Thursday, July 30, 2009

The profit motive

Fake libertarian Bill Maher is out decrying the profit motive:
How about this for a New Rule: Not everything in America has to make a profit. It used to be that there were some services and institutions so vital to our nation that they were exempt from market pressures. Some things we just didn't do for money. The United States always defined capitalism, but it didn't used to define us. But now it's becoming all that we are.
Actually I wish that more things in America were run with the goal of making a profit. Such a motive, combined with competition, invariably produces excellence. The computer I am typing this on wasn't produced either through charity or the efforts of government workers. Indeed, those areas that are exempt from the pressures of the bottom line tend to function rather poorly.

As Yale law professor Stephen L. Carter says, we should be celebrating profits, not demonizing them:
High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.

To the country, profit is a benefit. Record profit means record taxes paid. But put that aside. When profits are high, firms are able to reinvest, expand and hire. And profits accrue to the benefit of those who own stocks: overwhelmingly, pension funds and mutual funds. In other words, high corporate profits today signal better retirements tomorrow.

Another reason to celebrate profit is the incentive it creates. When profits can be made, entrepreneurs provide more of needed goods and services. Consider an example common to the first-year contracts course in every law school: Suppose that the state of Quinnipiac suffers a devastating hurricane. Power is out over thousands of square miles. An entrepreneur from another state, seeing the problem, buys a few dozen portable generators at $500 each, rents a truck and drives them to Quinnipiac, where he posts them for sale at $2,000 each -- a 300 percent markup.

Based on recent experience, it is likely the media will respond with fury and the attorney general of Quinnipiac will open an investigation into price-gouging. The result? When the next hurricane arrives, the entrepreneur will stay put, and three dozen homeowners who were willing to pay for power will not have it. There will be fewer portable generators in Quinnipiac than there would have been if the seller were left alone.
As Adam Smith said, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” As someone that attempts to turn a profit in their own life I am sure Bill Maher can at least understand that.

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