25. The Profiteer

0:00Chapter 25 The Profiteer It is clear that profits and everything associated with them have been under attack for a long time. What is not so clear is the reason for these attacks. Several different patterns can be discerned. The objection most often made is that profits, unlike other sources of income such as wages, rents or even interest, payment for weighting risk are unearned. There is no honest labor or effort associated with profit-making to justify the benefits. Most people do not understand the process by which profits are attained and assume that there is something untoward going on.

0:48It isn't fair to make profits without having to work for them. Another objection often voiced against prophets and especially against profiteering, unreasonable prophets, is that such prophets impoverish the rest of mankind. The notion is that there is only a finite amount of wealth available, and if the profiteers get more of it, there is less for everyone else. Thus, not only are prophets undeserved because they are unearned, but they actually harm from People by diverting funds from the rest of society. It also appears to many that profits are earned by taking advantage of the helplessness of others.

1:33This view constitutes a third type of objection, and is reflected in the scornful popular expression that profiteers earn their income from the misery of others. When the helplessness consists of a lack of knowledge, the critics of profits are especially is particularly vociferous in their condemnation. For example, the case where a profit is earned solely because the customer is unaware that the same commodity is being sold close by at a lower price is particularly vexing. When the customer is poor, the profiteer is even more condemned. The usual defenses of the idea and practice of earning a profit leave a great deal to be desired.

2:20They have in the past been limited to pointing out, one, profits are patriotic, and that to attack them is un-American, or perhaps communistic. Two, they are not very big anyway. And three, they are used in many cases for charitable contributions. Needless to say, these are not very formidable defenses. Consideration must be given to the function of profits in a modern economy and an effort made to provide a somewhat more spirited defense for the ancient and honorable vocation of profiteering. First, profits are earned by entrepreneurs who see and seize upon opportunities which are not readily apparent to other people.

3:09The opportunity grasped by the entrepreneur may vary from case to case, but in all cases people are offered trades which they hold to be in their advantage, and which would not be offered in the absence of the entrepreneur. In the most usual case, the entrepreneur sees a discrepancy between different prices, strawberries is selling at 25 cents per jar in New Jersey and 45 cents in New York. As long as the costs associated with the transport of strawberries—transportation, insurance, storage, breakage, spoilage, etc.—are less than the price differential of 20 cents per jar, the enterprising entrepreneur is in a position to offer two sets of trades.

4:00He can offer to buy strawberries in New Jersey at a price slightly higher than the prevailing 25 cents per jar, and then offer to sell strawberries to New Yorkers at a price below the 45 cents per jar that prevails in that market. In both cases, if he finds any takers, he will benefit those he deals with, either by by offering a higher price for their goods than they have been accustomed to receiving, or by offering to sell them goods at a lower price than they are accustomed to paying. In addition to the intratemporal price discrepancy case, there is the intertemporal case, where a price discrepancy between present goods and future goods is perceived.

4:50Take frisbees as an example. Consider all the factors of production, land, labor and capital, which are embodied in the final good of the frisbees offered for sale. The factors of production are goods of a sort themselves, and therefore have prices attached to them. After taking due account of the time it will take to convert these factors into the final good, three possibilities emerge. 1. There is no price discrepancy between the prices of the factors and the price of the future good. 2. There is a discrepancy and the factor prices are high relative to the price of the good. And 3. There is a discrepancy and the price of the final good is high relative to the prices of the factors. If there is no price discrepancy, the successful A valuable entrepreneur will not act. But if the factor prices are relatively high, the entrepreneur will withdraw from production.

5:57It would be wasteful to devote relatively valuable resources on a final good that will be relatively valueless. He might sell his shares in the companies which engage in such production. Or, if he does not hold shares, he can contract to sell them in the future at their present high price, which does not yet reflect the production error of manufacturing frisbees with resources that are more valuable than the frisbees themselves will be. He can cover these sales by purchases of the same amount of shares in the future, when he expects their value to be lower because of the production error. There are many people who are mystified by this process, often called selling short.

6:46They wonder how it is possible to sell something that you do not own, in the future, but at today's prices. Strictly speaking, one cannot sell anything that one does not own, but it is certainly possible to promise to sell something in the future that one does not yet own, on the understanding If, on the other hand, the entrepreneur thinks that the price of the final good is like a

7:37The third type of hidden opportunity which the entrepreneur can seize upon does not involve any price discrepancies, either inter or intra-temporal. This type of opportunity involves goods that have not yet been produced and therefore have no prices at all. Consider in this regard the frisbee before it was produced or invented. There was no guarantee at that time that the public would accept it.

8:22In cases of this kind, the entrepreneur feels, thinks or devines that there is something, The lack of which may not even be apparent to anyone else, that consumers would greatly value if they could but be told of its existence and convinced of its beneficial attributes. In this case, the entrepreneur plays nursemaid to the idea through the processes of invention, financing, advertising and all other steps necessary to bring an idea to public acceptance. After having considered some of the types of activities profit-making entrepreneurs are likely to engage in, the results of profit-seeking can be assessed.

