Today is the day that retail stores cajole us by the millions into their stores to scratch and claw for the deals that come and go as fast as I hit my snooze bar and roll over. I have never participated and don’t plan to today. In fact, I’ll make sure this week that we’ve got all the supplies we need to make it through to Sunday church without having to head north on Okemos Road and into Crazyville.
That said, I am in no way against the event and even like to hear about the numbers afterwards. I’m a fan of company profits, and I like to hear that companies by and large had a good run and will post gains. Gains mean appreciation and dividends, and these mean rising investments.
But there is a growing negative sentiment about corporate profits. I thought I’d take this post to discuss it briefly.
Those against profits see them as a “cost” to consumers. If profits did not exist – in healthcare, or banking for example – then prices can come down. This makes sense to some on paper. If a pencil costs me a dime, and the store selling it makes $0.03 selling it to me, then if it weren’t for profits, I’d get that pencil for $0.07.
Let’s not overcomplicate things – this is the essence of the argument. A sideline discussion is often brought up about the greed of capitalists and the despicable things some of them have done in the name of enhancing the bottom line. There are also some who believe that there is only so much to go around, so if you have more, I necessarily have less – another myth. But the essence of the argument against profits is that if you remove or reduce them (legislatively or otherwise) you lower costs to consumers and benefit them.
The problem with this argument is that it ignores the important reality of incentives. The logic against profits would work if we were all a bunch of robots and our needs/desires never changed and we did not value choices. But alas, we are humans who have consistently acted, and will continue to act, in accord with what we determine to be in our own best interest.
According to an Article on the Acton Institute website written by Rev Robert Sirico, “Profitable companies are the ones that find a way to create and deliver products and services at prices high enough to cover their costs, but low enough that customers find them attractive. The profitable company, in other words, is one that flourishes by creating and delivering value.”
So, in the light of a much more realistic view of the world, consider the following about profits:
Profits provide incentive for providers of goods and services. Setting up shop in just about any good or service has costs to it. My 14-year-old daughter just opened an Etsy shop – dutchiemade is her handle – see the link at the top of this page. Etsy is amazing. They make opening up a shop a breeze. Yet, there were still costs of various kinds involved in getting this up and running: material for her iPad cases, her time, fees to upload the products – real money for a 14-year-old, and this is before anyone has paid her a dime. Why would she do this? Better question, why would any business spend money to open up if there was no chance that they would make a return?
Profits provide the up-front money for new product delivery and improved services. In my previous example, where would the money come for my daughter to make this investment? You should assume that her dad is neither an underwriter nor an investor in this new venture. It was the profits from a successful childcare “business” that created the excess cash for this new start up.
Profits make improvements in yesterday’s products. Research and Development claims a very large percentage of a company’s revenue. This process is not cheap, and companies are constantly doing this for the purpose of improving their offerings and because they know that you will not buy their product unless you see the benefit that these dollars spent will improve your life. Take away the incentive that profit provides and you quickly eliminate any allocation for R&D. This shows up pretty quickly in the marketplace.
Higher profits attract new firms into industries. If my daughter was the only one selling attractive protective cases for iPads and she was selling them for $100 each – she may sell some. If she does, others will see that price and decide that it can be done for less. Once a few competitors join the market, my kid needs to make some decisions. She either needs to increase her value or reduce her price – both of these questions have come up in the last few weeks and both of these benefit the consumer.
Capitalism, the process of creating and rewarding profit-driven companies, is a good system. It keeps prices low; it brings new products to us constantly for our review at no cost. And, if that weren’t enough, it allows us to participate passively as investors to gain from the collective efforts.
Next time you hear someone denigrate the big bad corporation, speak up. You would not want to live in a society driven by the alternative. Someone would still have to make choices – it would just no longer be you.