Marxist class-warfare propaganda. Profitable businesses provide benefits for many people. Profitable businesses are more likely to create innovative products, provide job security, pay taxes, invest in new factories and equipment, hire additional employees, and increase employee compensation. Unprofitable businesses are the opposite.
They are less likely to create innovative products, provide job security, or pay taxes. They are more likely to shut down factories, lay off employees, and cut employee compensation. Clearly, profitable businesses benefit many people besides shareholders. If you doubt this, ask someone who has worked at an unprofitable business. By the way, even many non-profits owe their existence to profit. Wealth created by profitable commerce has funded many charitable organizations, hospitals, museums, and parks. Too much profit? Some people may be thinking, “Well, I’m not against all profit. I just don’t like it when businesses make too much profit.” Is “too much” profit really a problem? If it is, we can’t stop at moral indignation. We are obliged to think about a solution. Should government establish maximum profit levels? That would raise some difficult questions:
What is an acceptable rate of profit?
Will it differ based on the riskiness of each industry?
How will it accommodate different business models, e.g., low-volume, high-margin versus high-volume, low-margin?
Will greater profit be allowed in some years if other years have losses?
How will adherence to the profit targets be enforced?
Who’s going to do all this added work?
That’s just the tip of the iceberg, but it illustrates the unmanageable complexity of government-controlled profit margins. Really, it’s worse than that. Such a scheme would also disrupt the supply of goods that society wants, and unleash a massive wave of crony capitalism and corruption. Capitalism offers a better solution. It’s called competition. If a business makes “too much” profit, that encourages other businesses or entrepreneurs to enter that market. The added competition usually drives down prices and reduces profits to a more normal level.
Sure, the capitalist solution is not always perfect. But it’s better than a government solution. Tolerance To be clear, I’m not saying that people are motivated only by profit. People do help others out of the goodness of their hearts, and they donate their time and money to charitable causes. I applaud and encourage that. But we cannot base our economic system on the charity principle. The economy needs the profit motive. Some people are motivated by profit and others are motivated by good intentions.
To me, it seems practical to tolerate both kinds of people. Consider a cure for cancer. Are we more likely to discover a cure if we (a) allow only humanitarians to work on it, or (b) allow both profit-seekers and humanitarians? Why sneer at someone who does it for profit? Anyone who invents a cure for cancer will provide a magnificent service to society whether they work for personal profit, good intentions, or both. Let’s tolerate both kinds of people. That will maximize the wellbeing of society.
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