One of the great social errors is the critical attitude towards profits and the profit motive.
A surface level consideration of the subject is a shared error between the opponents of the profit motive. This error has lead to the deprecating term 'profiteering', an accusation of immoral action by immoral businessmen who seek to benefit at other people's expense. The implication of this concept generally implies that the profit motive is tolerable, provided the margin is not too large for services that aren't in too high in demand. These qualitative abstractions are the product of the protester's intuition at best. At worst it is the econometric calculation of economists who use a fictional scenario of 'perfect competition' as a benchmark for monopoly and profiteering behaviour on the part of entrepreneurs. Both are egregious mistakes that fail to understand the nature of human action and philosophically reject the natural right of freedom to exchange between individuals.
Let us begin with breaking down what the word 'profit' means. Profit has nothing necessarily to do with money or financial gain. Profit is simply the subjective benefit of any action or exchange. But an understanding of profit cannot exist outside of an appreciation of human action. Austrian school economists make a big deal about human action because for us, the social science of economics begins with individual human action. Ludwig von Mises defined human action as 'purposeful behaviour', in contrast to involuntary action of the nerves and tissues (i.e. reflexes, involuntary bowl movements). Human action takes place when we perceive that we can reside within a state of greater satisfaction or lesser dissatisfaction and employ preconceived means to do so.
For example, imagine Bob is lying down on a cement floor trying to get rest, but finds himself intolerably uncomfortable. Bob perceives that he could be more comfortable if he took off his jacket and used it as a makeshift pillow. Bob then acts on his belief by sitting up, taking off his jacket, scrunching it up and resting his head on it. After acting, Bob gladly find that he is more comfortable than before.
What was the incentive or profit motive for Bob in this example: comfort. Without the intolerable desire to be less discomforted by the cement floor, Bob would have never acted. Without perceiving the use of a jacket as a pillow and the comfort that might bring, action also wouldn't have happened. This example demonstrates that unconsciously we all are inspired by the profit motive in every action we perform... whether scratching our backs, walking the dog or cooking food.
We act because human beings desire to be subjectively better off, to profit. We define for ourselves what is profit, no one else can inhabit our skin, read our minds and determine what we really want (except God). Now, this does not mean that we perfectly know what we want or the best means to get what we want. We fail, we reassess and, if we have the courage to do so, we act. If we succeed, we profit.
What about exchange? Any voluntary exchange cannot take place unless both parties perceive they are both receiving something of greater subjective value. It may turn out after the trade that one or both parties discover it was a bad trade, in that the value of what they received was below what they expected. This is inconsequential as to what motivated them to engage in the trade in the first place: profit. When it comes to trading one good for another (i.e. no medium of exchange or money), profit can range from an emotional, psychological, practical or sentimental benefit.
In some ways it is easier to identify the subjective value of traders in a pure barter economy (i.e. no money). With money, it requires an additional mental step of understanding the purpose of money and what it represents. Money is a medium of exchange, something that is universally accepted for all goods traded on the market. Consider the following example:
Imagine Bob has a pile of eggs and Jane has a pile of firewood. Without money, Bob and Jane could only really trade when Bob wanted firewood and Jane wanted eggs at the same time. This is technically called the double coincidence of wants. The only way to avoid this problem is to use something else to trade with that is always accepted by all parties. In this example, Bob wants firewood from Jane but Jane doesn't want eggs in return. Bob goes to the market and trades his eggs for silver coins and then goes to Jane and exchanges the coins for firewood. Jane can now exchange or buy shoes with those silver coins without having to look for an firewood-loving shoe maker. Since everyone accepts silver coins, the function as the medium of exchange for every transaction in their market.
Historically, money has typically been a commodity, a physical natural resource with limited supply that is valued highly by nearly everyone. This commodity has been gold and/or silver due to their rarity, high cosmetic value as jewelery and physical properties. Because gold and silver have the power to be exchanged for any good on the market, they have consistently emerged as money across many civilisations thoughout time. Undoubtedly you have probably heard the term 'gold standard' to represent something of the highest quality.
Governments have a history of supplanting gold or silver as money in favor for paper, some with almost no intrinsic value that can be reproduced almost infinitely (especially as 1s and 0s in the electronic age). Unfortunately, the expansion of the money supply through money printing, either through fractional reserve banking or debt monetization by central banks, leads to the devaluation of each individual unit of money and creates signal distortions in the economy that causes the business cycle. The subject of this article will not explore this story further, other than to give a context of what money is and how it works.
As mentioned earlier, money has the power to be exchanged for any good on the market and the quantity of money necessary to be exchanged for a good is the 'price'. Prices also gives an indication about the value, supply and demand of a good on the market. There is a price for producing a good to be traded on the market and a price it will be sold for on the market. The difference between the selling price and the cost price is popularly understood to be a profit. This monetary profit is the subject of the hatred discussed at the beginning of this article. What what does this profit represent?
One more example. Bob wants to trade his eggs for Jane's firewood, both wish to do so freely and voluntarily without coercion. Bob and Jane each consider 15 eggs for 1 log of firewood to be a profitable trade. If the trade is perceived to be anything less than profitable, it will not occur. If it was perceived to be an equal trade (or 'fair' trade as some like to use equality and fairness interchangeably), there is no benefit whatsover for the trade to be occuring in the first place. From another angle, an 'equal' trade of 14 eggs for 1 log of firewood has the same value to Bob as not trading at all. It may even be perceived as a loss given the opportunity costs in setting up a trade meeting (i.e. not cutting more firewood while meeting with Jane). Likewise this realization may occur after the trade has occurred. Bob finds out that 14 eggs has as much value as keeping his 1 log of firewood. Come the next trade with Jane, he'll be asking for more than 14 eggs. There must be a subjective profit for trade to occur or continue.
