Profit is Good - Part I

The business world is a tough place.  It’s so tough, in fact, that most of us aren’t all that interested in being our own employer.  The majority of us would prefer to have a job working for someone else.  Why?  A paycheck.  We don’t have to worry much about how much we’ll have in the bank come next Friday.  We made an agreement with our employer – in the form of a salary, a hourly wage, or an amount per piece of production.  We can predict pretty accurately what that amount is going to be. 

Entrepreneurs – business owners – those folks who choose to go it on their own and work for themselves, don’t have that luxury.  They have zero ability to predict how much money is going to be in the bank come Friday.  Going into business they face rather daunting odds (most businesses fail within the first three years of starting up).  There’s a lot of uncertainty: are people really going to want to buy what I am selling?  Can I make it better, cheaper, or faster than my competitors?  You can’t really know until you try. 

And the risk – holy smokes!  Sometimes you have to plunk down some serious green to get started.  It might be a store front, a piece of machinery; it might be employee’s salaries.  The list is endless…  And what if you fail?  How do you face your kids, your spouse, your friends?  Why in the world would you do this to yourself voluntarily?!

There’s got to be something in it for people to want to take on that level of uncertainty, to bear all that risk.  And there is.  It is called profit.  Profit is the reward that the market gives a successful entrepreneur – one who has marshalled scarce resources responsibly, efficiently and has rearranged the pattern to create something that enough customers value more than their present alternatives to pay more than the costs to produce it.

Entrepreneurs are motivated to do their thing because they know if they do it well they’ll receive a reward.  Profit is a powerful incentive.  It inspires people to take on daunting risks, keeps them alert to new opportunities no one may have thought of before, and gives them a sense of urgency to make things happen before others beat them to it.  Profit acts like a spur to the side of a horse, propelling innovation, discovery, and economic growth.  Where I come from, that's a good thing.

Comments

[John]

Great post, Ben. People often note that entrepreneurs would be entrepreneurs even without the kind of strong profit motive we have in the United States, and they are correct that most of the folks who start businesses do so for more than just a calculated monetary return (they love the fun of it, the autonomy, and the risk). But it takes more than just an entrepreneur to start a business. It takes financing, the attention of coworkers, and the patience of family and friends--all more likely in a system that promises high risk premiums for those who shoulder the burden of uncertainty.

Our mammoth economic system was built on the profit motive, and it has demolished every other system in its path (European bureaucracy, communism, et al). Sometimes I think the only thing strong enough to stop it is a penchant for Tocqueville's "debased taste for equality" in the populace at large coupled with an ever-increasing relegation of the powers to enforce this equality to the state (oh yeah, and politicians who, in true Hayekian form, are more than willing to use force to ususrp the money, lives and energies of others).

[Ben]

Thanks John - appreciate your kind words. Not sure I got your "Hayekian" comment (he was a lover of markets and freedom, not political profit and coercion) -- but maybe I misunderstand your point.

Cheers,

Ben

[John]

Sorry...muddled. Acting as Hayek would expect, not prescribe.

[jon]

Ben,
This was such a great post on Profit is good, that I sent it to my daughter at college. A great analogy for her to relate the businees as "college" and the profits as an "education". As a dad you have to try anything to motivate the younger generation...jon

[Andy]

John, I don't think that capitalism has yet 'demolished' European bureaucracy and socialism. Although it's apparent to many that the old European social and business model is collapsing under the weight of its untenable welfare programs. Although there are many characteristics of the free-market capitalist system still in place in Europe, most notably in Anglosphere countries like Ireland and England (especially Ireland), and quite vigorously in the 'new Europe' republics like Slovenia and Estonia, other 'old Europe' countries like Germany, France, Italy, Sweden, and others, seem to be content to keep living with an interventionist nanny state. Most Europeans are glad to take their guaranteed their six-week holidays, enjoy a 35 hour work week, “free” child care, generous unemployment, etc. So people work less, produce less, and the pie keeps getting smaller.

In France in particular, the government's dirigiste approach to maintaining an unfree market looks like it's going to survive the current unrest, at least in the short term. There is a lot of talk about government solutions (more programs) to appease the rioters, but little or no talk about creating a bigger free-market pie for all to share. I think these Euros systems will gasp and muddle along for a short while, longer if they make the new Baltic and Slavic Republics toe the line with more regulation and higher taxes.

(Ben, great post, by the way!)