Profits

In some circles profit is almost a dirty word. It conjures up fat capitalists sucking up the livelihood of poorer people in order to stuff their pockets and make themselves fabulously wealthy.

This is a complete misunderstanding of the role of profit. Profits do not represent money that rightfully belongs to others, but are what lies behind the wealth-creation that has so benefited the world. Some of us postpone consumption so that we can enjoy more goodies later. There would be no reason to do so otherwise. By using wealth to create more wealth in the future we can have access to more choices and opportunities. The prospect of making a profit leads us to invest, and the investment creates new products and processes and new efficiencies.

People are motivated by profit to provide goods and services. As Adam Smith put it:

‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.’

Sometimes people are envious of high profits and think them somehow unfair. In fact the high profits encourage others to enter and start up in competition, which in turn benefits the consumer by increasing choice. Moreover, high profits motivate others to start up new ventures in the hope of doing likewise. Thus profit is the incentive for increased economic output, as well as for the introduction of new products onto the market.

Profits do not represent wealth taken from others, but wealth created by added value and exchange. Without profits there would be no reason to forego present consumption by investing. Profits thus make us look to the future and what we might achieve in it, and lift our eyes above the present gratification that would prevail otherwise. Profits are the incentive that sets people on the road to economic expansion and the self-betterment which it makes possible.

Marxists erroneously suppose that profit represents exploitation, with goods commanding a price higher than the labour cost of producing them. They err in supposing that value derives from labour costs. In fact it derives from demand, and is in the mind of the person contemplating the object, not in the object itself. It is because we value things differently that we trade. The investor hopes that people will value the goods produced more than the price that will be asked for them, and that this will be more than it costs to produce them. Profit benefits people rather than exploiting them, and it does so by making available new goods that they value and are willing to buy.

Profit is not a dirty word. It is one that inspires us to benefit our fellow citizens in the process of benefitting ourselves.