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Walter E. Williams
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Profits Are for People

Comment

The Occupy Wall Street demonstrators are demanding "people before profits" — as if profit motivation were the source of mankind's troubles — when it's often the absence of profit motivation that's the true villain.

First, let's get both the definition and magnitude of profits out of the way. Profits represent the residual claim earned by entrepreneurs. They're what are left after other production costs — such as wages, rent and interest — have been paid. Profits are the payment for risk taking, innovation and decision-making. As such, they are a cost of business just as are wages, rent and interest. If those payments are not made, labor, land and capital will not offer their services. Similarly, if profit is not paid, entrepreneurs won't offer theirs. Historically, corporate profits range between 5 and 8 cents of each dollar, and wages range between 50 and 60 cents of each dollar.

Far more important than simple statistics about the magnitude of profits is the role played by profits, namely that of forcing producers to cater to the wants and desires of the common man. When's the last time we've heard widespread complaints about our clothing stores, supermarkets, computer stores or appliance stores? We are far likelier to hear people complaining about services they receive from the post office, motor vehicle and police departments, boards of education and other government agencies. The fundamental difference between the areas of general satisfaction and dissatisfaction is the pursuit of profits is present in one and not the other.

The pursuit of profits forces producers to be attentive to the will of their customers, simply because the customer of, say, a supermarket can fire it on the spot by taking his business elsewhere. If a state motor vehicle department or post office provides unsatisfactory services, it's not so easy for dissatisfied customers to take action against it. If a private business had as many dissatisfied customers as our government schools have, it would have long ago been out of business.

Free market capitalism is unforgiving.

Producers please customers, in a cost-minimizing fashion, and make a profit, or they face losses or go bankrupt. It's this market discipline that some businesses seek to avoid. That's why they descend upon Washington calling for crony capitalism — government bailouts, subsidies and special privileges. They wish to reduce the power of consumers and stockholders, who hold little sympathy for blunders and will give them the ax on a moment's notice.

Having Congress on their side means business can be less attentive to the will of consumers. Congress can keep them afloat with bailouts, as it did in the cases of General Motors and Chrysler, with the justification that such companies are "too big to fail." Nonsense! If General Motors and Chrysler had been allowed to go bankrupt, it wouldn't have meant that their productive assets, such as assembly lines and tools, would have gone poof and disappeared into thin air. Bankruptcy would have led to a change in ownership of those assets by someone who might have managed them better. The bailout enabled them to avoid the full consequences of their blunders.

By the way, we often hear people say, with a tone of saintliness, "We're a nonprofit organization," as if that alone translates into decency, objectivity and selflessness. They want us to think they're in it for the good of society and not for those "evil" profits. If we gave it just a little thought and asked what kind of organization throughout mankind's history has accounted for his greatest grief, the answer wouldn't be a free market, private, profit-making enterprise; it would be government, the largest nonprofit organization.

The Occupy Wall Street protesters are following the path predicted by the great philosopher-economist Frederic Bastiat, who said in "The Law" that "instead of rooting out the injustices found in society, they make these injustices general." In other words, the protesters don't want to end crony capitalism, with its handouts and government favoritism; they want to participate in it.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

