A World Without Profit

A World Without Profit

posted at 8:52 pm on June 26, 2010 by Doctor Zero
regular view

The concept of profit takes a lot of abuse from the Left.  Democrats usually spit the word out as though it were a curse, especially when they’re working to increase government control over private industry.  Our current economic malaise illustrate that, contrary to liberal rhetoric, the absence of profit does not lead to “shared wealth” or “economic justice.”  A world without profit is a world of poverty.

What, exactly, is “profit?”  Technically, it’s income minus expenses.  This does not provide a complete understanding of the concept, however.  If you’re one of the many people who lined up to buy a new iPhone last week, you can appreciate how the retailer made a profit – he paid a certain amount to purchase his inventory of iPhones, added in his overhead costs, and sold it to you for a few dollars more.  His supplier made a profit from him in the same manner, in a chain of commerce which extends all the way back to the manufacturer.

However, it could be said that you also profited from this transaction.  You acquired a device you could not possibly have built yourself, in exchange for the earnings from a few hours of your labor.  You value this device more than the other things you could have bought with the money you paid for it.  Your job allowed you to efficiently convert some of your time into the money you used to make the purchase.  Every voluntary transaction produces a mutualincrease in value – both parties benefit, or they would not perform the transaction.  The dealer wanted your money, and you wanted that iPhone.

How did you earn the money you used to buy the iPhone?  You most likely traded some hours of your labor to your employer, in exchange for a paycheck.  Once again, both parties made a profit.  You might view your job as an unpleasant necessity – feel free to hum a few bars of “I Owe, I Owe, So Off To Work I Go.”  In truth, there are other ways you could use your time to take care of basic survival needs.  You might be able to find an easier job that pays less.  At the extreme, you could live in the wilderness, hunting and foraging for food.  Your job is not the only way you can survive… it is the most efficient use of your time, and it generates the most value for other people.

To put it another way, you want to maximize the profit you earn by selling your labor.  This naturally leads you to produce the maximum added value to the economy.  Millions of people engaged in this quest generate a staggering amount of value, beyond what would be created if they merely attended to their basic needs in a primitive fashion.  The voluntary exchange of this value, through mutually beneficial transactions, produces fabulous wealth.

We Americans are swimming in a sea of profit.  The depth of that sea is measured in time. Profits are not earned all at once.  You (and your parents) probably invested a good deal of time and money acquiring an education, to increase the value of your time.  If you’re young, you might not have achieved a net profit on that investment yet.  Some people never do.

Companies suffer immense losses on their way to realizing future profits.  Apple spent a lot of money designing and creating those iPhones, and success was not guaranteed – in fact, they’re selling well ahead of expectations.  An even more dramatic example is the pharmaceutical industry, where billions are spent researching drugs that might require years to reach the market.  Some of those investments are lost on drugs that never go on sale at all.  Once pharmaceuticals are put on sale, there’s no guarantee they’ll generate big sales numbers.  Success at the corporate level requires the ability to calculate risk, and it is driven by the anticipation of profit.  No corporation bases its business plan on the money it thinks it will spend and earn today.

I doubt most people appreciate how much our standard of living depends on the exhilarating anticipation of huge profits.  The pursuit of profit is a high-octane fuel, pumping through a turbocharged economic engine.  It leads to the development of miraculous products, such as the iPhone, which in turn create new opportunities for investment and earnings.

When businesses and individuals believe their opportunities for future profit are restricted, or likely to be seized by the government, they become unwilling to incur short-term expenses.  What happens to the supply of medical care, when young people realize grueling years spent at expensive medical schools will lead to tightly controlled salaries and punishing tax rates?  What company will accept the risk of selling health insurance when their already thin profit margins are virtually erased by mandates and regulations?  Why suffer the immediate costs of hiring and training new employees, when the forecast for future revenue is grim?

It is important to understand that our economy functions at such a high level that relatively small reductions of incentive can unleash tremendous shock waves, the way small twists of the wheel produce dramatic turns for a car traveling at high speeds.  It is also important to realize the wealthy investors who drive business formation can always put their money in safer investments with lower rates of return.  They take big gambles when they see big prizes.  We need a lot of rich people wagering high stakes to generate the kind of prosperity we have enjoyed for generations.  Instead, they’re looking at the shelf of shabby carnival prizes offered by our increasingly socialized economy, and leaving the table with money in their wallets.  They can live comfortably on modest rates of safe interest from their vast fortunes.  They don’t have to hire you, or supply capital for your business ventures.

The same forces influence the behavior of individual white and blue-collar workers.  Rising taxes, increasing minimum wages, and expensive mandates like ObamaCare price entry-level jobs out of the market.  Lavish welfare benefits lead those at the lower end of the job market to see insufficient profit in taking those entry-level jobs.  Waves of government stimulus, subsidy, and price controls destroy the ability to forecast future sales and earnings.  No one chases a profit they cannot see clearly.

In the end, there are only three reasons people do anything difficult: desire, ambition, or compulsion.  The number of people willing to perform extremely challenging work because they truly enjoy it, or answer a spiritual calling, is insufficient to provide for the vital needs of a huge industrialized nation.  That means ambition can only be replaced by compulsion.  The work product of compulsion doesn’t have anywhere near the value created by free people, in the pursuit of their ambitions.  The difference is between a prosperous society filled with stores selling technological miracles, and the grey communal existence of long lines for mediocre goods furnished by the State.  That difference will be measured in the barren wasteland where the middle class used to be.  As Francisco d’Anconia puts it, in a famous passage from Ayn Rand’s Atlas Shrugged:

Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns–or dollars. Take your choice–there is no other–and your time is running out.

I choose dollars, joyously and without reservation.  Those who demand you choose otherwise will lead you into a World Without Profit, where you have very few other choices to make.