John Singleton with Bob Howard, Rip Van Australia (Stanmore: Cassell Australia, 1977), pp. 204-08, under the heading “Profits”.
It is a socialist idea that making profits is a vice.
I consider the real vice is making losses.
WINSTON S. CHURCHILL
Profit is the driving force of the free market. It determines where, and in what quantities capital is invested. It determines what is produced, in what quantities, and of what quality.
Profit can be measured in many ways, but the most common is in money. It could be argued that too much emphasis has been placed on money, and as a result, the pursuit of profit has come to be regarded as a regrettable, though unfortunately necessary, evil. Another way of putting this would be to say that too much emphasis has been placed on short-term profits, and not enough consideration has been given to the requirements of long-term profits. For example, a ruthless businessman could get larger short-term profits by brutally exploiting his employees, but by so doing he would be signing his long-term death warrant. Competitors who offered better working conditions would take his employees away from him, or, if the practice was widespread, the conditions would produce a situation favourable to the growth of a strong, anti-business Union movement. Furthermore, the general attitude of people to business would be hostile, and favourable to government legislation to control business. In all these ways, there have been enough short-sighted people in business to bring all these problems (and attempted solutions) into being in Australia today.
Profit is a dirty word, and business is regarded with suspicion and even hatred. The proposed solution is to get rid of the evils of greed and its consequent rush for profit, and to put “a human face on business” by turning it over to “society as a whole”. In other words, to turn to socialism, or some variation of it.
While one can, to some extent, sympathise with people who feel this way, it is not possible to agree with them. Their proposed solution is far worse than the problem, and arises from a basic misunderstanding of both business and people. This is not to deny that there have been bad businessmen, and bad business practices. There have been, and always will be.
But what is profit? How does it arise, and what does it signify?
The first thing is to understand something fundamental about human nature: people will only act when there is some incentive to act — for example, when they can see some profit in acting. A businessman runs his business to make money. He may also love his occupation, and a get a kick out of the whole business experience — out of the challenge, the competition, the enjoyment of his skill. But he must make money to survive.
A person in a burning building will (usually) try to get out of it. His profit is staying alive. Another person might work hard for twenty years to spend two years lying on the beach. His profit is being able to escape from work. Others might work to help others, because of the sense of satisfaction and fulfilment this gives them. Whatever the situation, people act because they have some incentive to do so. In most cases, this incentive, directly or indirectly, involves getting money. Money is either an end in itself (for example for a greedy miser) or a means to other ends (allowing a life of luxurious leisure, or gaudy ostentation, or whatever).
The pursuit of this profit motive usually involves trade. This again is a commonly misunderstood process. It is often thought that in any trade, there is a winner and a loser. There isn’t, unless the trade is a forced one. In any voluntary trade, all parties must gain (or at least, at the time of the trade, believe they are going to gain — they could, of course, be mistaken) or the trade would not occur. A common example of this is the used car business. The buyer looks for a car to buy. The seller has cars he wants to exchange for money. The buyer rejects many cars because either he can’t afford them, or, in his opinion, they are not worth the money he’d have to spend to get them. In other words, he decides he’d rather have his money than that particular car. At last he makes up his mind on a car he’d like. He tries to beat the salesman down. The salesman may drop his price a little, but finally reaches a point where he will go no lower. Beyond that point, he’d rather have the car than the money.
When an exchange finally does take place, implicit in it are the facts that the buyer, at the agreed price, preferred the car to the money, and the seller preferred the money to the car. They both get what they want — they both gain.
Even if the buyer was in a position where he didn’t really want a car, but had to have one for a job he wanted, he still is making a net gain. The desire for the job outweighs the reluctance to buy the car.
In any voluntary trade, all parties believe at the time of the trade that they are going to gain from it. Therefore, one person’s profit is not another person’s loss. The price paid is a measure of the balance between the buyers demand and the available supply. You might be tempted to say that that’s all very well. A “reasonable” profit is okay, but why should an unscrupulous person be able to fleece other people and make “excessive” profits just because of, say, freak circumstances? Nobody minds “reasonable” profits, but “profiteering” should be outlawed.
Why should it? The “excess profit” situation sometimes arises during time of personal suffering, for example, Queensland’s annual floods. Motorists are sometimes stranded for days at a time with floods in front of and behind them. “Profiteering” takes the form of excessive prices for food, drink, shelter or a tow out of the water, and the public cry of disapproval goes up. The same thing happened in Darwin after the cyclone — “greedy” landlords raised the rents on the few houses left standing making huge profits out of other people’s misfortune.
In these examples we can see an extreme case of high demand versus low supply. According to our previous equation of price being a measure of supply versus demand, this situation should naturally result in high prices. Of course, what people find offensive about this situation is the apparent inhumanity of it: taking advantage of other’s misfortune. But when one considers the consequences, the results are anything but inhumane.
