Profits II

In part I, I addressed the left’s attack on the profits of ‘Big’ business.    Yet the left has a far more fundamental objection to profits, even profits that would otherwise be considered reasonable.  Profits result when the amount paid is greater than the cost. Thus from the left’s perspective, they are always inherently wasteful at best.

This is what is behind the push for single payer health care. Since government does not need to earn a profit, it should be able to deliver better health care for a lower cost.  If everything were static, this would be true. Government could just do whatever a for-profit company was doing, and the money that was being earned in profits could be used by government to reduce costs, or to provide better health care.  This is what is behind the complaint that it is wrong to profit off of other peoples’ illnesses. (Ignoring, of course, that Doctors, Nurses, and many other profit, i.e., get paid, in the process.)

The problem, however, is that the economy is not static, or at least it better not be, otherwise we would have a recession, or worse.  A strong economy is a dynamic economy and the driving force for the dynamism is profit.

A clear example of this can be seen in the history of John D Rockefeller.   While he is best known as the man behind Standard Oil, Rockefeller was a rich and successful man before he even got into the oil business.  In fact, he would have met the left’s definition of someone who had all the money he needed.  Thankfully, however, when someone at his church approached him with an idea about investing in the then emerging oil business, he did not say “why would I need any more money?” but instead decided to invest.

Rockefeller approached the oil business, as a businessman seeking to make a profit.  He did not just ask, ‘how can we do this?’ he asked ‘how we can do this better?’  While all businesses exist to make a profit, it is the paradox of business that if profit is a business’ sole goal, it will not be in business long.  This is because customers want goods and services, not for the business to make a profit.  Thus to make a profit, a business must provide goods and/or services that customers wants to purchase, at a price they can afford,  and still have money left over for profit, all while doing a better job than the competition.

This is not an easy task, and it is why most businesses fail. More importantly, it is a never ending task.  Even if a business succeeds, what they are doing that makes them successful will soon be copied by others and perhaps even improved upon.  Thus to remain profitable, businesses must constantly be searching for new and better ways to deliver their goods and services at a cheaper cost.  Those that don’t will begin to lose market share, and may even go out of business. This is why some business giants of the past are no longer around.

So when Rockefeller entered into the oil market, his goal was to provide the best product he could at the lowest price.  He built better refineries and developed his own delivery system. He also spent money on research to discover what to do with all the gunk left over from the refining process.  As a result, he developed over 300 by-products from what used to be thrown away or dumped into rivers.

Today we mainly know the results of his effort in that he became one of the richest men in America.  But he did not become rich because people just wanted to make him rich. He became rich because of the vast improvement his work and investment brought about.   For example, prior to the changes he brought to the oil business, only the rich could afford to light their homes at night.  When Rockefeller drove down the cost of oil “from 58 cents to eight cents a gallon” suddenly millions could afford the new luxury of having light at night.

This is the dynamism that the profit motive brings to the economy; a dynamism government simply cannot match. Government does not innovate, it regulates, and regulation kills innovation.   While the profit motive drives businesses to deliver ‘the best at the lowest cost,’ government had little concern for cost.

In fact, the driving force for government is in the opposite direction.  Government agencies that do seek to drive down costs are ‘punished’ with lower budgets, because “they did not need the money.” It is the rare bureaucrat that wants to see their budget cut.  On the other hand, agencies that are inefficient and wasteful often have their inefficiency rewarded with increased budgets.

The profit margin is vital for creating a dynamic and growing economy, an economy that is constantly seeking innovations that will deliver the best goods and services at the lowest price.

Attacks on the profit motive are nothing less than attacks on the very thing that has so vastly improved our standard of living.