Friday, January 13, 2012
In praise of profit
Profit is the ultimate destination of effort among free men.
by John Hayward
Profit is under assault again, as presidential candidate Mitt Romney is clubbed for his successful career at a private equity firm. Why, those heartless Bain Capital pirates sailed into boardrooms with daggers between their teeth and made hard-working employees walk the plank, all because they wanted to make a profit!
Sometimes those who assail the profit motive allow that making some profit is okay, as long as you don’t try to make too much. I have never once heard someone who stated or implied this belief follow up with a list of morally acceptable profit margins for various industries. They never stop to think about the “czar” who would end up compiling such a list in Washington, the amount of power that such a bureaucrat would need to thwart the unacceptable pursuit of profit, or the level of political corruption that would ensue as various politicians and their corporate “partners” sought to influence his decisions.
It never occurs to anti-capitalists and class warriors that profit accrues over time. Today’s losses will hopefully become tomorrow’s profits, but this is not guaranteed. Every company acquired by a company like Bain Capital was a massive loss on the date of acquisition. Sometimes years of hard work and operational loss are necessary to cultivate a profit. The pursuit of ultimate reward is what drives businesses large and small through those lean times.
If you want to rule those ultimate profits out of bounds, empowering the State to seize them, I hope you’re ready to live in a world without innovations, such as new prescription drugs. Those require immense investments in research, development, and testing, accompanied by the strong risk that a particular drug will fail to pan out, or meet with government approval. No sane investor would undertake such investment and risk without the hope of a very bright light at the end of the tunnel.
The pursuit of profit is often equated to “greed.” Greed is unjustified – the hunger for that which has not been earned. It is also short-sighted and destructive, which is what critics have in mind when they castigate investors for descending upon a company like predators and disemboweling it. Mitt Romney’s company, Bain Capital, specialized in buying troubled companies and attempting to turn them around. How many of those companies would have perished completely without their investment?
In order to characterize their behavior as “greedy” and short-sighted, it would be necessary to demonstrate that either their acquisitions would have fared better without their involvement, or that Bain could have made different decisions that would have paid off better for their investors in the long run. How many of Bain’s armchair quarterbacks are up to the challenge of making such a demonstration?
That’s one of the great logical flaws in the populist assault against profit: even if we were prepared to concede that a certain level of profit is unacceptable, the would-be commissars lack the tools to measure all the factors that went into a given large-scale investment. What dollar value can be assigned to risks that were taken, and other opportunities that were passed up on? The denunciation of profit is an act of intellectual arrogance, in which the populist declares that all of the many things he doesn’t know are irrelevant, and the superior knowledge of investors and management is without value.
Profit is the ultimate destination of effort among free men. This is especially true when they voluntarily cooperate on a large scale. People are generally committed to work and investment when they believe they will profit from the endeavor. Given two investments to choose from, most will pick the one that seems more profitable, or more likely to profit. Others are recruited to projects with the promise of profit. Everyone wants a raise, and many people will leave one job for another because they believe the return on their effort will be better. Taking a job that’s easier, more reliable, offers better benefits, or requires fewer hours of work is also an attempt to maximize profit for the sale of your labor. The quest for a way to secure the same return with less investment is the pursuit of greater profit.
There are other ways to secure cooperation for smaller projects, of course, and some people run businesses for reasons other than the pure pursuit of profit. Charitable endeavors are noble, but general prosperity cannot be built exclusively through charity. Not everyone can spend their days getting paid to do what they would have done anyway, for fun. Across a vast population, when assembling corporate endeavors on a grand scale, the pursuit of profit becomes the only moral means of allocating resources. It is also the most efficient.
The alternative is the use of compulsion to force people to do what the majority - or more commonly an influential minority - believes they should do. You might have noticed that, besides being immoral, it also isn’t very effective. The offer of profit is an act of persuasion. Every other method of organizing thousands of people, over a long period of time, involves issuing commands. Free people should only tolerate command during times of emergency. You might have noticed that politicians love to declare that everything is an emergency, crisis, or “war,” for this very reason.
Americans have so completely accepted the demonization of the profit motive that we reflexively accept the reverse proposition: those who claim there will be no personal profit for their actions are automatically assumed to be virtuous. Politicians depend very heavily on this concept when they slake their thirst for political power. For example, President Obama loves to claim that he’s acting against his own self-interest when he insists on tax increases for millionaires, because he is a millionaire. You aren’t supposed to think about the value of the power he wants to amass, compared to whatever increased tax bill he might face at the end of the year. The billions of dollars he would harvest from others are meant to be invisible.
It is no coincidence that even as our economy has become more politicized, and more money is seized and directed by the federal and state governments, we have been made to believe that power has no dollar value, and therefore the quest for power is not “greed.” This is the crucial paradox that enables those who would dominate to pretend they are noble, because the only real sin is the pursuit of profit. If you would have economic liberty, you must have the courage to reject that argument in its entirety.
Profit is the blood of industry. It fuels growth, advancement, and investment. Of course it must be pursued lawfully. The critics of profit are seeking power beyond the law, by assigning themselves the power to condemn that which is not illegal. Laws are deliberated and passed by elected representatives, but the condemnation of profit can easily be carried out by self-appointed tribunals.
The lawful pursuit of profit forms a bond of duty between investors, management, and employees. If the companies acquired by Bain Capital had been focused on maximizing their profits, they probably wouldn’t have become attractive purchases for venture capitalists who saw opportunity in their assets and business models. How, exactly, are we supposed to prevent venture capitalists from buying troubled companies and reforming them? Pass strict laws hobbling them from taking certain actions that somebody, somewhere, finds distasteful? The results would be very dismaying for every distressed businessman who wants a capital infusion. If profit is immoral, then investment is a sin… and if you’re prepared to accept that, you might as well stand by and await further commands from your rulers, because no one will be making you “offers” any more.
To read another article by John Hayward, click here.
Posted by Brett at 11:53 AM