Aspiring filmmaker Taylor Erickson has a pet theory, which he shares in his two minute film “ The Greatest Economics Lesson .” If businesspeople would just focus on “providing value” (which he defines as focusing on the interests of consumers) instead of short-term profit, the world would be a much better place.
To the contrary, by pursuing profit, entrepreneurs serve as great benefactors of humanity.
He learned this from a friend – a property manager - who had long focused on the bottom line before experiencing a “spiritual awakening.” Subsequently, he made a conscious effort to put himself in the shoes of his property renters. Soon he found that “extra care” prioritized over profitability boosted both his business and the welfare of his customers in the long run.
A False Dichotomy
This, of course, is hardly a revelation to any business owner. At the core of “The Greatest Economic Lesson” is a false dichotomy between profit and human welfare. Businesses do not, as Erickson puts it, “neglect the human side” of economics by “getting wrapped up in minimizing expenses and maximizing profit”. To the contrary, by pursuing profit, entrepreneurs serve as great benefactors of humanity.
There is no conflict between “providing value” and earning profit. In fact, the only way to earn market profit is by creating value. Profit is earned by selling products for more than the costs of production. If sales exceed costs, that indicates that the entrepreneur has increased the value of resources by recombining them into products that people want more.
Over time, profits draw in competition, driving consumer prices down. As prices fall, poorly-run and inefficient firms suffer losses and withdraw from the market while the remaining firms continue to hone their product offerings.
Taken as a rule, Erickson’s “theory” is essentially a recipe for failure.
Not only specific customers, but the whole economy benefits from the profitable production of a good or service. Whether that profit is generated by finding cheaper, alternative inputs or applying new and ingenious processes, utilizing resources more efficiently leaves more for other industries and non-commercial undertakings.
(In this context, of course, we are speaking of profits produced on bona fide markets. Governments and government-created monopolies may also generate “profits”, but do so by coercion - crowding out or regulating away competitors rather than offering improved goods and services.)
First Thing Last?
However novel Erickson seems to find his friend’s revelation, no business is viable over the long term if (a) consumer demands are not met, (b) at prices that they are willing to pay, and (c) with increasing efficiency as market forces hammer consumer prices down. Neither does it take a “spiritual awakening” to know that the long-term prospects of any business are closely tied to its willingness and ability to serve its customers best. What aligns entrepreneurial effort with consumer interest, while encouraging efficiency and innovation, is profit.
Taken as a rule, Erickson’s “theory” is essentially a recipe for failure. Budding entrepreneurs choosing to focus exclusively on “extra care” at the expense of profitability will flounder and fail to efficiently serve consumers. Earning a profit is the most critical test to prove the viability of an enterprise. Losses indicate that the labor, capital and time expended on production have been misdirected in light of consumer preferences.
What makes modern living standards possible is globe-spanning economic specialization and cooperation. Such unfathomably complex cooperation cannot be coordinated by the rule that producers should simply be as generous as possible. Profit and loss are the only non-arbitrary indicators that a producer’s use of scarce resources is expedient, not only for his or her customers, but for human welfare in general. To have everyone neglect considerations of profit would be to break down economic cooperation: to shatter the integrated economy into a multitude of isolated charities. And without an extensive division of labor, there would soon be very little wealth with which to be charitable.
In the United States, the word profit is increasingly uttered with disdain. Many Americans have effectively absorbed Marx’s Labor Theory of Value without ever hearing it. To them, the idea of paying more for an item than it cost to produce is akin to being ripped off. Politicians have characteristically capitalized on this trend, with increasing legal and regulatory limitations on pricing (laws targeting “price gouging”, for example, exist in no less than 34 states) and public opprobrium commonplace in social discourse (“fair prices” cited against “obscene profits”, etc.).
But Erickson’s short film does, in the end, provide a lesson, one greater and more cautionary than he likely intended. This lesson is that in spite of the spectacles presented by the collapses of Venezuela and Greece, contrasted with decades of rising living standards in market economies, individuals still, incredibly and most perplexingly, find reasons to doubt not even to what extent, but whether, profit-seeking businesses benefit mankind.