The Purpose of Profits

Property is theft! -Pierre-Joseph Proudhon

Great wealth has always sparked deep resentment among some of those who lack it. For a few it's envy; they don't see wealth as immoral, they just wish they were the ones who possessed. For others it's fear; history is full of examples of the very wealthy using their money for unfair advantage or illegitimate power.

This kind of resentment is petty and harmless. But there is another kind of anger over wealth, particularly wealth earned via investments and profits. There are many who find the whole pursuit of profit to be fundamentally immoral and beyond salvation. Money is the root of all evil. Man's higher calling lies elsewhere. There is greater merit to the "service" professions; teaching, nursing, social work, etc. Private business is inherently selfish, if not positively evil. Corporations epitomize how the pursuit of profit ruins your soul.

At this point, I'd like to ask "What ARE profits?". Fundamentally, profits aren't just money. They are two things; information and rewards.

To make a profit, you must do many things. You must find a demand or a market that can be served better than it is today. You must invest in developing some process that meets the demand. You must wait, living less well than you otherwise could, while the process is developed and your wealth is tied up. And you must endure the anxiety that your scheme will fail, your time will be wasted and your investment money will be gone forever.

Many investments come to nothing. Thomas Edison famously tried 10,000 different filaments before he discovered that tungsten made a successful light bulb. Risk averse investors don't try invention; instead they buy government debt, or put their money in mutual funds, or buy securities on the stock exchange. These people don't usually lose their investments, but they also don't get the spectacular return that Edison, or Bill Gates, or Sam Walton received when they took those big risks.

Today, the cost of developing a new jetliner or cancer drug runs to the tens of billions. Who should provide that money? The fall of the Soviet Union was, in large part, the result of the fact that massive government investment can't match the flexibility, innovation and entrepreneurial spirit of millions of retail investors.

Profits tell us whose innovation was a success. With this information, future investment is given a guide or direction. And the rewards for successful investment give the incentive to future investors to also risk their savings on innovation. If there is no chance of reward, what incentive is there to invest?

So why do some people scorn profits and corporations (which are, ultimately, vehicles to allow multiple people to invest in a common enterprise)? Why the resentment?

First, let's take a look at which people evince such a resentment to profits and corporations. Usually, the angry crowd isn't made up of poor people. Most poor see the rich as a role model, not an adversary. Many poor desperately save so they can own their own business, or perhaps put their hopes in their children by working extra hours so their children can remain in school and begin the path to a better life. No, the angry crowd usually includes fairly well-educated people. Ministers, teachers, professors, government clerks, lawyers, journalists, professional politicians and the like. These people see themselves equal to the wealthy in terms of talent and schooling. They feel they should also be equal in material prosperity. They followed the rules, got their degrees or diplomas, but they can't afford the European sedans or European vacations that their investment banker classmates buy so freely. They feel cheated. What did they do wrong?

Mostly, they didn't take risks. They didn't sacrifice to build up enough savings to have their own working capital to start a business, or they didn't invest "sweat equity" in their garage or dorm room tinkering to invent the next Apple or Google. Or they didn't accept a career that involved years of stressful graduate school (medicine) or high-pressure, 14 hour days (investment banking). I don't blame them. I want to enjoy life, and my passion isn't in invention or analyzing spreadsheets to midnight. But there are those who do make those sacrifices. Let us recognize them, and allow them their reward.

And let's face it. We all benefit, too. The inspiration and hard work of the innovative and entrepreneurial classes is what makes our nation the most dynamic economy on the planet. China's mandarin class never gave them any edge in commerce or science. It's the combination of excellent education with the "animal spirits" of drive and ambition that have made our nation such an economic powerhouse. We forget that at our peril.