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Profits Are for People
· Wednesday, October 26, 2011
The Occupy Wall Street demonstrators are demanding "people before profits" -- as if profit motivation were the source of mankind's troubles -- when it's often the absence of profit motivation that's the true villain.
First, let's get both the definition and magnitude of profits out of the way. Profits represent the residual claim earned by entrepreneurs. They're what are left after other production costs -- such as wages, rent and interest -- have been paid. Profits are the payment for risk taking, innovation and decision-making. As such, they are a cost of business just as are wages, rent and interest. If those payments are not made, labor, land and capital will not offer their services. Similarly, if profit is not paid, entrepreneurs won't offer theirs. Historically, corporate profits range between 5 and 8 cents of each dollar, and wages range between 50 and 60 cents of each dollar.
Far more important than simple statistics about the magnitude of profits is the role played by profits, namely that of forcing producers to cater to the wants and desires of the common man. When's the last time we've heard widespread complaints about our clothing stores, supermarkets, computer stores or appliance stores? We are far likelier to hear people complaining about services they receive from the post office, motor vehicle and police departments, boards of education and other government agencies. The fundamental difference between the areas of general satisfaction and dissatisfaction is the pursuit of profits is present in one and not the other.
The pursuit of profits forces producers to be attentive to the will of their customers, simply because the customer of, say, a supermarket can fire it on the spot by taking his business elsewhere. If a state motor vehicle department or post office provides unsatisfactory services, it's not so easy for dissatisfied customers to take action against it. If a private business had as many dissatisfied customers as our government schools have, it would have long ago been out of business.
Free market capitalism is unforgiving. Producers please customers, in a cost-minimizing fashion, and make a profit, or they face losses or go bankrupt. It's this market discipline that some businesses seek to avoid. That's why they descend upon Washington calling for crony capitalism -- government bailouts, subsidies and special privileges. They wish to reduce the power of consumers and stockholders, who hold little sympathy for blunders and will give them the ax on a moment's notice.
Having Congress on their side means business can be less attentive to the will of consumers. Congress can keep them afloat with bailouts, as it did in the cases of General Motors and Chrysler, with the justification that such companies are "too big to fail." Nonsense! If General Motors and Chrysler had been allowed to go bankrupt, it wouldn't have meant that their productive assets, such as assembly lines and tools, would have gone poof and disappeared into thin air. Bankruptcy would have led to a change in ownership of those assets by someone who might have managed them better. The bailout enabled them to avoid the full consequences of their blunders.
By the way, we often hear people say, with a tone of saintliness, "We're a nonprofit organization," as if that alone translates into decency, objectivity and selflessness. They want us to think they're in it for the good of society and not for those "evil" profits. If we gave it just a little thought and asked what kind of organization throughout mankind's history has accounted for his greatest grief, the answer wouldn't be a free market, private, profit-making enterprise; it would be government, the largest nonprofit organization.
The Occupy Wall Street protesters are following the path predicted by the great philosopher-economist Frederic Bastiat, who said in "The Law" that "instead of rooting out the injustices found in society, they make these injustices general." In other words, the protesters don't want to end crony capitalism, with its handouts and government favoritism; they want to participate in it.
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Army Officer
Another insightful piece by Dr. Williams. An example to illustrate his point: there is a restaurant from a well-known national chain a few miles from where I live. I and my friends used to eat there a lot, as the food and service were excellent. That restaurant changed managers and the attention to detail went south rapidly: poor service, wrong orders, missing orders. We figured it was a temporary situation and tried again once or twice with similar results. Now we don't eat there any more.
It's not like the DMV: if I get bad service at high prices I can't get my license plates elsewhere. But the DMV is non-profit and I'm forced to use their services if I wish to drive on the roads that my taxes pay for. Not like the restaurant where we just take our dining business to a competitor.
There are some things only the government can do: fighting wars is most the obvious example, but our government does all sorts of things that are better done by for-profit entities. In those areas where government has to compete against the free market it doesn't do well. UPS, FedEx, and similar businesses would have sunk the U.S. Postal Service if it was not subsidized by tax dollars. And public schools generally deliver an educational service greatly inferior to private schools.
I'd rather deal with people who know that their job depends on making me happy than people who have the power to make my life miserable. That's just common sense - which is why the OWS kids don't get it.
