Two Kinds of Profits

Column for week of March 16, 2015

     Many people vilify profits.  I endlessly read of those
who claim nobody should profit from providing education. 
Then many of those same people demand higher pay for
teachers.  Can you spell hypocrite?  What is evil about profits? 
The first step to understanding profits is to recognize there are
two kinds of profits.  One kind is truly evil.

     When the highwayman robs his victim, the victim
receives no benefit.  The highwayman's profit is the unwilling
victim's loss.  All profits extracted from unwilling victims are
illegitimate and evil.  Fortunately there is another way to gain
profits.

     Consider a shirt maker who makes a shirt for $15.  He
sells the shirt to a willing customer for $20.  It would have
cost the customer $30 to make his own shirt.  Is the customer a
victim because the shirt maker's efforts gained him a $5 profit? 
Or, is the shirt maker a victim because the customer gained
twice as much as did the shirt maker?

     For both the sale was voluntary.  Each expected to
benefit.  If either hadn't expected to benefit, he wouldn't have
made the exchange.  Why make or buy a shirt if you gain
nothing by doing it?  In all voluntarily, free market transactions
each party expects to gain.

     The future is never 100 percent predictable.  Thus,
sometimes the traders don't get the expected benefits.  People
learn from their errors and try to do better next time. 

     Suppose the shirt maker sells a million shirts and earns
$5 million of profits.  Are his profits ill gotten simply because
he repeated the same act a million times?   How many shirts
did he have to sell before his profits became ill gotten gain? 
Should he have stopped at 100, 1,000 or perhaps 10,000? 
Would any of the million shirt buyers have benefited more if
the shirt maker had decreased his profits by selling fewer
shirts?

     Profits earned through free market transactions are
rewards for serving others.  The greater the rewards for serving
customers, the harder producers try to serve.

     The only way businesses earn profits in free markets is
by producing value.  Our shirt maker bought supplies and labor
worth $15 and produced a shirt that was worth $30 to the
buyer.  The shirt maker got $5 of that added value as profit. 
This was a good deal for everyone involved, including the
suppliers who sold the means for making the shirt.

     Before judging the merits of profits we must determine
whether the profits were gained by the way of the highwayman
or the way of the shirt maker.   Were the profits earned in a
voluntary transaction, or was someone coerced into paying the
profits?  Profits through coercion are a form of theft.  The
person paying the profits is coerced to pay the profiteer.

     Our economy is so severely regulated by government
coercion that it is all but impossible to separate good profits
from evil ones.  The morass of laws all but eliminates
completely voluntary transactions.  Even if government
coercion doesn't dominate the chain of production, it at least
infects it.  Few business profits are paid on a 100 percent
voluntary basis.

     Confiscating all profits to eliminate illegitimate ones
would be a cure worse than the disease.  It would kill much of
the incentive for businesses in the legal economy to serve
customers.  Black markets would flourish.  I hope no one
believes that is a good solution.

     The only sane solution is to eliminate the laws
restricting freedom in the marketplace.  Producers will then be
unable to extract illegitimate profits from customers.  Then we
will have no reason to worry about illegitimate profits.

     Competition in the marketplace eats profits like foxes
eat rabbits.  The only way for free market businesses to sustain
profits is to innovate.  Without new products and better ways
to produce existing products, competition grinds profits down
to zero.  That is why established businesses endlessly turn to
government for the imposition of restrictions on competition.

aldmccallum@gmail.com
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Copyright 2015
Albert D. McCallum