Peace on earth and goodwill towards all profit-makers

Profit-makers deserve our gratitude and loss-makers should fill us with dismay. In a secure ‘rule of law’ environment, in which property is respected and contracts honoured, it is the profit-makers who improve living conditions for everyone.

In his book Economics in One Lesson published in 1962, economist Henry Hazlitt attempted to dispel a host of economic myths, including the myth that the world would carry on merrily if people exerting extraordinary effort and investing their hard-earned savings received no benefit in return. He lamented that ‘The indignation shown by many people today at the mention of the very word ‘profits’ indicates how little understanding there is of the vital function that profits play in the economy.” Sadly, four decades later, people still display the same unwarranted indignation.

Whatever we may have on our shopping lists we must recognise that without profits, or the prospect of profits, owners of capital have no incentive to invest in their production. It is the prospect of profits that spurs on producers to deliver the goods and services that consumers want. If there is a high level of demand for a particular commodity and a shortage of supply, it is high profits that will encourage producers to correct the imbalance most rapidly.

Once supply and demand approach what economists call equilibrium, the most efficient suppliers start out-competing the less efficient, who are compelled to increase their own efficiency or risk suffering losses and potentially going out of business. Consumers have no interest whatsoever in the tussle that goes on behind the scenes. All that interests them is where they can make the best buys.

Unfortunately, because the function performed by profits is so poorly understood, governments tend to try and reduce the earnings of firms and individuals that supply the very goods and services that are in the greatest demand. Recently price controls were instituted on pharmaceuticals in South Africa because medicines save lives and the view was that ‘people should not profit excessively from saving lives.’ However, if profits are inadequate, medicines will not be produced at all, which is already the case with some vaccines.

A question that brings the notion of profits into stark relief is: ‘If you require a brain operation, who would you rather have operate on you, the highest-paid surgeon in the country who receives high fees because of her undisputed skill, or a lowly-paid surgeon who undertakes to do the operation free of charge because he is sorry for you?’ Most people would opt for the highly skilled surgeon, even if it meant taking out a second bond on the family home to pay the fees.

Health-care consumers demand and receive progressively better medicines, have access to greatly improved and expensive diagnostic equipment, and benefit from the utilisation of remarkable technological aids in the carrying out of surgical procedures. As a result, health-care costs are rising in real terms and people are living longer. Is it then really wise to attempt to dictate to the firms and individuals responsible for these life-extension measures what profits they may earn? No official can possibly institute price-controls that will not have the effect of reducing the quantity of health-care provided. How many people will die as a result? There is no way of knowing. Consumers as voters should lobby for the removal of the price controls, not for the benefit of their profit-making benefactors but in their own long-term interests.

In order to continue to prosper, firms must consistently supply consumers with value for money. Microsoft, for instance, must exert every effort to stay ahead of its competitors in supplying consumers with software, at a price they find acceptable, that performs the functions they want it to perform. If it does not stay ahead of the pack this mighty company will have its profits rapidly whittled away. That its profits continue to grow is a testament to the excellence of the service the company provided in its early years and continues to provide to the users of its software.

Every other firm that consistently makes above average profits on the goods and services it supplies to its customers must necessarily provide them with above-average value. If they did not, their customers would desert them. Do not begrudge your suppliers their profit – they have earned it. They make your life better, they make the world more peaceful, and they deserve your utmost goodwill. So add profit-makers to the list of people of whom you think kindly thoughts this festive season.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 20 December 2005