Profit seekers — those just after a quick buck — are often derided as being anti-social, as harmful to the interest of society at large.
Common objections to profits themselves are that they are unearned, that they drive up prices for consumer goods, and that excessive profits run others out of business. I am not sure how critics measure the interest of society, but I am pretty sure that by any standard the overwhelming evidence proves just the opposite. For simplicity, I want to deal just with competitive profits, and not monopolistic profits yielded from government privilege in a “mixed economy.”
The first thing to note about profits is that there are different kinds of profit measured in relation to time. Investment profit is a simple accounting measure weighting an action’s costs and revenues. Entrepreneurial profit takes investment profits and measures those against the opportunity costs of alternative decisions, of what could have been. Psychic profits are the purely intrapersonal gains or pleasures an individual experiences from action (like reading this commentary, I hope).
Another important point about the profit mechanism is that it is a system of profits and losses. In a consensually regulated market, entrepreneurs make predictions with capital they control to predict the future behavior of consumers. The entrepreneur is the sole risk bearer for all past decisions. Of course, others will most likely be affected by those past decisions, but employees and customers only risk their capital to the extent their have chosen to become investors.
Some see this profit as exploitative, saying the entrepreneur is skimming the wages of his or her employees. This indeed does happen — when government intervention prevents or undermines collective bargaining. In other cases, the profits reaped are what remain after paying wages and other factors of production. The entrepreneur, the first laborer, has foregone another profit opportunity and is rewarded last, after paying expenses, according to how efficiently he or she put capital to use.
Often, entrepreneurship is seen as a distinct field of economics rather than an integrated economic process of economic calculation. From reading Ludwig von Mises, he thinks of entrepreneurship more generally as making decisions under a condition of uncertainty to acquire and combine resources for a higher valued use.
Profits are Information
Profits are created when someone takes resources that are in less demand by consumers and transforms them into products of higher demand. Therefore, the existence of profit is a signal of a misallocation of resources, which consumers have implicitly expressed with their own actions.
Profits provide extra incentive to continue putting resources to their higher valued use, and it helps correct a prior misallocation of resources. Without a system of profit and loss, it would be impossible for those in control of capital resources to know the demand for one product vis-à-vis another.
Collectivized markets, like government policing, are incapable of devising such an efficient system because there is no reliable or automatic feedback mechanism, like prices in a market economy, to gauge consumer demand.
Profits as Anomaly
Profits come about from a change in market conditions. In a hypothetical scenario of universal complete information, profits would tend toward zero. If all businesses knew the future price and demand for all consumer products (goods and services), businesses would compete in such a manner that the costs of production would match the prices of the end consumer goods, less the depreciation and interest accrued on capital resources. However, because of technological advances, changes in consumer tastes, and unforeseen events taking place in the future, there is a constant hashing of new information that must be deciphered.
It is this uncertainty about the future that, in the long run, makes profits possible.
Tending Toward Zero
As I said, profits are not the norm. They come about by correctly predicting future market conditions. As the market for a product matures, profits will tend to decline. This happens for several reasons.
The method of production becomes more refined, and competitors begin cutting into one another’s profits. One method of increasing profits again is to reduce costs. This encourages competitors to emulate that success in order to improve their own profits by reducing prices, which spurs the whole cost-cutting cycle again. There is a limit to the point where costs can be reduced, and that is the price level consumers are willing to pay for a product. Below that point, businesses will tend to cease production and invest their resources into more profitable areas and seek higher returns on investment.
Cooperatives tend to exist in well-established, more ossified industries with predictable consumer demands, like farming, where the necessity for entrepreneurship is decreased. A reason why relatively few cooperatives exist is because people can possibly invest their capital into more profitable ventures. Losses also tend to disappear for much the same reason. Poor performers tend to go out of business or end production of losing products.
Counterintuitively, the criticism of high profits falls flat. Far from being unearned, an entrepreneur is in a constant flux of reading the future demand of consumers and managing the resources available to him or her. The maligned profit motive has the tendency to reduce final consumer prices, as we see in the electronics market. It is in the centrally planned markets like health care and insurance that prices continue to skyrocket. We can also see how high returns inform less-efficient business of potential profit opportunities.
It should go without saying, but a genuinely free market does not exist and never has. If one had, cooperatives and worker-owned collectives would probably be more common because technology and information would spread more quickly and barriers to entry would be diminished. Corporations exist at the pleasure of the state, meanwhile, receiving subsidies and protection from liability and competition.
