Freeman

ARTICLE

"Business Must Make a Profit"

MARCH 01, 1975 by PAUL L. POIROT

It’s a very nice thing to be a businessman who earns a profit through his efficiency in using scarce resources to serve custom­ers. Nice, because profit, in the strict economic sense, is some­thing for which consumers pay without its costing them anything. Profit accrues to the efficient pro­ducer who manages to cut costs; it is taken out of costs, not some­thing added to the price. Prices in a free market, with freely com­peting buyers and sellers, are de­termined by supply and demand. And a given market price may af­ford one or more sellers a hand­some profit while other sellers may be taking a loss. It depends on the efficiency of the seller as to whether he makes a profit; it doesn’t cost the buyer anything.

So much for the economics of profit. But that isn’t the point of this story. The point is that in today’s mail were two laments that "business must make a profit" — from entirely opposite views.

One was a businessman’s con­tention that he was entitled to a fair profit in order to acquire the capital to stay in business — so he could continue to pay high taxes, among other things. True, he’s en­titled to all the profit the market price will afford him, which means that he will have been more effi­cient than some of his competi­tors in that field. If consumers are not willing to pay a price that yields a given supplier a profit, then he’s free to cut his costs or go out of business or whatever; but he’s not entitled to a profit unless he earns it in open compe­tition. And if he earns a profit, it’s no one else’s business whether he uses it to increase his capital investment, or to pay his taxes, or to support his church, or to keep up with the Joneses.

The other lament that "business must make a profit" came from a misguided socialist who seemed to think that meant "the government could do it cheaper." He couldn’t know, of course, unless his so-called government exercised no powers of coercion and behaved as just another competitor in the market. In that case, assuming a strong market demand, any sup­plier who could "do it cheaper" would thereby earn a profit. So what really perturbs the social planner is that businessmen will not attempt to do things that are unprofitable. In that case, if it’s going to be done at all, the gov­ernment will have to force some­one to do it — which only seems to be cheaper than paying free mar­ket prices for the scarce resources used in the process. Another word, more descriptive of that govern­mental process, is w-a-s-t-e — just plain waste!

And that’s the story. Profit is a fine and honorable reward for ef­ficient service — and no wicked and slothful servant is entitled to it.

ASSOCIATED ISSUE

March 1975

ABOUT

PAUL L. POIROT

Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.

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