Profit is the source of all prosperity

Christopher Smart's 18th-century Song of David '...sung of it – the mighty source of all things – the stupendous force on which all strength depends; from whose right arm, beneath whose eyes, all period, pow'r and enterprise commences, reigns and ends.'

According to an old dictionary, advantage or benefit – the excess of returns over expenditure – the pecuniary gain in a transaction or occupation – is called profit. Yet nowadays many think profit a dirty word and few understand it as the source of all human growth and prosperity.

Indeed, many may not envisage the purpose of life as the pursuit of pecuniary gain. Yet most of us prefer to acquire a certain amount of money. This may help to cover at least some basic needs before we 'wake up and smell the roses' and settle into comfy contemplation of the best things in life being free.

Only a fortunate few wanderers stumble across free and unowned resources such as rough surface diamonds. There are only two other routes to pecuniary or other gain - plunder and exchange. The important distinction is whether both parties are happy about the process, or only one. Though strictly speaking, if a robber leaves some masochistic altruist ecstatically happy, that would be mutually profitable exchange, however involuntary on the masochist's part. But we'll come back to taxpayers later.

Voluntary exchange is when we get what we want by giving away what we want less. The two-way process leaves each participant better off, at least in his own perception. He may feel that his is the perception that counts, and this is no trivial consideration. It distantly relates to the hardwired reflex of even the most primitive lifeform that 'if there's a pain, stop eating'. Only you know when you're better off. Or your mother.

Since both parties benefit, each trade increases overall wealth. Plunder, on the other hand, reduces wealth or depreciates value. The victim waves goodbye to the entire value (to him) of his loss. Meanwhile the robber gains less value, as shown by the way he treats his loot and for how little he will fence it. So if a country is to grow and prosper rather than implode like Zimbabwe, some affordable lid needs to be kept on its PPP (proportion of predatory plunder).

Philosopher Robert Nozick identified the core ethical value of voluntary co-operation for mutual benefit. Here, 'core' reflects the game-theoretical notion that no group can break away so that it or the rest of society will become sustainably better off. And in peacetime that is how private individuals and firms prefer to operate. We aim to satisfy partners and customers with our offered goods and services, so as to obtain in exchange the satisfactions we desire. And in success we prosper.

Then we do three things with our new prosperity. To avoid going to jail, we 'render unto Caesar' all unavoidable taxes. We consume at will, notably directing hard-earned resources to non-profit community operations such as churches in exchange for non-pecuniary social and spiritual services.

And whatever's left over we save for a rainy day. But since not much is left, South Africans save too little to support enough entrepreneurial investment for faster growth. World Bank scattergrams yield rough correlations between savings and growth. Of poor countries the rising eastern star grew throughout the nineties at 8.74% per capita, thanks partly to Chinese people saving 40% of their income. Newly among the rich countries, South Koreans save 29% and grow at 4.9% per capita. And at the two ends of a 'beeswarm' scattering of 17 developing middle-income countries lie South Africa and Mauritius.

South Africans save a mere 13.5% of GDP income and harvest no growth per capita. Mauritians save 27% and their per-capita incomes grow by 4% a year. How hard is that, for goodness' sake? Simply maintaining low inflation and scrapping tax on interest would probably double savings, investment and growth in SA.

Naturally it is a matter of perception which good things are nice to have. And a democratic electorate chooses for itself how much government it can afford, providing which services. But many such 'good things' – free education and healthcare, say? – that become affordable with prosperity, do not in their absence prevent faster growth. Instead growth is easily stifled by various economic restrictions too well-understood to repeat. And the largest of these, the sum and summary, is high taxation, the basic cause of our low savings and growth levels.

World Bank figures emphatically confirm the commonsense of low tax and high growth, high tax and low growth. So does the logic of plunder. The taxed victim loses the whole value of his money, while the taxman gains less – not fewer banknotes, but less worthwhile use of them. Lacking the profit motive and the spur of competition, government employees can't address customer needs well enough to give satisfaction.

Towards re-election, politicians claim to do their best in the public interest and for the public good. And you may know of a public service that does no harm and adds more value than it costs. But that's not the way to bet. Like the Post Office, state operations tend to need endless monopoly protection and subsidies. Only when fully privatised can these ugly ducklings turn into effective swans.

Most academics, journalists and non-profit-making NGO-spokesmen are quick to criticise the profit motive and private wealth-creators. But at least they have to offer value to attract customer support. Wholly tax-paid government employees, who may like to see themselves as service-providers rather than plunderers, never need face the reality of voluntary rejection by taxpayers freely withdrawing their custom. Sad irony, then, when we freely choose interventionist governments to over-regulate and stifle economic growth and prosperity. Especially when it is only the stupendous driving force or motivation of profit that satisfies and enriches us as freely-choosing customers.

Author: Dr Jim Harris is a freelance researcher and writer. 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\30 September 2003 - Policy Bulletin / 01 September 2009