A Profit Without Honor
NOVEMBER 01, 1994 by R. C. SPROUL JR.
Mr. Sproul is editor of Tabletalk Magazine and the author of Dollar Signs of the Times (Baker Books, 1994).
My memories of my undergraduate ,days include an especially strange student who loved to wear a T-shirt carrying the slogan: “Human Need. Not Corporate Greed.” Like most liberal slogans, this one seems at first blush to be sane and compassionate. Humans, after all, are far more valuable than make-believe legal entities. But as with most liberal ideas, closer scrutiny reveals underlying folly. The assumption behind the T-shirt’s slogan is that profit is something that companies steal from consumers. Basic to this thinking is the myth that one man’s profit is another man’s loss, that free economic trade is a zero-sum game.
Henry Hazlitt, in his Economics in One Lesson, demonstrates that most errors in our economic thinking stem from a failure to see the big picture. We support tariffs against Japanese cars because we read about massive layoffs in Detroit. We overlook the massive layoffs that are spread thinly among smaller companies who can no longer export to Japan because of the tariffs. The same applies to profits. We imagine that Wonder Bread carefully calculates the cost of producing a loaf of bread, and then tacks on ten, fifty, or a hundred percent to the sales price. We see that profit as a pound of human flesh taken from the consumer. What we miss is the strength of our desire for that loaf of bread.
How important is a loaf of bread to you? If you really had to, how much would you be willing to pay? $2? $37 Imagine the folks at Wonder Bread wearing T-shirts with the slogan “Corporate Need. Not Human Greed.” I pay $1 for a loaf of bread. Am I gouging Wonder? Is my gain Wonder’s loss?
The confusion stems from a failure to understand the nature of free exchange. Barter makes clear the mutual benefit of free trade. Suppose I am a shoemaker. On a given day I can produce ten pairs of shoes. If I’m married to the old woman who lives in a shoe, in a week I can provide shoes for me and my family. After another week I have a surplus of shoes. I notice, however, that while their toes are warm, my large brood is hungry. Meanwhile, my neighbor the butcher has a full stomach and cold toes. I could try to stir-fry some shoe leather. My neighbor could try to wrap some steaks around his feet. The better option is for the two of us to trade. I trade from my surplus of shoes; he trades from his surplus of meat. Clearly everybody profits.
Money muddies the matter. A professor at a seminar asked his audience this: “If it costs a shoemaker $20 to make a pair of shoes, and he sells them for $40, who makes the profit?” The vast majority responded that the shoemaker profited. He did, but so did the consumer. We saw the value of the shoemaker on his shoes. What we missed was the value of the buyer on the shoes. He must have valued the shoes more than $40, else the trade would not have happened. Remember that even this exchange is ultimately barter. Where did the $40 come from?
The buyer had to sell something else to get the money, either his labor, or some good. He traded his labor or good for the shoes. Money is only a means for barter. It is the promise of future goods.
So why all the fuss if it is this simple? While we never pay more than we are willing to pay, we always pay more than we want to pay. Of course the same is true of the producer. He never sells for less than he is willing, but always sells for less than he would like.
Both Sides Gain
I recently spent a few days looking for a new car. I was unsuccessful. A dealer friend of mine suggested that I not negotiate for a car. He said that if I found a car I liked, I should just pay the asking price. The dealer, he explained, had to make a profit. I explained that the dealer would like to sell the car for $50,000. I would like to have the car for free. He, however, would be willing to sell the car for, say, $8,000. I would be willing to pay $10,000. Negotiating decides where in that intersection we end up. The closer to $10,000 we get, the more uncomfortable I become with the deal. Likewise the dealer becomes uncomfortable the closer we get to $8,000.
The beauty of free trade is that both sides profit. Suppose we had closed the deal at $9,000. Before the trade he had a car he valued at $8,000. I had $9,000 in cash. Our total value together was $17,000. After the trade I would have a car I valued at $10,000, and he would have $9,000. Our total value would be $19,000. Each of us would have profited $1,000. The deal never happened, however, because my top was $8,000, his bottom $10,000.
