Profits Are Good

When I got to college I was surprised at how much disdain capitalism and the bourgeoisie were held in.  I was a small town unsophisticated kid.  To me, a law abiding person who served the wants of fellow people and supported a family seemed good. The way life was ordered, with shopkeepers, tradesmen, doctors, clerks, was not only familiar but correct.

Professors didn’t agree with me. In fact, it was implied that my thinking was shallow. The bourgeoisie were exploitative, secretly dishonest, depraved, and above all boring.  The artist, the academic and the world historical individual were the ones who deserved respect. Don’t think too much about the trail of blood left by the world historical individual.

Anyway it is a story for another time how I came to decide that capitalism is good. I have decided to start a blog defending capitalism. To defend capitalism one has to defend profits.  For under capitalism no business exists and grows unless it is profitable.

The kid who went to college in pre-1960 America thought the way things were was pretty good, but he was unsophisticated about how an economy works. One thing was that, to me, profit seemed a dead weight on the economy. If the government could just make all our cars we could get the cars at a lower price paying only the costs of the auto manufacturer without that extra slice of profit which the owners demanded. Everything would be cheaper if everything was produced without a slice of profit. The government could pay the same wages to workers and executives, pay fair interest on the capital it needed to build factories, even make payments in lieu of taxes. Everyone gets the same things only cheaper.

So is profit just an unfair slice which capitalism rewards to the people who can afford to start a business? One of the most frequent critiques of capitalism is that it produces a high standard of living but distributes wealth unfairly.

Lets imagine a relatively free market town, such as Hong Kong in 1950.

Everything has a market set price.  Rent for a factory loft, hourly wages for a skilled leather worker, price of sewing machines, chemicals and dyes. It is not a perfect market. Perhaps telephone service and electricity have regulated monopoly suppliers.  Taxes may fall unfairly on some industries causing market distortions but in general everything trades by voluntary agreement at a price that the seller and the buyer agree.That does not mean sellers would not like to get more or that there would not be more sellers if the market price were higher. It is just that buyers who want it enough are willing to pay the current market price to meet their supply desires. Buyers who want it less are unwilling to meet that price either doing without or substituting.

You may want a factory loft in a good location for your shop, but you may settle for a factory loft located less conveniently.

A young man dreams of selling a high fashion woman’s shoe line.  He thinks he has design talent. After many years saving he and a partner decide to try.  So they buy what they need to produce shoes on the free market. They rent a factory loft. They buy sewing machines, leather, dye, etc.  They hire skilled leather craftsmen.

Now here is where some critique will occur.  They will pay as little as they can get away with cheating the worker.  The worker needs a job to eat so he agrees under duress.  The fact of the matter is there are many potential employers for such craftsmen at a range of wages. Most wages are probably pretty close to each other for equally experienced and skilled workers.  If someone pays too little he will get the less skilled and less reliable workers.  Underpaid workers who are not under performing will constantly be looking for another job. An employer who underpays will suffer high turnover. So there is a market wage that is imposed on the employer.

Its true the worker needs a job, but that is not duress any more that the fact the employer needs workers to make shoes. In both cases, there is a market, of employers for employees and of employees for employers.

So now we have this young dreamer. He buys goods and services on the market. He makes shoes and sells them. Suppose women like his designs and buy them. If the money he receives for his shoes is more than all his expenses the amount left over is profit.

Where did this extra money come from? He did not get it from his workers because he paid the prevailing wage for the quality of worker he got. He did not get it from the women purchasers because they were under no compulsion to buy his shoes. They freely parted with their money because they valued his shoes more than the price. He did not get it from the factory loft owner, or the seller of sewing machines, or the leather merchants, all who received their price.

Profit is additional value created by this business. That is why the American idiom “to make money” is so true. Women thought his shoes had a certain value to them. They received a certain amount of utility and pleasure from the shoes. They willingly parted with the price. Yet the price was more than the added up costs to make the shoes. The net value in the town is greater than before the shoes were made and sold.

It is easy to imagine how someone can add value to something. If Monet buys some oil paint and canvas and paints a masterpiece who would contest that he created value. If a village was using non optimal farming techniques and someone teaches them better techniques, crop production would go up.

We could all agree that producing more crops is better. However someone might argue that using resources for something so unnecessary and frivolous as women’s high fashion shoes is wasteful. Particularly when there is so much poverty in our town.

Value is subjective, however. A man might value opera more than housing. He might live under poorer conditions to free more money for the pleasure of attending live opera, who is to judge? You do not have to live under the conditions he chooses. Surely you do not argue that everyone must forgo spending money on pleasurable luxuries until everyone has some minimum standard of living. In any case, charity is a different question. Presumably the women buying the shoes got their money by voluntary exchange. They met someone else’s needs or wants of sufficient value that they could afford the shoes. They are entitled to purchase the shoes if it meets their needs or wants without depriving any other person.

Profit is the measure of how much added value a business has created. You might say the more profitable the business the more good it has done. Now I am assuming that the business in question has no special favors from the government and buys and sells in free voluntary exchange in a relatively free market. Profits are good.