9:11One result is immediately apparent, the collection and dissemination of knowledge. The knowledge of hitherto unproduced products is an obvious and dramatic example, but as As we have seen, the knowledge engendered by profit-seeking behavior is by no means limited to such exotic occurrences. On a daily basis, the profit-seeker is constantly bringing to the market knowledge about price differentials, both inter- and intra-temporal. This knowledge is of great benefit to all concerned. Without it, people in New Jersey would be eating strawberries which they would much The New Jerseyans only eat the berries because of their lack of knowledge of people who value them more than they themselves.

10:09In addition, without this knowledge, there would be people in New York not eating strawberries because they assume that the only way to get them is to pay 45 cents a jar, when in truth they could be had for less. Of course, the profit seeker does not bring this knowledge to bear as a teacher might. He is not one who goes about the countryside explicitly imparting information. As a matter of fact, after his work is done, none of the people in New Jersey and New York may even be aware of the relative prices of strawberries in those markets. What the prophet-seeker does is make sure that the effects of knowledge of prices in the different areas are felt.

10:59The prophet-seeker does not directly spread the knowledge himself. He merely spreads the strawberries, which in the absence of knowledge of their prices would not have been so allocated. It is perfectly true, then, that the prophet-seeker takes advantage of the ignorance of other people. If the relevant knowledge were present, the entrepreneur could hardly earn profits by shipping strawberries from New Jersey to New York. Although true, however, it is hardly reprehensible. Anyone whose function it is to sell a commodity must sell it to those who lack it. The fact that the lack is determined by ignorance does not make the lack or the need any less real.

11:46The profit-seeker takes advantage of the lack of knowledge of his customers in the same way that the farmer takes advantage of the hunger of his customer, by providing that which his customer lacks. The profits of the entrepreneur, therefore, are not made at the expense of anyone else. It is not true that there must be losses elsewhere in the economy equal to the gains of the entrepreneur, It is not true that the entrepreneur fails to create anything. The entrepreneur does create. He creates the possibility of cooperation between disparate and, in many cases, widely separated groups.

12:32He is a broker or intermediary in opportunities, as it were. It is his function to see to it that mutually beneficial opportunities are not bypassed. Why this type of effort should be singled out and denigrated as not honest work is beyond the scope of reason. In addition to serving as a focal point for the utilization of knowledge, the profit-seeking entrepreneur benefits people by offering them choices otherwise not open to them. The case in which the entrepreneur presents the public with an entirely new product is again an obvious example. But the principle has applications even in the more mundane case of intertemporal price discrepancies.

13:22For society benefits when valuable resources are not committed to final products which are less valuable than the resources themselves. Such resources can be used in the production of more valuable final products, that is to It should be borne in mind that all entrepreneurial transactions are strictly voluntary. The people with whom the entrepreneur deals are just as free to reject as to accept his offers. If they accept, therefore, it can only be because they feel that they benefit from trading

14:36be made on behalf of government transactions, because they cannot be said to be fully voluntary. Another result of the profit-making process is that after it is undergone in any given market, there is less scope for its continuation. Its success sows the seeds for its demise. Once the opportunity has been pointed out and fulfilled by the entrepreneur, However, his function is completed. Like the lone ranger of a bygone era, the lone entrepreneur must move on to make other pastures greener. However, if imbalances in prices should arise shortly thereafter, the profit-seeker will return. The incentive behind the entrepreneur's attempt to hold together the disparate parts of the economy is, of course, the profits he hopes to gain thereby.

15:36This is an excellent example of the beneficial effects of a profit and loss system. For the successful entrepreneur, the one who earns profits, holds the economy together by decreasing price discrepancies. But the entrepreneur who buys when he should sell, or sells when he should buy, who instead of Decreasing Price Discrepancies and Holding the Economy Together, Increases Them and Disrupts the Economy, Loses Money. The more mistakes he makes, the less able he is to continue in his error. We cannot hope to completely rid the economy of errors, but a mechanism that automatically tends to improve the performance of the entrepreneurial class at every given instant is not to be be dismissed lightly.

16:31Although a case has been made for the beneficial effects of profits, profiteering has not been mentioned. It is important to do so, for there are many who would contend in the spirit of the Aristotelian golden mean that profits in moderation are acceptable, perhaps even beneficial, but that the extremism of profiteering can only be deleterious. The word profiteering has always been used in a smear context. Profits plus I hate the son of a bitch equals profiteering, in the same way that firmness plus I think he is wrong equals stubbornness. Bertrand Russell has said, to illustrate this point, I'm firm, you're stubborn and he's a pig-headed son of a bitch.

17:24We do not have an equivalent term of opprobrium for the wage earner, wageer, who seeks exorbitant or unconscionable wage rates, perhaps because public opinion, the mass media establishment, favors high wages, but not high profits. Semantics aside, it would appear that if profits are a benefit to our society, then profiteering is of even greater benefit. The possibility of profits, as has been demonstrated, is a sign that something is amiss in the economy, indicating that people are not taking advantage of mutually beneficial trades. The actualization of profits indicates that something is being done about these missed opportunities.

