TERRE HAUTE — Profit is a beautiful thing.
I know many people regard profit as “obscene” — or at least “big” profits are regarded as “obscene.” But profits are actually wonderful and necessary for a growing, expanding, prosperous civilization.
All human action is aimed at “profit” in a sense. Humans act in order to bring about goals that they believe will make things better. They also take into account the opportunity costs of reaching their goals. You may have a goal of learning to play golf well, but that goal includes the cost of many hours of practice, the expense of equipment, lessons, etc.
If the cost is too high from the point of view of the actor, the action is either stopped or not started. In this sense, all human action can be said to be aimed at achieving benefits that exceed costs — that is, a “profit.”
To reach our “profitable” goals, we often cooperate with others through voluntary exchanges. Voluntary exchange — “trade” — is also a wonderful thing because any voluntary trade is always regarded as beneficial to both people trading. In other words, trade allows people to voluntarily increase their levels of satisfaction.
Trade also is wonderful because it allows people to specialize in specific fields of production or service. In a trading society, someone especially good at knitting can concentrate of making clothes and leave farming, carpentry and baking to someone else.
This specialization also is wonderful because it allows people to produce only those things at which they are best, meaning more stuff can be produced by the same number of hands. It also allows for the specialist to increase his skills and his efficiency, which also increases the amount of goods and services available.
The scope of possible trades between people increases dramatically when some “medium of exchange” — money — is used. The invention of money permitted humans to exchange with each other much more easily than if they could only barter with each other. Without money, for example, a brewer who wanted shoes would need to find a shoemaker who likes beer. That’s why money is also a wonderful thing.
Finally, money is also wonderful because it leads to “money prices.” And prices are wonderful because they allow people to figure out whether a certain item is profitable — or not — to produce.
The things required to produce an AM/FM radio, for example, have monetary costs. The parts, labor, assembly, transportation and time (in the form of interest rates) required all have money prices.
When the radio is completed and brought to market, it will command a market price of some level. If that price is below the price of the things consumed in production, we say the radio is not a profitable venture and productive resources are being wasted.
In a market economy, entrepreneurs discover quickly whether a product or service is profitable or not thanks to market prices. Profitable items are produced and wasteful items are abandoned. Without market prices for productive goods, it would be impossible to discover profitable uses for those goods.
I recently had the opportunity to travel to Poland and while there I attended a debate involving a “new left” professor, who had at one time supported the former Polish communist system but was now simply a European-style socialist. This professor amazed me at the end of the debate when he stated quite clearly, “Free market prices are necessary for a rational economy.”
This is exactly right because without money prices, profits and losses don’t exist. In a modern economy, with millions of possible uses of productive resources, an absence of market prices would mean no one could tell whether those productive resources were being employed wastefully or not.
The absence of market prices, in short, leads to economic chaos along the lines of what was seen in the former Soviet Union and its satellite countries, including Poland before 1989. No doubt, this professor, who was echoing the late Austrian economist Ludwig von Mises, understood this from personal experience as well as from economic theory.
That’s why I believe profits, trade, specialization, money and free market prices are all wonderful things. I hope Americans don’t have to go through the experience of Poland to find this out.
Arthur Foulkes is a Terre Haute native and longtime resident. The Tribune-Star reporter writes a column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes
@tribstar.com.
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