It is the reward for creating value
This article was originally posted by FEE.org, and written by Richard Turnbull
Profit is a funny word. It has come to mean exploitation. Why do we allow the Left to capture words like profit, or community, or compassion and redefine them into politically charged meanings far removed from what they really are? If we believe in a moral, popular capitalism, we need to reclaim key words for their true meaning. Let’s start with profit.
This is how the story goes: A company has profited at someone else’s expense. Since a company has profited at someone else’s expense, that person has been exploited. As a consequence, profit is immoral.
It is time to challenge the assumptions that underlie that narrative. Profit is a deeply moral concept, since without profit we will suffer, not from exploitation, but from a misallocation of resources, a failure to provide the goods and services that the economy needs, the loss of tax revenue, a reduction in employment and the inability to provide for social need whether through the private sector or the public sector.
So then, here are 5 reasons underlying the morality of profit.
1. Profit is the reward for putting capital at risk
Profit is the surplus generated by individuals (or groups of individuals) putting capital at risk. It is the price of risk. Hence profit is also the reward for innovation and ideas – the reasons why capital is put at risk. Why does that matter? Without a reward for risk capital and innovation then we will not grow the economy, provide for the needs of people, or create the wealth necessary for well-being.
2. Profit proves that the economy is not a zero-sum game
Profit is not exploitation. Of course, exploitation is not a good thing and economic surplus may arise as a result of immoral behaviour; but that is a different story. The problem there is the exploitation, rather than the profit itself. Profit generally arises from transactions that benefit both parties. The Left love the idea that the economy is a zero-sum game. If one party makes a profit, that must be due to another making a corresponding loss – and moral outrage against capitalism ensues. Profit actually represents the creation of wealth from mutually beneficial transactions. Unless wealth is created there is no investment, no employment and no opportunity for social good.
3. Profit shows that entrepreneurs are welcome
Entrepreneurs are the lynchpin of an economy. They are the creators and innovators of new ideas which then attract the capital investment needed. If entrepreneurs are not welcome, then an economy will stagnate. Entrepreneurs needed to be attracted by the prospect of profit, so that they will bring their ideas to fruition for the mutual benefit of all. An entrepreneur is not there to be squeezed (or even exploited) but for the economic and social good of society.
4. Profit generates investment and employment
Another idea beloved of the Left is that once profit is generated it is simply removed from the economy into the hands of the already wealthy. However, beyond the rewards which are taken, without profit then there is no means of investment whether in capital goods or human capital; in other words, no profit, no new markets, no new production and no new employment; indeed to the contrary we are likely to see a reduction in both. Many business people see the provision of employment, not necessarily as the primary aim of a business, but one of the aims of the business enterprise.
5. Profit provides the means for social transformation in society
Perhaps this is more controversial. Maybe we are not interested in social transformation and merely in ‘individual satisfaction.’ If we take that position we damage the moral underpinning of the rationale for profit. I am passionate about not letting the Left claim the mandate for social welfare and the transformation of society. They have neither history (Wilberforce, Shaftesbury were Tories) nor economics on their side. Profit is a surplus. To argue that profit provides a basis for social transformation is not a statement that such transformation has to be (or can be) achieved by the state.
Certainly, government has a role to play and the generation of wealth and profit is a necessary preliminary to the establishment of a tax base (the question of what should be taxed and how much is a separate question). However, profit also allows individuals to act. Through distributing surplus through individuals in employment and investment, profit acts as a mechanism for the well-being of individuals and families. Similarly profit provides the means for philanthropy at every level from an individual contributing to a local charity to the larger-scale activities of the philanthropist.
Suddenly, profit doesn’t seem so bad after all.
There is a story to tell about profit and the good that profit does. We have a responsibility to articulate and tell that story. What we discover is not only that profit has a function and a purpose but that as a concept it is deeply moral.
Let’s not allow the Left to take profit captive.
A special thank you to FEE.org. FEE offers all of their articles available for reposting. They are a great resource for information on free market economics. This article, originally written by FEE and reposted by Good Morning Liberty, is in no way an endorsement by FEE of original material created by G.M.L.