18:15Entrepreneurs are seeing to it that the strawberries get properly spread around. But if the possibility of profits indicates something amiss, then the possibility of profiteering signifies even greater gaps in the economic fabric. And if mere profits indicate an economic cure in progress, then profiteering is a sign that something of a substantial magnitude is operating to rectify the situation. of Moderate Profits being acceptable and profiteering being exploitative, we can see that the greater the profits and the greater the profiteering, the better off the economy is. A medical analogy comes to mind.

19:01If band-aids are good because the body can be cared for by them, then surgery, profiteering is better because it shows that a much more needy patient is being cared for. The most important defense of profit-making is based on political freedom. There are basically only two ways to run an economy. The first, voluntaristically, with decentralism and reliance on the price and profit and loss system to provide information and incentive. The second, compulsorily, with central planning, economic orders and directives, reliance on the initiative of the economic dictators and the obedience of everyone else.

19:49These two systems are the two polar extremes. All other economic systems are permutations and combinations of these two pure types. The compulsory or command economy is simplicity itself in outlook. The economic leaders simply decide what is to be produced, who is to produce it and how, and who is to reap the benefits of such production. By contrast, the voluntary or free market economy is quite complex. The individual must decide what to produce and how to produce it. The incentive is his own enjoyment of the product and what he may get for it by trading it with other people.

20:36Instead of being coordinated by economic directives, the free market economy, as we have seen, is coordinated by the profit and loss mechanism. Now consider this paradox. Those who are frequently the most virulent critics of profiteers, and by extension of the whole free market system, are frequently also vociferous champions of decentralism and the Rights of the Individual in Personal Matters. Yet insofar as they attack profits and profiteering, they are attacking not only the right of individuals to function freely in the economic domain, but the very foundation for freedom in every other area of human life.

21:24In their attacks on profits and profiteering, indeed, on all things profitable, they show show themselves to be in league with despots and dictators. If they were to have their way, and profits were severely restricted or outlawed entirely, coercive collectivism would be to that degree strengthened. Personal liberties would be washed away in a tide of orders from the top. The individual cannot be free if his economic existence is based on the decree of an economic Dictator, from whose dictates there is no appeal. In a free market, if you quit your job, an employee leaves your service, a customer refuses to buy from you, or a supplier refuses to sell to you, there are other actual or potential bosses, employees, customers or suppliers.

22:22But in a controlled economy there are no other alternatives. Deviations, eccentricities or non-orthodox inclinations are not tolerated. The champions of civil liberties have a uniquely brilliant insight and a truly humane dictum which they apply assiduously in the area of sexual morality. Nothing goes between consenting adults, and, implicitly, nothing goes but that which is between consenting adults. But they steadfastly refuse to apply this rule to any area other than that of sexual morality. Specifically, they refuse to apply it to the economic arena.

23:09But this humane dictum should be applied to all parts of human life, including the profiteer as well as the sexual pervert or deviant, to the entrepreneur as well as the fetishist, to the speculator as well as the sadomasochist. To argue that perverts, deviants and others of this ilk have been unjustly denigrated is one of the main burdens of this book. We cannot, therefore, be accused of having played fast and loose with the deviant community. But it is just as unfair to treat members of the profiteering community as pariahs. One last criticism of profiteering and the free market is the view that in the distant past, when there was an agrarian economy and life was simpler, perhaps a free enterprise system was viable.

24:04Today, what might have been appropriate for farmers and small tradesmen simply will not do. In our complex industrial society we cannot afford to leave things to the anachronistic whims of individuals. We need the strong central control of an economic planning board and the elimination of profits and profiteering from our transactions. This view is widespread. In some circles it is thought to be self-evident. But the analysis of profits as intimately tied up with a lack of knowledge must lead to the opposite view. The institution of profits is an invaluable aid in the gathering and dissemination of knowledge and the effects of knowledge.

24:53If anything can be taken as a mark of a highly complex, modern, non-agrarian economy, it is this self-same lack of economic knowledge and the utilization of it. It would therefore seem to follow that the profit system becomes more valuable as the economy becomes more complex. For in such an economy the information provided by the automatic price and profit and loss system is essential. Dictatorship, if it is ever viable, which it is not, is so only in a simple economy, one which can be easily managed by one group of bureaucrats.

25:38In conclusion, a sharp, rigid and basic distinction must be drawn between the profits that can be earned in the marketplace, and the profits that can be earned through government subsidies Profits and Influence, in short, through the system of corporate state capitalism. In the market place, all transfers of funds must be voluntary, therefore all profits must be based on the voluntary choices of the economic actors, and must hence be indicative of, and bring about solutions for, the wants of the economy. Thus, the assertion that the possibility of profits shows the scope of unrequited trades, and that the actual earning of profits indicates that these gaps are being filled, applies only to the free market economy.

26:35These assertions cannot be made in the absence of the free market. Profits in the mixed economy, an economy that has elements of the free market as well as The elements of coercion might well be due to no more than the prohibition of competition. For example, a tariff on imports will increase the demand for the domestic product, and profits in the domestic industry will rise. But it can hardly be concluded from this that any new information was uncovered, or that consumer satisfaction was in any way increased. If anything, the opposite would be the case. The tie between profits and well-being is thus sundered, and we can no longer infer the latter from the former.