All Commentary
Tuesday, June 29, 2010

Are Profits Fit Only for Serfs and Slaves?

In their recent book, From Poverty to Prosperity, Arnold Kling and Nick Schulz relate that ancient Romans believed it honorable to gain wealth through battle and conquest, but dishonorable to profit by engaging in commerce. Such work was considered so demeaning that it was left to the children of freed slaves. Because of the associated disgrace, those involved in commerce tended to leave business as soon as they could afford to do so. Kling and Schulz suggest such attitudes explain why the invention of the steam engine by Hero of Alexandria (in what was then the Roman province of Egypt) was largely ignored. Romans regarded the engine as a curiosity or toy; no one thought of putting it to work. The European aristocracy clung to similar attitudes up until the twentieth century, as did many in the antebellum South. Productive work was considered dishonorable and to be left for serfs and slaves.

Are we headed back to those same beliefs? In his State of the Union address President Obama proposed forgiving student loans to those going into (honorable) public service, but not to those going into (dishonorable) commerce. The idea that making a profit is morally tainted has become fashionable in recent years, as has the belief that those who earn profits must “give back to the community” to atone for doing so.

Yet making a profit is neither moral nor immoral—it is simply necessary to preserve life. Every living thing must make a net energy profit if it is to survive. If living creatures do not consume at least as many calories in the form of food as they expend procuring, preparing, and digesting that food, they will die. By analogy, if an oil company’s actions are to be of use to anyone (whether the company is owned by the State or private individuals), it must produce more BTUs’ worth of petroleum than it expends to find, produce, refine, and transport it.

Money Changes Everything

While the need for a net energy profit is obvious, the introduction of money clouds the issue. Energy profits may be all well and good, but monetary profits? Money is evil! Yet it is money that enables us to keep score. Without money and prices based on free exchange, it is impossible to determine whether any cooperative activity is worth the cost.

Suppose, for example, a company drills a well that will yield 100 barrels of oil a day. Is it worthwhile for the company to produce the oil, or should it cap the well and look for one that will flow at a higher rate? Theoretically, a net energy balance could be performed to decide the question—that is, the BTUs contained in the oil could be compared to those needed to produce it. Unfortunately, determining the energy cost of fabricating, transporting, and installing tanks, pumps, pipe, valves, fittings, nuts, bolts, and gaskets would be a monumental task, as would determining the energy needed to transport and refine the oil.

Suppose, however, that the necessary calculations could somehow be made, and it turns out that producing the oil would result in a net energy gain. What then? Should the company produce the maximum 100 barrels a day, or would that just leave it with a storage problem? An energy balance cannot answer this question because it does not indicate demand.

But there is still another problem. The only reason we could even consider performing a net energy balance to determine whether the oil should be produced is that energy appears on both sides of the equation. I am, for example, willing to invest 50 BTUs in order to obtain 100 BTUs’ worth of oil in return, but how much energy should I expend to produce, say, a pound of copper?

In a free market, prices—generated by the free buying and selling of privately owned things—allow us to calculate the costs and benefits of production, to determine consumer demand, and to compare the relative values of different goods. The oil producer does not need to know how much energy was used to make a valve. All he needs to know is its price. The manufacturer’s costs for materials, labor, overhead, and energy are all reflected in that price. Knowing the price of the equipment and of its transportation and installation enables the oil producer to determine his costs. Knowing his costs and knowing the price consumers are willing to pay for a barrel of oil enables him to calculate the monetary profit (or loss) that will result from recovering the oil. Because the prices the producer pays for equipment, parts, services, and labor include the value of energy expended, the producer can be reasonably sure that if he makes a net monetary profit, he will also be making a net energy profit.

Asking whether it is moral to make energy or monetary profits makes no more sense than asking whether it is moral to eat. Like eating, making a profit is neither moral nor immoral, it is simply necessary.

Fair Profits

That is not to say, however, that because making a profit is necessary, anything done in the name of profit is acceptable. Trading labor for food is one thing, snatching a crust of bread from a child’s hand is quite another. The question of morality, then, lies in how a profit is made, not in the bare fact that a profit is made.

There are only two ways in which a person may obtain goods to ensure a net profit and sustain life: produce it himself or obtain it from someone else. There are only two ways to obtain a thing from another: Take it with or without the other’s consent. If a good is obtained with consent (without either fraud or coercion), it must have either been exchanged for a service or another thing of value, or it must have been received as a gift or as charity. A thing obtained by consent is obtained morally.

If a thing is taken without consent, it is obtained immorally. This is true even if it was taken legally. In most societies, outright theft and fraud are illegal but most societies have legalized some degree of “rent-seeking”—that is, manipulating government rules to obtain unearned profits. Such legalized plunder is minimized in states whose economies are based on the free market and maximized in those in which government intervenes heavily. Mercantilism, political (or “crony”) capitalism, socialism, fascism, and communism are all based on varying degrees of nonconsensual exchange. If we are to live, we have no choice but to make profits. We can choose, however, how we make them. Will we do so by producing and freely exchanging goods and services with others, or will we once more convince ourselves that such activities are beneath us, fit only for serfs and slaves? Will we, like the Romans, choose to believe that wealth is honorable only if it is gained by plunder?

  • Richard Fulmer is a freelance writer from Humble, Texas, and the winner of the third annual Beth A. Hoffman Memorial Prize for Economic Writing for his article "Cavemen and Middlemen," from the April 2012 Freeman