Profit

This is another guest blog I did with Joe Katzman. Now that I have my own place I want to republish it. Thanks Joe!

Profits
by M. Simon

            "Concentration of wealth is a natural result of concentration of ability, and recurs in history. The rate of concentration varies (other factors being equal) with the economic freedom permitted by morals and the law... democracy, allowing the most liberty, accelerates it.
            -- Will and Ariel Durant

I might add that one other thing that advances wealth accumulation is rapid changes in technology. We're about to under go a very major transition in energy technology, from a fossil fuel dominated economy to a fossil fuel free one in about the next 70 years. This is bound to concentrate wealth in the hands of those who can build and finance the revolution. This new wealth will be built on that nasty five letter word - profit.

What is profit? How should we think about it?

Profit is a measure of relative efficiency - in a reasonably honest market. We do want the rewards to go to those who honestly earn the greatest profit. It is the best way to increase the efficiency of the system. Getting the efficiency up is the best way to meet the needs of the poor. Which is why I left the progressive camp. I would count myself as a progressive except that every time I have scratched below the surface of a progressive I have found a socialist. Don't get me wrong, I have a lot of respect for socialist ideals. It was why I was a socialist many years ago; but they tend to think of profit as sin. I think of it as the reward for reducing waste.

So we have to ask ourselves how well has profit been working? Let's look at one small measure. The median income for blacks - the lowest performing "class" in our economic system - is now $2,000 a year greater than the median income of Sweden - a socialist paradise. Did you know that Sweden is on the decline economically while America and its blacks are still advancing? In a rapidly changing economy some will do better than others. The increases in efficiency will benefit everyone, but not equally. No doubt the tide rises faster in some places than others but it has been lifting all boats. Concentrating the money where there is the most honest profit is the fastest way to increase the efficiency of the system.

What about crooks who steal our money by simulating increases in efficiency while really they are just fakes and frauds? News flash - there have always been fakes and frauds. It is an inherent part of every market. The rule "buyer beware" is a very old one for a number of reasons. Very old reasons. Human nature has not changed a lot in the last 5,000 or so years. So what do we do about the frauds? Expose them from time to time, take our lumps for being gullible, learn something, and get on with our business. I think Enron is a perfect example of how a free market handles failure. The failure collapses but the real market, while wounded, heals and starts real growth again. Go to wind.enron.com - What shows up is GE Energy Corporation. What real value Enron had has been redeployed by another more honest (we hope) company. If they are not honest I predict the real resources will get redeployed again because they have real value. Real value is what every investor should be investigating, and real profits. The real problem as always is not the frauds but our own cupidity.

Our system is a harsh one. The only advantage it has over any other is the results it delivers especially in two very important areas for our well being:

1. An continuous incentive to increase efficiency; and
2. Better living with continuously lower effort.

I would explain why third world "sweatshops" are good for America and good for the world, but I've run out of space and time. Another time perhaps.

© M. Simon - All rights reserved. M. L. Simon

Welcome Carnival of the Capitalists folk. You might also like to have a look at my review of De Soto's "Capitalism".