Profits – The Life-Blood of Economic Progress
You hear it all the time. People (especially politicians) complain that the oil companies are making obscene profits. Altruists and socialists state that businesses make their profits on the back of the workingman. You may hear someone say government ought to do something to curb the greedy capitalists and speculators. They are earning too much profit. The person spouting the last claim probably doesn’t realize he used the word “earning.” Of course, when it comes to his own profits—I doubt I have to complete this sentence.
Profits and Losses
Milton Friedman stated that the social responsibility of corporations is to increase their profits because in so doing they increase the amount of value that they create for the world. In other words, they are satisfying the consumer’s most urgent desires. It seems absurd to wax on about how corporations are supposed to indulge in altruistic endeavors. Only a fool can fail to realize that this squandering of profits would lower the productivity of labor, reduce the supply of goods and services and make everyone worse off—especially the unfortunate people who are already at the bottom of the so-called economic scale.
Envious people abandon logic when they moan and groan about excess profits. They never speak about the corollary of profits—losses. If they were logical they would be ecstatic about a company earning excess profits by satisfying consumer desires. They would think it was wonderful that a business could reinvest some of those profits in new goods or services—or more efficient ways of producing the same good or service.
When a company suffered losses you might think that people would lament the fact that capital and human effort were squandered—the consumer’s most urgent desires were thwarted. Of course envy and jealousy don’t foster the virtues of reason and logic. And there are always plenty of charlatans in the form of altruists and politicians to play on the peoples’ negative emotions—convincing the gullible that another’s good fortune is their misfortune.
For instance the oil companies are vilified for earning what some call “obscene” profits. Would they prefer that the oil companies earn fewer profits or even possibly suffer losses? Now there’s a cure for the energy crisis—oil companies losing money and forced to shut down operations.
Tragically, most people are ignorant of the basic laws of economics. This sad fact allows altruists, do-gooders and politicians to appeal to this ignorance. Of course, ignorant people rely heavily on their negative emotions of envy and jealousy. Politicians play these emotions to the hilt. Soon they are sabotaging the workings of the marketplace. It’s a miracle we have any oil at all.
Re-investment of Profits
In an unhampered market, companies would re-invest their profits in productive activities—thereby better supplying the consumers with more of what they desire. There is only one reason a company would not proceed in this way—government interference on the marketplace. Crippling government regulations have prevented oil companies from efficiently exploring for our energy supplies. Our (United States) energy policy is the joke of the world. Nobody believes we are serious about solving our energy woes. There is no room in this article for a lengthy discussion of the problem. A little research will supply you with mountains of evidence confirming this.
Since the creation of the Federal Reserve System and the Federal Income Tax we have been experiencing a gradual corrosion of our economic system. Excess money creation and crippling taxes are eating away the seed corn of economic progress. Inflation causes illusory profits. Excess taxes result in capital consumption. If a company earns 6% on their investment of capital when prices are rising at a rate of 9% this company is actually losing money. If this same company has to pay taxes on a 6% rate of profit their losses are even greater.
Role of Profits
Profits and losses are the market’s way of guiding production. High profits encourage capitalists and entrepreneurs to expand production in that line of business. Losses or declining profits are signals that business should diminish or discontinue production—capital is needed elsewhere. The consumers demand that a business invest capital in areas that satisfy their highest values.
It seems that as consumers, individuals want their needs and desires satisfied immediately—and sometimes that doesn’t seem quick enough. However in their role as political observers and voters they are intent on killing the goose that lays the golden eggs. They support any politician who happens to come along with another way of destroying the very system that supports their comfortable standard of living. It could be that they are suffering under great illusion caused by their ignorance of Economic Law (praxeology)—or maybe their neurotic behavior is the result of their illusions mutating into delusions. Regardless, any attempts to prevent a successful company from enjoying excess profits are contradictory and destructive to the well-being of all.
Conclusion
A lucid understanding of the laws of economics (praxeology) is necessary for any analysis of the workings of the marketplace. Refusing to do this allows moralistic anti-capitalistic altruists, do-gooders and politicians to pick your pockets and systematically eliminate the personal liberty and freedom our founding fathers embraced and so valiantly fought for. If you open your eyes and look around you—you can’t help but be aware of all the economic destruction that is occurring. The locusts of economic chaos are descending upon us.
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