Wednesday, August 26, 2009

What Good are Profits

Bookworm Blogger has a take on this question:

Oh, I understand the envy mentality that says, "if someone is earning profits, it's unfair and I demand my fair share." I also understand the entitlement mentality of people that say, "I have a right to food, shelter, health care, etc. and therefore if someone profits there from they are stealing from me." These are social justice arguments peddled by morons.

Here's my proposition: I propose that profits are good and that profit-making should be encouraged.


Let's say that that I decide to build a backyard jungle gym. I pay a certain amount of money for the raw materials. To that, I add the cost of my labor and intellectual property (the design. This is the cost of my jungle gym…the total cost of inputs. If I cannot sell the jungle gym for a price that equates to more-than the cost of these inputs, the net perceived value of that jungle gym to the buyer is negative to zero. There is, therefore, no incentive for me to build more, although I might donate the one already built.

However, if the buyer is willing to pay more for that jungle gym than the cost of its component parts, then I have created value. By contrast, should the prospective buyer believe that they should be able to obtain my jungle gym for less than the cost of its inputs then I will have created something worth less (i.e., worthless).

What I am trying to say is applies directly to the current health care debate and all other government entitlements under contemplation. A brother in-law, a renowned professor of finance economics, told me that he believes the world moves forward purely based on incentives. Profit (i.e., added value) is the incentive for value-creation. Take away profit, either by trying to control prices (Cap and Trade) or providing something for "free", destroys the perceived value of the goods and services in question. Things of high value are treasured, things of low value are trashed.

We've seen what happens to societies from which the profit motive has been stripped away, such as communist societies (where profit was forbidden) or third world oligarchies (where profit is stolen from the many by the few). Such societies lack incentives to grow and instead decay. However, where profit is valued, societies flourish and add value to the general good.

Let me share a specific example: an aging friend of my mother-in-law, living in a Florida retirement community that spends its days plotting devious ways to extract as much as possible out of their limited budgets, has figured out a splendid way to avoid waiting lines in emergency care whenever she perceives herself to have a health problem, no matter how minor. You see, she dials *911 to get ambulance service "for free". No need to wait, go to the head of the line! It costs her nothing. It costs her community quite a bit.

What I believe has happened here is that subsidized Florida Care has enabled this person to disconnect the "price" (cost plus profit) of the services provided from its value. For this person, the price ergo value of emergency health services had been discounted to zero and can therefore be squandered. Obviously, this is not sustainable.

When people disconnect the relationship between costs and profit to the concept of value, goods and services lose all value. I fear that this is exactly where we are going under the current mindset –an economy stripped of the profit motive will ultimately be devoid of perceived value.

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