Take Darwin. If rents had been allowed to rise to very high levels, what would have happened? People would have paid them, because they had little choice — in fact, that’s why they would have risen in the first place. People would have bid for the houses, just as they bid in an auction. Home owners would have been confronted with a number of families wanting the house, all trying to outbid each other for it. There are two other extremely important results as well. First, families would have shared the houses to split the costs. As the prices went up, they would rent out rooms, and make do with less and less space. This would be a good thing, as the available houses would have spread much further than otherwise. Second, there would be the prospect of high profits for anyone who could supply housing or shelter of any sort at short notice. So, every builder, caravan owner, or manufacturer, prefab house builder, or even boat owner, in Australia or overseas, would have done some quick sums to see if there was anything to be gained from moving into Darwin. There would also have been a great incentive for the people of Darwin to get their homes repaired. Within a very short time, shelter would have been available again.
Admittedly, much of this early work would be temporary, and standards might not be high enough to withstand another cyclone. But the people would have had shelter, quickly, and they could have, at a later time, upgraded their buildings to whatever standard they liked, or even simply discarded their temporary shelter once they had something permanent constructed. Quickly, within six months, this new shelter would have forced the rents back down to “reasonable” levels. As far as standards are concerned, the people who live in Darwin should set their own. Having just been through the hell of that cyclone, and suffered the high costs associated with it, they wouldn’t need to be forced to ensure that their buildings were of adequate strength and safety. In this regard, the high rents would help to drive the lesson home, because if their house was strong and still standing, they reaped their own rewards. If it wasn’t they paid the price. And also if it wasn’t strong enough the chances of getting insurance would be between none and zero.
All of this could have happened and would have happened. But as we all know, it didn’t. Instead, during the Darwin disaster we saw a pure exercise in fascism, as, true to form, eager politicians practised the old trick of turning every contingency into a resource for accumulating force in the government. Glory hunters were everywhere, jostling one another to get their photos in the papers, expressing “concern”, offering “help” and (unsaid) seeking votes. All they succeeded in doing was perpetuating the disaster.
They, for example, imposed rent control, and at a stroke, killed off all chances of a natural economic recovery. They forbade people to repair their own houses, and dithered about letting contracts for the building of new houses. Result? It was over a year before a single new house was built.
People who complain about profiteering are never consistent about it. When it comes to them selling something, they charge what the market will bear. If you, for instance, had a car that you thought was worth $1000 and you wanted to sell it, would you take $2000 for it if someone offered it? Would you sell it for $800 if you thought you could get $1000 for it?
Profits serve a very important economic function. They do not, as is often thought, simply go into rich people’s pockets to be squandered on lavish parties and high living. (Usually, the people who squander money are those who have never had to earn it in the first place, for example public servants, politicians — or anyone spending someone else’s money.) However, as they squander the money it finds its way into the hands of people who do value it. It has always been the case that if a person is not big enough to live up to their money, it will destroy them.
What do those people who do have money do with it? Where do Lang Hancock’s millions go? Back into the ground to find more minerals to produce real worth, and to provide jobs for people.
It is fashionable to crucify profits, but what really happens to the money when a company does make a profit? The government cops 42.5 per cent of it for a start. Most of the rest pays dividends to shareholders, and the remainder is invested (often the dividends are simply re-invested anyway). The invested money is used to build new factories, start new industries, expand operations, install newer and better equipment, research and develop new processes, machinery, production methods, and in all these ways provide new jobs. Furthermore, by developing and installing new plant and equipment, thereby raising the productivity of employees, the company ensures its future competitiveness which enables it to pay higher wages.
The higher the profits, the more a company is able to do in all these areas. That some of the consequences don’t always follow is often attributable to restrictive legislation, which prevents competition or experimentation, or which has allowed Unions to control wage movements. Companies that don’t make profits are either bankrupted, or are propped up by the taxpayer. Either way, they help no one.
On a real free market, profits would flow to those who best satisfied consumer needs. Competition would ensure that only by cutting costs, increasing efficiency and building “better mousetraps” would people be able to achieve greater and greater profits. Market situations would develop that allowed entrepreneurs to reap very high profits, but the very fact that they did so would being into being the competition that would quickly reduce the level of profits to an equilibrium point. Money would always tend to flow into the most profitable areas in the economy, thus providing the lifeblood of healthy competition with its resultant maximisation of quality and supply and minimisation of price. In a rigged economy, such as we have now, this doesn’t happen. Inefficient industries are propped up, or protected. Industries that we should not have, because of the possibilities of cheaper imports, are maintained by tariffs. Monopolies are institutionalised so that open competition is not allowed, and the consumer is constantly exploited. Free enterprise and the profit motive cop the blame. But they don’t deserve it.
