Profit is the opposite of what your socialist friends think
Profit gets a lot of coverage in the popular media, most of it bad. The for-profit prison, resourcefully maximizing its occupancy. For-profit health insurers, charging ever-escalating premiums. Evil profit-seeking billionaire Jeff Bezos, cackling as an avalanche of cardboard boxes suffocate his warehouse workers.
Successful business owners are easy to resent, so politicians waste no time encouraging you to do so.
“News outlets deserve better than to be chopped up and stripped for profit.”
“I called out shady mortgage lenders who exploit veterans for profit.”
They don't even agree what profit is. AOC suggests it’s like sterling newsprint spools — a hidden asset found within even a money-losing newspaper. Elizabeth Warren fashions it a type of sausage made of ground-up veterans. Can you do a proper job of opposing something if you’re hazy on what it is?
Follow the physical resources
Let’s set the record straight, starting with what profit means. You know the accountant’s definition: how much revenue you took in minus how much you paid in expenses. But if you dig beyond the accounting abstractions, what does it really mean in terms of people’s lives?
You own a restaurant. It consumes physical resources of beef, onions, and labor. It creates physical meatloaf, table service, and ambiance. You can’t do arithmetic on onions or ambiance, so if that were the whole story, you couldn’t talk about a profit or a loss.
Profit requires another ingredient: a market where your customers vote on how much your meatloaf is worth in dollars and where your suppliers and employees likewise put a price on your inputs. They tell you how much your meatloaf means in their lives and how much they value the resources you consumed.
And because they do it in dollars, you can figure out which is bigger. At closing time, if you find yourself with more dollars than when you opened, you made the neighborhood better off. Or if you end with fewer, you cost the community net resources. They’re telling you they would have preferred to use the beef and those hours of labor to some other effect than your meatloaf.
In terms of physical stuff, your profit isn’t plunder. It’s exactly the opposite: proof of the net good you did for other people.
Profit = Sustainability
Socialists since Marx’s day have been vexed by a paradox. Since the earth has finite resources and manufacturing involves extraction, they reckon, capitalism must collapse eventually. A handful of ultra-rich people will control the dwindling supply of stuff, markets will dissolve because no one else has anything to trade, and the masses will ultimately overthrow the elites.
Yet 150 years later, the collapse is nowhere in sight. Instead, resources on the verge of running out prove oddly robust, and the freest markets seem to yield the most prosperous people in stubborn defiance of Marxian theory. Seeing profit in terms of physical resources makes the reason clear. Profit rewards the person delivering more value for others while consuming fewer resources. It rewards conservation, not exploitation. The socialists follow the money flowing toward the capitalist and miss the real story: the useful value goes the other direction.
If you looked only at the mountains of thank-you notes he inveigles from children and hoards in his offshore tax haven, you’d spot Santa Claus for a greedy exploiter with a heart of ice. Think of how many favors he can call in from the people he rewarded for being "nice." The man is a threat to our democracy.
But if you zoom out to consider who got the physical stuff, the picture changes completely. The notes are what he received in return; the real story is what he did for the rest of us to earn them.
In a market economy, we’ve standardized reusable thank-you notes with pictures of Andrew Jackson or the queen, which help us fill in for Santa by trading favors with each other. But they also tempt us to fixate on the bits of paper held by the few rather than the favors done for the many. Following only the money is an economic fallacy with a long pedigree and a name: mercantilism.
Socialists are also misled by their own successes. Where the government prevents markets from forming, people are free to cast off their honest valuations and indulge in an orgy of unsustainability. They pump sludge into government-owned rivers. They clog government-owned roads. Government replaces the healthcare market with a healthcare system, allowing drug makers to triple their prices. Joe the Voter buys crazy things Joe the Consumer never would: a sprawling government bureaucracy, unimaginably wasteful wars, a surveillance state, a voracious prison system and so on. "Late-stage capitalism," clucks the socialist, when it's exactly the opposite of capitalism.
While you might be pleased government programs are unsullied by profit, you should be terrified they're insulated from its goateed alter-ego: loss. As useful as the profit motive is for encouraging entrepreneurship, the loss motive may be even more socially valuable. If your meatloaf is terrible, the market will nudge you with losses and eventually bankrupt you to stop you from screwing up perfectly good hamburger.
The drug war would never work as a business model, but as a government program, it can keep ravaging society for decades. A mechanism for shutting down bad ideas is a precious thing.
Profit = A distress signal from someone in need
Wherever there's a profit opportunity, there's someone or many someones in need of help. (Photo by Hugo Jehanne)
A market economy is a resource grid that runs on price signals. The integrity of those signals is never more critical than in a crisis when water or power generators are in short supply and lives are at stake. Victims need resources urgently, and they say so by bidding up prices, offering profits to anyone who helps.
Here we get another view of profit: a distress flare, broadcasting a signal on the grid to mobilize resources to where they’re most needed. People in need bid up prices, prompting locals to conserve whatever the community is short of and leave more available for others. And they simultaneously encourage the guy two states over to load the pickup truck with supplies and make the eight-hour drive into a disaster zone.
Unfortunately, these are exactly the moments when profit’s critics get most vocal and most deadly. They don’t applaud the people stepping up to help but instead denounce them as “price gougers,” as if prices didn't equally reflect the demand curve. The most backwards critics even threaten suppliers with prison sentences because prices rose, as California Attorney General Xavier Becerra recently did in response to the state’s wildfires.
“Profiting off human misery” is a familiar yet bizarre charge. Human misery is everywhere to one degree or another. If you don’t deserve a profit for alleviating the worst of it, when do you?
The profit motive is the best mechanism we have for getting resources to the right places, fast. It doesn’t preclude alternatives like charity, but it works when they fail. If FEMA or good Samaritans were meeting the victims’ needs, or if they could run electric generators on the attorney general’s sanctimony, prices would have already dropped. It’s difficult to find words harsh enough for someone who “helps” disaster victims by taking away their flare gun.
Stand up to the haters
The market is an important machine. All our lives depend on it. And it depends on high quality profit and loss signals.
It is not okay for economics deniers — especially those in public office — to demonize profit or to demand critical industries try to function without it. Why don’t they stick to something less destructive, such as cutting off the electricity to hospitals.
Don’t let the haters go unchallenged; the truth is the opposite of what they’re telling you. Profit doesn’t exploit the needy, it serves them — more reliably than any of the charlatans denouncing it.