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Thursday, August 26, 2010

It’s Good to Make a Profit

I attended a recent gathering where someone made the unchallenged remark that corporations were profiting at our expense. That got me to thinking – if Microsoft makes big profit, is there some group of exploited people who are poorer by that same amount? I suspect many people think so. People in Congress may think so too, because they are considering legalizing something called a “B” Corporation, which could legally pursue so-called “social responsibility” in place of profit.

Apparently this cultural bias against profit has been around for a long time, going back even to the Ancient Greeks and Romans, and is related to a similar bias against productive work. (See article by Richard W. Fulmer in “The Freeman”, July/August 2010.) According to this view, productive work is fitting only for serfs and slaves; honorable men gain wealth through battle and conquest (Wow!).

In spite of popular beliefs, profit is created wealth, not transferred wealth. To understand why, observe that profit is the difference of sales minus expenses. Sales are a measure of the value to the economy that has been created. Expenses are a measure of the resources of the economy that have been consumed. Thus, profit is the excess of value created over resources consumed and represents wealth that did not previously exist.

So, to answer my own question, - no one is exploited because Microsoft has a profit. That profit is wealth that would not exist, had Microsoft not been so successful. Of course, Microsoft’s competitors got hurt, but it was the competition from Microsoft that hurt them, not the profit.

I can hear the profit bashers now, claiming that Microsoft should have reduced its profits by lowering prices even more. But lowering prices doesn’t always reduce profits any more than raising prices can erase losses. And lowering prices too much could (or did) get Microsoft accused of unfair competition.

Another important benefit from the pursuit of profit is that resources of society are allocated most efficiently when profit is maximized, which is beneficial to everyone in the long run. That’s why economist Milton Freeman so famously said that corporations have only one social responsibility, which is to increase their profits.

We should also inform the profit basher that he himself makes a profit in his job, assuming his pay exceeds his job-related expenses. Who has he exploited? That should make it very clear that it is good to make a profit.

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