COPYRIGHT 2011 CREATORS.COM



Comments

7 Comments | Post Comment
We plebes don't need politicians to be angry at Corporate America's C-Suite royalty. All we have to do is read the business news. First, we can recognize CEO's who are worth their salaries and perks. They stand in sharp contrast to well-connected parasites like Bob Nardelli, who famously brought Home Depot to its knees and walked away with millions. Or let's look (if we can stand it) at Léo Apotheker, CEO of Hewlett Packard for all of eleven months, during which time the stock fell 40%. He was rewarded for his startling results with some $35 million in salary, signing bonus, stock options and relocation expenses.
We great unwashed have also noticed that the disparity between what the CEO makes and what the rest of us take home has increased immensely over the past two decades. You folks up in the C-Suite are doing just fine, seemingly irrespective of results, while the rest of us are rapidly losing ground. Median executive pay increased more than 25% between 2009 and 2010, while corporate profits went up 1.5% and a whole bunch of us were out of work or watching our 401K's disappear. Or both.
So, yes, we are indeed envious. It must be swell to be a CEO. There's no downside to mediocrity or failure. Win, lose or draw: you're in the money.
Comment: #1
Posted by: Mandy Cat
Mon Oct 24, 2011 9:34 AM
An idealistic capitalist is just as bad as an idealistic communist. We all know that those in power are going to use everything they have to stay in power and that includes using profits to manipulate Washington. Do you honestly believe bad companies go out of business while good companies remain afloat? If that were the case, we would never have stagnant monopolies.
Comment: #2
Posted by: Clucri
Mon Oct 24, 2011 1:05 PM
Mr. Williams seems oblivious to the consequences of concentrating most of the wealth at the top at the expense of almost everybody else. While productivity has gone up, real wages have fallen. This is a formula for political upheaval. For a primer on what is wrong with the present situation, Mr. Williams should visit this handy site:
businessinsider.com/what-wall-street-protesters-are-so-angry-about-2011-10?op=1
The unvarnished truth in thirty or so very clear charts.
Comment: #3
Posted by: Mark
Mon Oct 24, 2011 6:43 PM
I respect your report and the thought that created the words. This topic is being driven very deeply into the dedicated rank and file that put years of service front and center. Currently, there is very little substance coming from the top .01% group in response to the subject outside their respective companies. Get a look at inside communications and you will find the most marvelous rhetoric imaginable in downward inter-company communications. Not only are we experiencing "the most exciting times and promising futures", we are "the most important assets" of our companies. I can't get past the rhetorical response as to why I will not get a .01 % raise while our CEO will continue to get paid 15M, will continue to own or control 1.4% of the company stock, and receive benefits if terminated for cause. Who is going to break the ice? What would become of the first CEO who would distribute one year of his wealth into a pool for the "most valuable assets"?
Comment: #4
Posted by: Brian
Tue Oct 25, 2011 6:47 PM
The hatred of the rich and successful that increasingly spews forth in our culture is easy to project to its ultimate end: the equalized poverty of, say, Cuba or North Korea. It isn't the occasional case of an improperly rewarded bad CEO that the Occupiers decry, it's the entire idea that anyone is rich at all. It comes from, among others, the Sermon on the Mount, Karl Marx, your college professors, the evening news, and most bizarrely, from guilt-ridden billionaires. As I watch news coverage of the various Occupations and read the comments here, I greatly fear that the efforts of the few pro-capitalist advocates like Prof. Williams have been for nothing. I don't often wish to be wrong, but this is one of those times.
Comment: #5
Posted by: Phillip Schearer
Wed Oct 26, 2011 8:49 AM
...And the worship of the rich, and the apparent associated acceptance that they have a god given right to control the political systems of our nation to assist them in concentrating the nation's wealth in just a few hands, leads, inevitably, to the sort of capitalist paradise currently found in China where almost everybody, except the wealthy, lives in poverty.
.
Funny, the residents of Denmark enjoy a much more equal distribution of their wealth than we do and, yet, somehow, are not wallowing in poverty on their way to a Cuban or North Korean lifestyle. While the form of government practiced in Denmark may not be ideal for our nation, neither is destroying the middle class on the alter of the ultra-wealthy. The so-called "job creators" are amassing ever larger piles of cash and demanding ever lower tax rates, yet somehow they keep forgetting to create the jobs. In the mean time, real wages for most everyone else continue to fall.
.
The previous comment seems to find that Warren Buffet's pointing the inherent dangers to our nation from the coddling of the wealthy by congress is the result of some sort of guilt. An understandable conjecture if one is simply unwilling to consider the idea that he just might be correct.
Comment: #6
Posted by: Mark
Wed Oct 26, 2011 12:46 PM
There is nothing wrong with profits. In true free market capitalism, both buyer and seller walk away satisfied that they made a good deal.

Wall Street profits, however, are not based on anything like free market capitalism. To show paper profits, to generate stock sales, Wall Street corporations cut corners everywhere else, such as product quality, employees, plant maintenance and safety. This guts the companies' underlying financial health, as "profits" are claimed and misallocated to low-yield expenditures.

Dividends to do-nothing shareholders and interest on debt bleed companies' profits and debilitate the company over the long term, because neither gives value for the investment and both take a big bite out of disposable income. I contend many of these companies are more invested in stock churning than in producing real products, and this is why the Occupy Wall Street crowd is so angry.
Comment: #7
Posted by: Katharine C. Otto, MD
Thu Nov 10, 2011 7:27 PM
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