Do not think for a second those privileges come without a price. Without government-financed intellectual property enforcement, a foreign policy of American hegemony, bail outs and rent seeking, and a fiat credit monopoly, were else would these corporations get the money to pay off politicians?
Image credit: Conlawprof, with a Creative Commons license
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The Ideal Form of Government
For ages, people have tried to construct the most ideal form of government. By “ideal,” I mean that which fulfills its purpose. The ideal pencil functions as a pencil should, allowing a writer to transcribe ideas onto a medium. What idea, good or bad, a writer transcribes is irrelevant. The pencil qua pencil does its job. Two writers with completely contradictory ideas could even use the same pencil, albeit not at the same time.
The role of politics is to decide who controls the figurative pencil or another resource at any particular time and for what ends. The same could be said of government. Two individuals might have diametrically opposed reasons for supporting a government, but they both support the existence of government. For example, Thomas Jefferson stated that government should be established to secure our individual inalienable rights. In comparison, Benito Mussolini said, “Fascism conceives of the State as an absolute, in comparison with which all individuals or groups are relative, only to be conceived in their relation to the State.”
These two ideas cannot both be true at the same time. Nevertheless, there is an ideal form of government that could conceivably achieve both Jefferson’s and Mussolini’s ends, though not at the same time, of course.
What Is Meant by ‘Government’
As the argument goes, men are not angels, so government is necessary to resolve disputes that arise. But what is a government? John Locke put much thought into this and decided that a functioning government needed to satisfy three “inconveniences” that would arise when living in a society that lacked a government. Locke believed there needed to be a known, settled law by which all disputes are ruled against. Second, he believed there must be a sufficient threat of force behind those ruling so they are followed. Third, a government would need to function as an independent judge of disputes.
Why a Worldwide Dictatorship
The only way to remotely satisfy all three “inconveniences” is to establish a world government. Governments exist now in a state of anarchy with one another as there exists no supra-government that lives up to Locke’s standards to enforce international laws and agreements. Because of their ability to offset the costs of aggression with taxes, governments pose a far graver danger to peace and security than do regular criminals, so a world government is imperative if local or national governments exist. Citizens of other countries also exist in a state of anarchy with citizens of other countries, although this seems to be less of a problem than government-on-government coercion. The United Nations is the closest thing that resembles a world government, yet it does not have the power to coercively impose taxes on citizens of its member nations. Member nations voluntarily fund the UN, and it does not possess the enforcement power to make its resolutions binding.
Even if a world government capable of enforcing its rulings were established, members of the world government would still exist in a state of anarchy because no one external to the government enforces rules upon lawmakers. The one way to reduce conflicts within the government is to reduce the number of government officials. Conceivably, the least populated government would rest power in a single person to avoid incidences of anarchic relationships. Now, admittedly, even this would not entirely end the existence of anarchy since the dictator would also exist in a state of anarchy with everyone else on the planet. Yet, a worldwide dictatorship would be the most ideal government, should one exist, to eliminate anarchic relationships.
For Jeffersonians, world government would be a nightmarish thought at first blush. Many Jeffersonians also believe that government is inevitable, that some form of government will always exist. That is certainly a theory and all the more reason to support immediately establishing a world dictatorship of limited powers before a world government of expansive powers is possibly created by a Chinese-Indian coalition.
For the Mussolini crowd, a worldwide dictatorship would soon enough make “the State as an absolute” a reality.
Why Not a Worldwide Dictatorship
I am being facetious in advocating a worldwide dictatorship. But a world government is where support for any government inevitably leads its supporters. In fact, a worldwide dictatorship of limited powers would quickly dissolve into complete tyranny. (Hint: Hierarchical power structures are not responsive to demands for accountability.)
What we see is the more that power is disproportionately divided among people, the more violence tends to erupt and corruption festers. Government is so dangerous precisely because it can externalize the costs of its violence onto captive taxpayers. The more that power is dispersed and divided, the greater that rights are respected and peace prevails. The profit and loss mechanism and competition, not the impossibility of constant vigilance, provide a natural check on the size of business enterprises and the power they can aggregate to themselves.
In truth, the ideal form of government is none at all since its purpose, from a rights-respecting perspective, is impossible. That does not mean a lack of governance or rule-making in society. A society without the ability to bring order would quickly be no society at all. The absence of monopoly government does not mean everyone will be of a pure heart and display empathy for his fellow man. Precisely because we are not angels, rules and rules enforcement should not be centrally commanded and controlled.
Image credit: rick, with a Creative Commons license