The same is true of every free trade. Each time we buy a loaf of bread or a candy bar, each time we sell our labor or a used car, we receive more than we give and both sides profit. Profit then does not stand against human need, but actually supports it. There is nothing dark and sinister about the profit motive because in free trade profit can only be reached by causing others to profit.
The same is true in non-monetary exchanges. The profit motive woke me up this morning. Like many others I am engaged in the battle of the bulge. I got up early this morning to jog around my neighborhood. All things being equal, I would have preferred to sleep later. All things, however, are not equal. My waist size is not equal to my pants size. I freely exchanged my time and energy this morning for the benefit of a slimmer body. My jogging was a profitable venture. The only thing I lose is pounds.
Profit Saves the Day
Profit, however, does so much more. I have only begun to chronicle some of its outstanding qualities. Profit also communicates important information. Consider the massive flooding along the Mississippi River in the summer of 1993. Many people who are otherwise comfortable with the idea of profits were put off by what they considered obscene profiteering by some of the entrepreneurs who went into the ice or generator business in the aftermath of the flood. Thou sands of families found themselves without electricity as the waters rained destruction down on the river towns. Ice became a hot commodity. News reports inveighed against those cold-hearted folks who charged $5 or $10 dollars for a bag of ice that once sold for $1. Surely this wasn’t legitimate profit.
Consider, though, what those profits did. With so many people in need of ice, how long would ice last at $1 a bag? If you were in such a situation how many bags would you buy? It depends upon the cost, doesn’t it? At $1 a bag I know that I could use ten bags. Two go in my refrigerator, two more in the freezer, two in my cooler, and four just in case I might need them later. At $10 a bag I discover I can do with two bags. I may even invite my neighbor to store his perishables with mine and split the cost of the bags. Multiply these numbers by the hundreds of families in need of ice and you’ll see how vital the high cost of the ice is to insure that there’s enough to go around. Those high prices, rather than putting ice out of reach of those poor people, actually insured that more people would be able to get some needed ice. Profit saved the day.
The high cost of the ice, however, did more than keep the demand in check. It also served to increase the supply. Imagine yourself sitting in your easy chair in eastern Illinois watching the news reports on the flooding. In your driveway sits your refrigerated truck. Imagine first that the news reported that the government mandated that all ice be sold at $1 a bag in the troubled regions. What would you do? Nothing. Now suppose that you heard that ice was selling for $10 a bag. Because of the profit motive you would get out of your chair, run down to the local grocery store and buy out all their ice at $1 a bag. After filling your truck with the precious commodity you hit the highways and head west to seek your fortune. By the time you arrive you would probably find that others had had the same brilliant idea, and because the supply was better, ice was now selling at $5 a bag.
The profit motive not only reduced the demand for ice, but the profits earned alerted others of an opportunity, and the supply grew. Rather than taking unfair advantage of the flood victims, profit-makers actually served the victims’ needs far better than an artificial price ceiling could have done. Profit brought the ice to those who most needed it. Remember also, that each and every bag of ice purchased—t any price—represented mutual profit for buyer and seller. Buyers paid more than they would have liked, but never more than they were willing.
There are obscene profits. When I was mugged several months ago, my assailant made an obscene profit. He traded my health for my money. To do so, however, he had to steal my health. It was not his to trade. In like manner the government makes obscene profits when it trades my freedom for my money via taxation. As with the mugger, I am given a choice: pay up or lock up. My freedom, however, is not the government’s to trade. They first had to steal it from me.
The same is true even when the government pays for what is mine. Suppose the government wants to build a highway through my house. Suppose also that they give me the fair market value for my land. This is obscene profit. Obviously I value my land more than the fair market value. If not, I would have sold it. What the government stole from me was the difference between the market price for the land, and the price at which I would be willing to sell it. Even if the government pays me ten times the market value for my land, if I value it at eleven times the market value, the government has earned an obscene profit. (All this, of course, excludes the other illicit profit of the government. They are buying my property with money they first took from me. It is like a mugger forcing me to sell him my watch I value at $50 with the twenty dollars cash he just stole from me.)