Posted October 26, 2011 at 10:07:47 AM
DennisC
Dang, Army Officer, that was well said!
Posted October 26, 2011 at 12:05:05 PM
Richard Ryan
Another exceptional piece by Dr.Williams.Should be required reading in every educational institution in America.
Army Officer`s post puts it better than I could have.Your post also should be required in all American schools.
Richard Ryan
Lamar,Missouri - Birthplace of Harry S Truman
Posted October 26, 2011 at 12:24:56 PM
DennisC
Dang, Army Officer, that was well said!
Posted October 26, 2011 at 1:45:25 PM
Will in Texas
Government has a "legal" monopoly on many things. I think the terminology has been traditionally only used to illustrate businesses with obvious unfair advantages and therefore outlawed, rightlfully so because it thwarts competition. Government monopoly is a misnomer...the correct term is tyranny. Monopolies stiffle competittion; Government is killing it.
Posted October 26, 2011 at 2:44:34 PM
T
I always get a kick out of the term Non-Profit. People say it like they are working for peanuts when they work there. Maybe the local cadres and volunteers do but not the administrators. Some of them bring home more money than many or most owners of small businesses. Some make several hundred thousand to millions of dollars a year. You can't tell me that that isn't Profit.
Posted October 27, 2011 at 8:09:56 AM
JAC
Army Officer: Good comments. And don't forget, with its increasingly poor performance, and in spite of all the tax dollar subsidies, the Post Office is on the brink of bankruptcy!
Posted October 27, 2011 at 8:26:10 AM
pete
Item 1: "Too big to fail"
After 9/11 United Airlines filed chapter eleven. They wanted to get out from under their obligations to employees who were convinced by their union that "the only way to save United, and thereby their jobs, was to buy stock" during a 1993 strike. As a Jonny-come-later employee I was told that if I wanted the job I would have to buy the stock. I was lucky, having only been there a few years. I knew people who'd been with United for 30 and 40 years, and they lost their collective ass on the bankruptcy. If not for a judgement in federal court they would also have lost their entire retirement. The same fate was true for non-UAL employees who were heavily invested.
United Airlines, shed of the burden of it's debts, bought out Continental and became United/Continental or some such. The same thing would have happened with GM and Chrysler had nature been allowed to take it's course.
Like an airplane will fly if left to do what it does, business will take care of itself if not interfered with by purposefully incompetent people.
Item 2: Google your favorite "charity" and check out there BoD and their tax information. The are required to report salaries of the BoD and upper management.
Posted October 29, 2011 at 6:11:15 PM
Paoli Pete
WOW! I love your writing, sir! I look forward to it every week. This article, however, was exceptionally good. Thank you for it!
All the very best,
Pete
Posted October 31, 2011 at 11:53:53 AM
G Dub
Looks like these comments above, and mine, shower praise on 'Army Officer'.
Well said Sir.
Isn't / wasn't the most important obligation of the Federal Government that of protecting Americans and American interests from foreign threats ?
. . . Certainly not the issuance of the myriad regulations, permissions, waivers, un-constitutional legislation and the like.
Oh Lord, 6 Nov 2012 cannot come soon enough.
G Dub ( also a retired Army Officer and living just up the road from Richard Ryan in Lamar )
Birds of a feather ?
Posted October 31, 2011 at 12:05:40 PM
john98
He nailed it!
The "Occupy" folks are asking
"What about us?"
as the ultimate in entitlement mentality.
Posted October 31, 2011 at 2:10:30 PM
Will in Texas
Why does "profit" get a bad wrap? Jealousy (covetousness) is an all too powerful emotion that is way too easliy stirred.
Posted October 31, 2011 at 6:15:09 PM
Will in Texas
and BTW...I luv you Dr Williams...You Da Man!!
Posted October 31, 2011 at 6:16:58 PM
Nobody Important
@ Army Officer:
Regarding public school and private schooling... It is very harsh comment that you have made because some people cannot afford private schooling for their kids. Even worse, most private school will not provide special services... And the disabled students are stuck with the schooling that is provides by public government.
If private school is run on majority of customers, the minorities will suffer for this... Because the services itself is expensive.
Do not compare things like public educations because sometimes they are the only service that is provided as opposed to other various services...
Posted October 31, 2011 at 6:56:24 PM