Quickies: The Significance Of Profit

     Ace quotes Thomas Sowell on the subject:

     While capitalism has a visible cost -- profit -- that does not exist under socialism, socialism has an invisible cost -- inefficiency -- that gets weeded out by losses and bankruptcy under capitalism. The fact that most goods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency. Put differently, profit is a price paid for efficiency.

     [From Basic Economics]

     It isn’t often that I’m moved to disagree with Sowell, truly one of the finest thinkers of the past fifty years, but the above strikes me as a fundamental error – indeed, an error so pernicious that it’s been used by capitalism’s enemies to attack capitalism morally.

     I would argue that in reality, what we call “profit” is really the wage we pay to reimburse individuals and institutions for:

• Innovation;
• Risk-taking;
• Convenience;
• Meeting an unmet demand;
• Compliance with regulatory forces;

     ...and other aspects of the path that leads:

• From product conception;
• Through product creation;
• Through product production;
• Through product marketing;
• Through product distribution;
• Through product retailing;
• Through product warranting and service.

     Each of those stages in the path from producer to consumer involves work: physical, mental, emotional, or some combination of the three. (Never doubt that last; the emotional cost of the risks a producer must take are almost never appreciated.) Unreimbursed labor will not be performed for long. That’s the true lesson of Mankind’s experiments with socialism.

     As for “efficiency,” there is no metric for it that two economists will agree on, because it involves subjective decisions at every stage of production, distribution, et cetera with which any argument must necessarily be equally subjective. But if “efficiency” cannot be measured, it is merely an opinion – and therefore cannot be “priced” in any inarguable way.

     The only “economists” who claim that “efficiency” is a valid yardstick for an economic system are socialists – and when pressed to define their terms, they invariably refuse, change the subject, or attack the questioner. Remember that the socialist attitude toward market competition is that to have two or more firms making “the same product” is inherently inefficient. Yet socialism fails at the fundamental task of any economic system: delivering goods and services in a quantity and quality and at a speed that pleases the eventual consumer.

     I could go on about this for many pages, but it’s a nice day, so I’ll spare you.