Only governments and criminals have the power to engage in coerced exchange. The only difference is that one is legal, the other is not. The only other way for profit to be obscene is if the free trade involves fraud. If a soda company marks a can at 12 ounces and it only contains 11 ounces, they have earned an obscene profit. If I sell a car with an odometer that reads 50,000 miles, and the car has 150,000 miles on it, I have earned an obscene profit. If the government tells me that I can redeem a bond in twenty years for $50, and then inflates the money supply such that twenty years later the bond has only $10 of purchasing power, it has earned an obscene profit.
The difference between an obscene and a legitimate profit has nothing to with the percentage of the profit. If Jackson Pollack invests $ 10 in paint and canvas, and half an hour of his time to create a masterpiece that I value at $10,000 dollars, that is no obscene profit. The eleven-ounce soda is obscene profit.
Greed and Wealth
What about the wealth that profit can create? Is that not obscene? Is there not something intrinsically obscene about opulence? Perhaps our friend in the T-shirt was not so offended by the idea of profit, but by the radical disparity between the excess of Beverly Hills and the squalor of nearby Watts, between Manhattan and Harlem.
The difference is so stark that it is difficult to explore dispassionately the reason for it. Liberals would have us believe it is this monster, “corporate greed.” Greed does explain the wealth of the wealthy. What we miss is the more proximate cause of the wealth. In a free market, wealth can only come from one source: meeting the needs of others. It is, in large part greed which drives the movie moguls. That hunger for wealth, however, is met not by oppressing the people of Watts, but by meeting their desires. The drive for profit in a market system always translates into the drive to meet the wishes of others.
Consider Henry Ford. It would stretch our credulity to suggest that Mr. Ford created his company because of his deep and abiding concern for convenient transportation for the common people. It seems far more likely that Mr. Ford, like most of us, wanted to be rich. The desire of Americans for a convenient means of transportation was but the means to the end of Mr. Ford’s personal fortune. He assessed the situation and realized that by mass producing automobiles he could reap huge profits, and enjoy a life of enormous wealth. The result was that millions of people exchanged a certain amount of their wealth, which Mr. Ford valued more than his cars, for Mr. Ford’s cars, which the people valued more than their money. Everyone wins.
Mr. Ford’s greed did not lead him into tyranny. Rather it forced him to become a suitor. To satisfy his greed he had to satisfy the buying public. To maximize his profit he had to maximize the desirability of his product. To satisfy his corporate greed, he had to meet human need. Where profit rules, democracy rules. Every dollar is a vote by the buying public.
The plight of the urban underclass also has its root in greed. In this instance the poor are in part poor because of obscene profits. The profiteers, however, are not businessmen but bureaucrats. The professional poverty pimps profit by perpetuating the misery of the underclass. Their profits are obscene because they are engaged in fraud. They profit by selling the lie that government can help them out of their poverty by stealing from others. It is not profit that causes their poverty but the plundering of profits by politicians.
Ivan Boesky made headlines when he announced, “Greed is good.” Greed, if understood as the desire or willingness to do anything, including lie or steal, to profit, is not good. After all, “What profit is it to a man if he gains the whole world, and loses his soul?” If, however, greed is merely the desire to increase one’s wealth through meeting the desires of consumers in a free exchange, greed is not bad. The profit motive drives all that we do, from working long hours at the office, to Mother Teresa’s works of compassion. Even she profits, for she values the privilege of serving her God far more than her other options. Even our T-shirted friend, however he may now be endeavoring to meet “human need,” does so out of a profit motive. Driven by profit, he seeks to destroy profit. Corporately, all that we do freely, we do for profit.
Profit created our friend’s T-shirt; it even drove him to wear the shirt which despised profit. Profit created the college where he studied. I only wish he had profited more from the education available to him. Profit, finally, drove you to invest your time and energy in reading. I hope you found your reading to be profitable.