Some people who fancy themselves to be “progressive” or “liberal” have a slogan, “people over profits.” Some organizations proclaim that they are serving people rather than seeking profits. The implication is that there is something bad about “profits,” or that there are profits at the expense of people.

Profit is revenues minus cost. From an economic perspective, profit is net of all costs, explicit and implicit. Costs include normal returns on assets and the normal wages of the self-employed. Therefore, in the long run, after competitors have entered or left the industry to avoid losses or seek gains above normal, a competitive company makes zero economic profits. It remains in business because it is covering its costs, including normal yields on its investments.

If a company is making an economic profit, the firm has gains beyond costs. Is that bad for society? The eternal economist answer is, “it depends.”

If a company is making an economic profit, the firm has gains beyond costs. Is that bad for society? The eternal economist answer is, “it depends.”

Profits come from several sources. Entrepreneurial profits are the gains from innovation, such as new products, better marketing, and improved reputation. Usually, entrepreneurial profits are temporary, as competitors copy the innovation, the price drops, and the economic profit is gone. Entrepreneurial profits are good for society, for they promote improvements and efficiency.

If a company has losses, that implies that it is not successful in meeting the desires of the customers, and market dynamics make such firms leave the industry. Profits indicate good management and entrepreneurship, and losses indicate errors in judgment, or changed conditions the firm cannot successfully respond to.

Another source of profit is monopoly. Profits from government-created monopolies, such as from patents and copyrights, can be good if they stimulate art and inventions, and bad if they offer excessive protection. Those opposed to profits from intellectual property rights should focus their opposition to the government that protects the monopoly profits.

Natural monopolies such as utilities, having high fixed costs and low variable costs, are usually regulated, and opposition to those profits should be addressed to the regulators.

The view that profits are bad sometimes is due to the thought that the “profit” is gained through fraud, such as with false advertising or the lack of disclosure of bad effects. But the concept of the market presumes ethical competition, not theft, so the gains from fraud and deception are not really profit in the economic sense, but loot from theft.

Another source of profit antagonism is the thought that the firm is profiting by exploiting their workers. If the firm is using slave labor or forced labor, the gains are again not really profit, but the theft of the labor of the workers. If the labor is voluntary and the firm is paying the prevailing wages, then the low wages are the fault of the economy, not the firm, because the workers are employed there due to worse opportunities elsewhere. Protesters should direct their opposition to the government which has stifled economic growth and development.

Genuine profits are people. People earn the profits and make the profit by serving customers, investors, and society. Profit-seeking is the source of growth and innovation.

Genuine profits are people. People earn the profits and make the profit by serving customers, investors, and society. Profit-seeking is the source of growth and innovation.

Just as theft is not genuine profit, neither are gains from subsidies. If the government gives millions of dollars to a corporate farm, or protects the company from foreign competition, the gains do not come from the non-existing free market, but from governmental favors. Government is stealing funds from taxpayers and giving them to the special interests. Protesters should focus their opposition on the subsidies, because one cannot really blame a dog from biting and swallowing a piece of red meat dangled by its nose.

Some subsidies are provided indirectly and implicitly. Such is the case with gains from higher rent and land value. The public goods provided by government—streets, highways, schools, security, transit, and parks—generate higher rent. If the land holders pay only a small part of the cost, then they are receiving gains - rent and land value- that appear to be profit, but are actually subsidies. Those opposed to such subsidies should direct their protests to the government, because one cannot blame real estate speculators and owners for playing by the rules.

If companies profit from low wages, they are providing better opportunities, and the fault is with the economic policy that keeps wages so low. Genuine profits from business and entrepreneurship is a social good, so those who sneer at profits should redirect their derision to the real culprit—defective government economic policy.

We can see that much of what is called “profit” is really theft, subsidies, and government-protected gains. Much of the negative attitude about profit is misplaced, for when business is taking advantage of subsidies, it is government that is allowing this theft from the public. If companies profit from low wages, they are providing better opportunities, and the fault is with the economic policy that keeps wages so low. Genuine profits from business and entrepreneurship is a social good, so those who sneer at profits should redirect their derision to the real culprit—defective government economic policy.

© Text Copyright Fred Foldvary, Ph.D. rights reserved.
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