This is actually a cliché of socialism, but it often goes unchallenged because the businessmen who repeat it are rarely suspected of endorsing ideas with socialistic overtones.
The notion that a business is entitled to a fair profit has no more to commend it than does the claim that workers are entitled to a fair wage, capitalists to a fair rate of interest, stockholders to a fair dividend, landlords to a fair rent, farmers to a fair price for their produce. Profit (or loss), regardless of how big, cannot properly be described as fair or unfair.
To demonstrate why fair should not be used to modify profit as a right to which someone is entitled, merely imagine a businessman, heedless of the market, persisting in making buggy whips. If no one were willing to exchange dollars for whips, the manufacturer would fail; not only would he have no profit but he would lose his capital to boot. Would you have any feeling of guilt or unfairness for having refused to buy his whips? Most certainly not!
We do not think of ourselves as unfair when we search for bargains. We have no sense of unfairness when employing a competent as against an incompetent helper, or borrowing money at the lowest rate offered, or paying a low instead of a high rental. The idea of guaranteeing a fair dividend to one who invests in wildcat schemes never enters our heads. When we shop around, our choices cause profits to accrue to some businessmen, losses to others. We do not relate these exercises of free choice to fairness or unfairness or consider that anyone’s rights have been infringed.
In market-place parlance, there is no such thing as a right to a "fair" profit. All that any person is entitled to in the market place, be he businessman or wage earner, is what others will offer in willing exchange. This is the way believers in the free market think it should be.
However, when it is claimed that business is entitled to a fair or reasonable profit, the claimers must have something else in mind than what they can obtain in willing exchange. Otherwise, they wouldn’t mention the matter.
While the "something else" these businessmen have in mind is rarely understood in its full implications, it must, perforce, mean something other than individual freedom of choice. In short, it must mean the only alternative to freedom of choice: authoritarianism. When the market—freedom in exchange—is cast aside, there remains but one other determiner as to who will get how much of what, namely, government! And when government determines or controls profits, prices, wages, rents, and other aspects of production and exchange, we have socialism, pure and simple.
When "fairness" is demanded as a substitute for what can be obtained in willing exchange, the asker, consciously or not, is insisting on what naturally and logically follows: a planned economy. This means all forms of protectionism, subsidies, maximum hours, minimum wages, acreage allocations, production schedules imposed by the state, rent control, below market interest rates, free lunches, distressed areas designated and financed by governmental confiscation of peoples’ capital, federal urban renewal, TVA, state unemployment insurance, social security, tax discrimination, inflation, and so on. These measures—socialism—are government’s only means of "fairness," and they institutionalize unfairness!
The declaration that business is entitled to a fair profit connotes equalitarianism; that is, a coerced evenness in reward to the competent and incompetent alike. From what does this type of thinking stem?
It may very well be a carry-over from the static society which, as in a poker game, can award no gain to anyone without a corresponding loss to someone else. It is to overlook the economics of the free market and its willing exchange where each party to the exchange gains. If each party did not believe he gained, there would be no willing exchange. There couldn’t be!
Or, this type of thinking may stem from the labor theory of value which holds that the worth of a good or service is determined not by individual evaluations but by the amount of effort exerted: if as much effort is used to make a mud pie as to make a mince pie, they are of equal worth! Marx, acting on this theory, evolved his system: in essence, to have the state take from the mince pie makers and give to the mud pie makers. After all, goes the cliché, aren’t the mud pie makers entitled to "a fair profit"?
Assuming the market is free from fraud, violence, misrepresentation, and predation, the economic failure or success of any individual is measured by what he can obtain in willing exchange—fairness being a state of affairs that is presupposed in the assumption. Everyone, according to any moral code I would respect, is entitled to fairness in the sense of no special privilege to anyone and open opportunity for all; no one is entitled to what is implied by a fair price, a fair wage, a fair salary, a fair rent, or a fair profit. In market terms, one is entitled to what others will offer in willing exchange. That is all!
The Freedom To Fail
Because failure is repugnant to a welfare-oriented society, we see continued efforts made to put a floor under everything.
This includes a spreading attempt to bolster up faltering business firms or even whole areas or industries by government grants, loans, subsidies, defense contracts, and the like.
Ironically, the greatest danger to our economic system today lies not in a direct attack on profits, but in a well-meaning effort to insure everyone against failure. To put it bluntly, this means subsidizing inefficiency; it is the antithesis of the effective operation of the profit motive.
We are in danger of losing one of our greatest freedoms: the freedom to fail. Profit and loss are two sides of the same coin; take away one side and you take away the whole coin. Our greatest economic asset is the right to invest private capital in the hope of making a profit, but at the risk of losing our shirt.
GEORGE CLINE SMITH, senior partner, MacKay-Shields
Economics, Inc., before the semiannual meeting of the
Manufacturing Chemists’ Association, Inc.