Joel Watts – Question 6 (Profit) – Answer
What is the value of profit as a motive for action in the marketplace and competition as a regulating force? Do you trust profit making organizations more than non-profit? Under what circumstances?
While profit and the profit motive are often maligned they are the driving force in most of that we do, nor should this be seen as a problem. As 1 Timothy 5:18 says “For the Scripture says, ‘You must not muzzle an ox while it is treading out grain,’ and, ‘A worker deserves his pay.’” For some, the concept of wages and profit may seem like apples and oranges. But they are really the same thing, the compensation we get for our work.
Like many things, the profit motive can be both overdone and underdone. More importantly, it needs to operate within a system that allows it to be productively channeled, and that system is the free market system driven by choice for consumers and competition among suppliers. If businesses do not provide good value, customers can go elsewhere. Even most not-for-profit organizations must provide value in order to receive donations.
Government has no such driving force. This also explains why government is so wasteful. It has nothing to do with the people, but with the incentives, and the system in which they operate. Government has no competition, and can just demand money in the form of taxes. In fact, to be innovative and save money, for much of government is counter-productive. Administrators who do this would be “rewarded” by having their next years’ budget cut, whereas wasteful administrators are likely to have their budgets increased even more.
When it operates within a system of choice and competition, the profit motive has some very positive outcomes. The first is a desire to improve. Whether this is an individual who goes to school so as to get a higher paying job, or a business that wants to attract more customers, the profit motive drives improvement. The second is that the desire to improve, when combined with competition, pushes people to search for new and better ways to do things; in short it results in innovations.
This is something that most not for profits simply cannot do. Not-for-profits can consume and distribute wealth but they do not create it. To be sure they can adapt to innovations, though they often have trouble doing even that, but rarely do they ever drive innovation. This is particularly true for Government because rather than innovation, government regulates, which by definition hinders innovation. Regulation looks back and seeks to standardize past practices, rather than looking forward to create new ones.
The side effect of all this is a tremendous amount of good for humanity. This is seen both in the increase in the standard of living, and in the tremendous array of products and services that make our lives better, nearly all of which we have because of the profit motive.
In addition, because most resources are limited, the profit motive, when combined with choice and completion drives a more efficient use of these limited resources. The more efficient you are the lower your costs and the higher the profit. Before Rockefeller got into the oil business, most of the oil produced was simply wasted. It was wasted because no one knew what to do with it so it was just thrown away, or wasted because of leaks and losses during transportation, but it was wasted.
Rockefeller sought to improve all aspects of the process, from funding the development of some 300 new uses for the “gunk” that used to be thrown away, to better delivery systems that reduced loss. As a result the cost of the oil used at the time for light dropped from what was for most an unaffordable 58 cents per gallon to an affordable 8 cents, allowing them to have light at night. In the process he created a vast amount of wealth, a vast number of jobs and increased the standard of living for millions.
The profit motive not only benefits the society at large, it benefits the individual as well. There is, of course, the desire for self-improvement it instills, but it goes deeper. At the heart of a system governed by choice and competition is the exchange of value. The employer pays you in exchange for a certain amount of work. You pay a store in exchange for goods and services received.
While the ultimate goal of a business is to earn a profit, if a business makes profit their primary goal, they are sure to fail. This “paradox of business” is simple to understand: who wants to deal with such a business? To attract customers, a business must provide value in exchange for the money they receive. To grow a business must provide a better value than their competition.
To do this one cannot just focus on what they want, they must be concerned with the needs and wishes of others. This is why most companies provide far better customer service than government does. For profit companies are driven by the profit motive which forces them to be concerned with the wishes and desires of their customers.
This also goes a long way towards explaining why those who support free market solutions driven by the profit motive tend to give more to charity than those who support government solutions. The profit motive operating in systems governed by choice and competition reduces poverty, increases the standard of living, make society better, and makes the individual better. What’s not to like?