In the context of money, cash profits represent both parties subjectively benefiting from an exchange (again, providing the exchange is voluntary without coercion). Those who rail againt the profit motive and 'profiteering' believe that the exchanges should be one sided: that is that one should lose and one should gain. One party should be enslaved to produce goods for the 'less fortunate', who are expected to do little or nothing in return.
Typically most people do not object to the profit motive, unless there is some sort of crises.
For example, the flood disaster in Brisbane early January 2011 created several supply shortages of food in flood affected areas. On top of this, the sudden onset of neosurvivalism saw hundreds of people stocking up on canned food. Some stores were forced to raise the price of bread, which led to a popular circulating YouTube video of a tough Aussie condemning the disgusting (I won't repeat his colorful metaphors) profiteering and price gouging. He went on to suggest that rationing at the original lower price is the appropriate thing to do. Of course suggested rationing as he correctly recognizes the consequences of price controls, namely shortages.
This gentlemen failed to understand a few things, none of these concepts are basic and so I don't hold it against him or others who cheered him on. Firstly, the economic argument that price controls lead to shortages, even with rationing, as the low price for bread allows a greater number of individuals to purchase these goods, for less than urgent demand (i.e. buying an extra loaf to the one you already have at home). This crowds out consumers who have comparatively have urgent needs (i.e. having no food in the fridge). A high price eliminates consumers with lower priority needs for a good (i.e. product). There is more to say on this and if you need to read more to understand my point then lookup 'marginal utility theory' in Carl Menger's book 'Principles of Economics'.
The second economic error, which relates squarely with this article, was that of profits. It is easy to assume that greedy store-owners raised their prices only to get more money by exploiting the less fortunate. This ignores the impact of wholesale supply (many supply routes were underwater) shortages and likely short-term reduced revenues associated with the flood and recovery. Prices must rise to maintain profits due to these considerations. Indeed profits even act as demand signals for the future supply of goods and competitive opportunities, which will ultimately lower prices towards their marginal cost of production (or the lowest cost of a good that preserves the acceptable quality of a good determined by consumers) to a profit level sufficient for entrepreneurs to act.
The final and perhaps chief error has to do with the right of the entrepreneur to sell his goods at whatever price he sees fit regardless of the circumstances. The attitude amongst those outraged by rising prices in times of crises is usually one that demands for 'something to be done'. This means either price controls or some other form of State coercion to appropriate goods that belong to the entrepreneur. Public good or public interest is an invisible cloak for theft and slavery when used as an excuse to take someone else's property by force or threat of force. It is true that the unseen is poorly appreciated, this is acutely applicable for the entrepreneur. The entrepreneur (i.e. The store owner), has expended their own or borrowed capital to purchase goods like bread, milk etc. They have risked a loss on the expectation to receive a profit when their goods are traded for money. To deny them profits in the name of fair trade, social justice or public interest is to quite literally rob them of their property and motivation to continue trading in the market place.
Returning to the example of Bob and Jane, imagine that Jane insisted on 14 eggs for 1 log of wood. Bob refuses the trade. An outraged observer, Ricky, approaches Bob and verbally abuses him for profiteering and price gouging. Ricky explains that Jane has 4 children to feed who haven't eaten for days and that his behavior was reprehensible. Bob tries to explain that he has his own family to feed to no avail. Ricky, enraged, grabs a large stick and threatens violence to Bob unless he makes the trade. Reluctantly, Bob concedes. Ricky hails it as a victory for fair trade and social justice.
Question: did that scenario seem fair or just to you? Place yourself in Ricky's position: would you threaten violence to a man to give up his own property against his will? Can any violence against peaceful people be justified if they are not violating anyone else's life, freedom or property? This is the implicit threat when the government is called in to intervene with prices and the marketplace in general.
The main concern associated with the profit motive and rising prices in times of crises has to do with the poor, who may be priced out of the market. It should be said that we shouldn't assume that a single good, such as bread in the case above, is the only good available to the poor. The market has provided several food stuffs that accessible to the poor and rich in times of crises to survive.
Additionally, we should remember that if prices are too high, goods will not be sold in the first place, which is counter productive to entrepreneurs who would make a loss on unsold goods. Recently this fact was demonstrated by my father who was going to buy some replacement water for his pool, but finding that the prices had more than doubled decided to just chemically treat the pool instead. Another customer remarked that the pool shop was profiteering, my dad replied: 'No, they're just stupid, I'm not gonna buy from them.'
All goods are not homogenous, in that there are 'premium' goods (with some improvement in quality or psychological benefit) with higher prices and 'homebrand' goods with lower prices. Profit opportunities always exist within these heterogenous goods and within social demographics. If the rich are the only capable of buying bread, a profit opportunity exists to bring bread to the poor that they can afford. Indeed, this is how many of the goods we take for granted on a daily basis are available to us in the first place. The history of the free market is that the best possible goods are sold for the lowest possible price. As such, even some of the poorest in our society live in a better quality of life than the Kings of old.
These considerations should remind us to pause and consider the true implications of those who view profit as an evil to be eradicated.