Condemning the Profit Motive
I recently encountered a laundry list of objections to the profit motive. The following is the list with redundancies removed, edits for clarity, and my comments. Many of the complaints are based in ignorance of how markets work, ignorance of the perverse incentives created by government regulation, failure to consider problems with available alternatives, refusal to consider the possibility of government failure, demands that companies solve complex social problems (some of which are created by government), and an insistence on perfection.
1- Lack of accountability
Accountability to whom? Companies are certainly accountable to their shareholders, suppliers, and customers. To a large extent, they are also accountable to employees and annuitants. They are required to adhere to contracts their officers have signed and to the laws and regulations of the communities in which they do business.
By contrast, to whom are unelected bureaucrats accountable? Bureaucrats who can: write regulations that have the force of law, interpret their own regulations, determine whether a company is in violation of the regulations, and penalize companies that they determine have violated them.
2- Disregard for public welfare
Companies that are unconcerned with the welfare of their employees and customers tend not to stay in business long.
3- Increasing inequality
Having a job is, by far, the surest way out of poverty. An American who is keeps and holds a job is unlikely to be poor. According to a 2019 U.S. Census Bureau report, the poverty rate for individuals who had worked full-time for the entire year was 1.5%.
In the U.S., much of the current wealth gap is due to asset inflation caused by the Federal Reserves’ easy money policies, which were, in part, driven by the federal government’s deficit spending.
Globally, however, poverty significantly declined prior to the COVID pandemic. For the first time in human history, less than 10% of the world’s population lived in extreme poverty. Prior to the Industrial Revolution and the spread of free markets, the extreme poverty rate was over 90%. Extreme poverty was humanity’s “natural state” for most of its estimated 300,000-year existence. Its drop to 10% from 90% in just two hundred years is nothing short of miraculous.
4- Lowering product quality
Companies produce goods of varying quality to match the needs and means of their customers.
5- Price gouging
As economist Alex Tabarrok observed, “A price Is a signal wrapped up in an incentive.” High prices reflect demand and provide incentives for producers to meet the demand by increasing production and redirecting goods. Prices also provide incentives for consumers to purchase less and find substitutes. Artificially limiting prices in the face of real shortages does little more than spread and prolong the shortages.
“Exploit” means to make full use of and derive benefit from a resource. Companies that make full use of natural resources minimize waste and pollution. Companies benefit from employees and employees benefit from their employers – by definition, they exploit each other. As long as employees are free to accept or reject their conditions of employment, there is no exploitation in the pejorative sense.
Karl Marx claimed that employers exploit workers because they do not give them the full exchange value of the goods and services they produce. However, Marx’s alternative also exploits workers. The formula “From each according to his ability, to each according to his need,” necessitates Marxian exploitation. A worker whose ability exceeds his need receives less than he produces and is, by Marx’s own definition, exploited.
7- Subversion of government laws and regulations
Some companies do ignore laws and regulations and, when caught, pay penalties. Occasionally, company officials go to prison. Perfection is not an option while human beings are imperfect.
8- Prioritization of stockholder interests
A company’s responsibility is, first and foremost, to satisfy its owners’ interests. In a free market, they can best do this by providing – within the confines of the law – goods and services for which consumers are willing to exchange the products of their own labor. This activity benefits consumers and society.
9- Neglect of environmental stewardship
Much of this neglect stems from a failure by governments to define and protect private property rights. During America’s Industrial Revolution pollution was worse than it needed to have been because the courts refused to enforce property rights. When people sued factories for polluting their air and water, for example, judges decided in favor of the factories on the utilitarian basis of “the greatest good for the greatest number.” Judges reasoned that more people – employees and customers – benefitted from the factories’ activities than were harmed by their pollution.
Had property rights been enforced, factory owners would have been required to pay restitution for the harm they were doing, giving them an incentive to find ways to reduce that harm.
Settling ponds, for example, could have been used to eliminate the heavy solids released into streams and rivers. Perhaps, companies could have even found uses for those waste products. Standard Oil, for example, found ways to use gasoline, which before, had been considered useless and dumped into the nearest river.
Given freedom and the proper incentives, people find ways to turn problems into opportunities.
10- Risky and unsafe working conditions
Most of the reduction in workplace deaths and injuries has been the result of technological advances made by the private sector. Throughout human history, knowledge was gained through trial and error – trial and error in a world in which error often resulted in death. The first steam engines were dangerous because they were the first steam engines. We hadn’t yet learned all the ways they could fail and how to prevent those failures. The same is true for the first factories, cars, and airplanes. The steady decline in workplace accidents in the United States began long before OSHA and other regulatory agencies were created.
Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource.