The Grand Illusion
Over the past several centuries, all manner of ethical and practical questions have been raised about the necessity of economic profit, its role in a society, and even whether it is necessary. Most truly thinking individuals [yes, a value judgment on my part] believe that, because there has never been a long-standing civilization that did not incorporate a market-based economic system in some form, some form of profit is also necessary. Beyond that, I have some doubts that any majority consensus exists.
From my own experience and research, however, I will make two observations: (1) Absolute maximization of profits results in a minimization of freedom. (2) Absolute minimization of profits does the same.
The second point is more obvious to most people because a market-based economy, for a practical purposes, ceases to exist if there is no profit at all, and even the egalitarian Scandinavian countries had to pull back from taxation levels that were so high that they effectively destroyed profits.
The first point is continually ignored or disputed by extreme free-market types, despite the plethora of evidence to the contrary. What isn’t obvious to most people, particularly politicians, regulators, and ultra-price conscious consumers is that maximization of both revenue and profits requires keeping wages and costs low, keeping inventory to those items in the highest demand, and eliminating competition. Politicians and regulators, at least at present, only look at low prices. The Amazon lawsuit against Apple and the Big Five publishers was a perfect example. The Department of Justice effectively stated that it didn’t care if Amazon’s practices gave it a ninety percent market share. All DOJ cared about was that short-term prices were lower. Well…now that Amazon won, just what happened to all those low prices? I certainly don’t see much difference to the consumer. Another example is the cable/satellite television market. Now that the major communications content providers have largely consolidated and are maximizing their profits, the diversity of content has dropped drastically… and prices have increased. Walmart is yet another example.
Or put in another context, freedom in any area isn’t free. Just as there’s a cost to political freedom, there’s also a cost to economic freedom of choice, and when low prices completely trump freedom of choice, not only does quality suffer for the goods most people can afford, but only the ultra-rich can afford truly high quality goods and services… and some goods and services aren’t available at any price… and in the long run, prices aren’t even lower.
In any economy based on competition (read Free Market) the drive to maximize profits by any individual or company will, as you note, lead to practices which are decidedly anti-Free Market, e.g. monopolies, suppression of labor movements, etc. But I also believe that in a market which is kept free by government regulation (i.e. against anti-competitive combinations) and free of government meddling (e.g. tariffs and subsidies) will in fact maximize the profits for the economy at large and therefore provide the greatest overall benefit to society.
Societies prosper the more people get to keep what they earn, but in order to guarantee that they do, governments must tax in order to preserve that ability, i.e. to provide defense of the borders from invasion, ensure effective justice and honest and reliable courts, etc. Without government assistance in providing an environment where free markets and free competition thrive, everyone has to spend much more than they ever would in taxes just to provide those services and protection for themselves. Just look at Somalia as an example of a truly unregulated free market, where piracy thrives and any business person must invest heavily in security.
I think profit is a sensible aspiration. When you make food, you want to make what you need and then some more. When you build, you want enough room but some more. Profit allows you to capitalise on opportunities, and gives flexibility if you wish to expand/grow or if a bad period happens.
If you’re farming enough just for yourself (I believe you term this a subsistence level?), you cannot support a family unless you are able to make a profit – enough to feed them or to sell to buy/trade for what you need. If you have a warehouse and it’s the right size at that moment, a boom in business can leave you struggling because you haven’t got the room to expand into for more products. That inability to profit leaves you, in both cases, unable to work to your best.
There’s profit on a logical level, but then there’s profit for profit’s sake, something I think is an underpinning thought behind contemporary business practices.
The sad part is that so many could be even more successful if they actually thought beyond themselves.
One of the most successful banks out there completely avoided the economic downturn and did it while being conservative in their growth, honest with their customers and providing excellent benefits and care for their workforce.
Papa Johns suffered a massive PR hit when they sabotaged their workforce as opposed to providing health care. Research shows that said healthcare cost would have been less than a $0.10 increase per pizza. A smarter business man would have raised prices a quarter, marketed his concern for his workforce, citing the increase as something to help them. And then started making a $0.15 profit per pizza.
As a side note, I see that you will be attending Phoenix Comicon this year, Mr. Modesitt. My thanks and I look forward to meeting you if I can get away from my own booth during the con.
I saw an approximation of a truly unregulated market working in Russia in the 90s. Contracts weren’t worth a dime if there was no way to enforce them, which there effectively wasn’t unless you could afford to employ people with no necks to go round do that yourself. A contract was just a stage in the negotiation: the minimum you had to do to persuade the other side to think about whether or not they wanted to do their bit. Western companies poured billions into the pockets of former bureaucrats who held out prospects of huge profits downstream – almost all of which profits went into their pockets and eventually into real estate in London and New York.
As with everything there needs to be a balance between free market and regulation. To draw from your Recluce series, too much order (regulation) or chaos (free market) in a body, business in this example, will kill the host much sooner than is natural. Big business has been short-term growth driven due to impatient stock holders and ridiculous executive compensation packages. There is little incentive for many executives to look to the long term as their tenure is usually about 3-5 years before they move on. If executive compensation took 10+ years to pay out, then I suspect we’d see a very different attitude towards long term growth.
Would you rather have a tree such as a poplar that grows tall quickly, but is among the first to fall during windstorms or an oak which grows slowly, steadily and can live well over a century? Unfortunately as humans we’re wired to focus on the near future as the far future is too abstract a concept for most. Our caveman ancestors focused purely on day-to-day living and that behavior still drives us sub-consciously today.
One way to change this is to get people to stop focusing solely on price (short term) and understanding a product’s quality and longevity (long term). When I was younger I’d buy the cheapest tools I could, but they would not last long before breaking. Now I buy slightly more expensive, but by no means top of the line tools that easily last 10-20 years of hard use. This is a lesson I’m trying to instill in my kids by explaining how I make purchases.
If more people had more income, they could choose what to spend it on. But is jacking up low-end wages (such as for Walmart employees) really going to improve the quality of any product? If not, and if raising their wages reduces the number employed or increases the cost of low-end products (bought most heavily by those who can’t afford better), then what good would it do? They still wouldn’t be able to afford anything better than what they sell, if that.
I seem to recall a passage in “A Connecticut Yankee In King Arthur’s Court” that attempted to explain price-driven inflation to someone who could only comprehend that in the city, people were paid more.
Maybe the anti-trust laws do need revising; it’s not only low price that counts, but a reasonable variety of alternative products or suppliers.
As for me, I don’t like crowds, so I tend to avoid Walmart stores near big cities except late at night. Except in a restaurant (where if I go there regularly, I tip generously and am quiet and undemanding, save that I go through a lot of free iced tea refills), I seldom care about service, but I want value (which in some cases isn’t the cheapest product, but the cheapest that will last awhile under expected use, and function well).