I Have This Argument All The Time With The US Forest Service
I operate recreation areas in the US Forest Service and from time to time get criticized that my profit adds cost to the management of the facilities, and that the government would clearly be better off with a non-profit running the parks since they don't take a profit. What they miss is that non-profits historically do a terrible job at what I do. They begin in a burst of enthusiasm but then taper off into disorder. Think about any non-profit you have ever been a part of. Could they consistently run a 24/7/365 service operation to high standards?
Don Boudreaux has a great quote today that touches on this very issue
from page 114 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:
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.
It is also the "price" paid for innovation.
Mike Powers:
The issue is that it's hard to convince childish, jealous people that profit is something other than simple extortion. Maybe in a capitalist system milk costs a dollar a gallon, with five cents of that dollar going to profit; but the guy buying the milk thinks "what's so great about that jerk, he gets to have five cents for nothing just because he has a cow". In a socialist system milk costs three-fifty a gallon, but the guy buying the milk can be happy that all of that three-fifty can be traced directly to some aspect of providing the milk to him.
August 11, 2015, 9:00 amMatthew Slyfield:
" In a socialist system milk costs three-fifty a gallon, but the guy
buying the milk can be happy that all of that three-fifty can be traced
directly to some aspect of providing the milk to him."
If and only if there is milk available to buy. Constant supply shortages are one of the inefficiencies created by socialism. The profit in the capitalist system the five cents of profit is directly traceable to some aspect of providing the milk to him, specifically, it goes to making sure that there is always milk there for him to buy.
August 11, 2015, 11:00 amsean2829:
Venezuela is trying to turn that lesson on its head with price controls. The government is forcing companies to sell goods at a loss, their money is worth next to nothing and staples have vanished from store shelves. On the bright side however, you can get more than 500 gallons of gasoline for a dollar at the black market exchange rate of the Bolivar.
August 11, 2015, 11:03 amSwami Cat:
I am glad you added the part on innovation, as it gets to the heart of what is going on better than Sowell's comment. Profit reflects the "constructive competition" dynamic which acts as the engine of discovery, problem solving and product improvement central to free enterprise. Producers effectively compete to cooperate better with consumers, with profit acting as the scorecard on how they are doing.
Honestly, I get the sense that nine economists out of ten don't even grok this, let alone 99 non-economists out of a hundred. (I am well aware Sowell DOES grok this)
August 11, 2015, 12:20 pmSimonF:
In UK our lottery franchise was up for renewal a few years ago. There were 2 bidders and the selection was based in a large part on how much was raised for "good causes". Of the 2 bidders one, Virgin (yes, him) was a non-profit and the other was a for profit.
When the for profit company won because they would raise more for "good causes" there was all hell to pay because of those nasty capitalist profits. IIRC one of the reasons they could pay more out was that their cost base was far lower.
August 11, 2015, 1:06 pmAuricTech LIC:
In the movie version of Guys and Dolls, Nathan Detroit has one of the most thoughtful comments I've ever heard on why profits are necessary:
"Well, being I assume the risk, is it not fair I should assume some dough?"
August 11, 2015, 1:36 pmSamWah:
Grok: A word invented by Robert A. Heinlein. You can, and should, look it up. (Yes, I go Rah, Rah for RAH.)
August 11, 2015, 2:10 pmmesaeconoguy:
This is the same argument made by socialized medicine advocates, that profit makes medicine much more expensive, missing the efficiency and innovation part.
August 11, 2015, 3:07 pmBrotio:
SamWah goes rah, rah for RAH!
August 11, 2015, 3:08 pmNot Sure:
How many socialism advocates do you suppose there are, that refuse to take a check from their employer on payday?
August 11, 2015, 3:48 pmA Critic:
I work for a non-profit food service business owned by a church. They are celebrating ten years of business. I estimate, on the low side, at least one million dollars wasted of product and labor in that time. It's for the good of the community or so I am told.
August 11, 2015, 7:35 pmfd:
https://en.wikipedia.org/wiki/Intermountain_Healthcare would seem to be an outlier: five times "ranked number 1" among nearly 600 competitors, according to wikipedia. They've been my healthcare provider for nearly 30 years and their entire operation continually impresses me. Their success frankly baffles me because I know of so many other "non profits" that earn their poor reputations. Why does IHC seem to be so differently successful? I can't figure it out. Perhaps the mormons simply know how to "do" non profit? (By "mormons" I mean not the church proper but the people of that persuasion who have an outsized influence on the running of the place.)
August 11, 2015, 8:08 pmAndrew_M_Garland:
A company organizes work and production. The company pays costs to suppliers, salaries to employees, taxes to the government, and profits to the owners. The market value of the production of the company is divided up among the participants.
Profits paid to the owners are not fees for productivity, they are the distributions to the owners which attracted the owners to run the business. Only competition can reveal if the business can be run more efficiently, or if other production by other companies will make this company obsolete.
The existence of a profit does show that the company is using inputs which altogether are worth less to society than the products it produces. This is similar to an artist using $300 in paint, canvas, and studio rental to produce a painting which (s)he sells for $900.
It makes no sense to think of profit as an avoidable cost. It is just as avoidable as the salary demands of the workers. The product could be sold for less if the owners would work for less, or if the workers would accept less. There is no reason for either the owner or worker to take less, absent competition. The customers are willing to pay the offered price, which is all that matters.
Yes, price competition can force the owners to earn less profit, as labor competition can force workers to take less salary. Innovative owners can find more profitable things to produce or spend less on production, and innovative workers can find higher paying jobs possibly by improving (investing in) their skills or by spending less on travel to work.
Government claims to eliminate the payments (profits) to the owners, reducing costs and allowing a lower selling price. This is a lie. Right off, government has to pay someone to be like an owner controlling the structure and goals of the company. Then, Government almost always adjusts the accounting to ignore the costs of other government services supplied to the company. These non-accounted services are almost always far larger than the profits would have been. If the company loses money under government control, this is called "a subsidy", as politicians never want to be responsible for a loss.
For example, US government Medicare insurance is supposedly better managed than private insurance. Private insurers must account for costs such as billing, fraud prevention, and a special tax paid to government(!). Medicare uses the IRS to bill its clients, doesn't bother with much fraud prevention, and doesn't have to pay itself the special tax.
The government accounting says that it pays less for insurance management by ignoring costs incurred by other parts of the government. It also pays less to discover fraud, but does not account for losses from that undiscovered fraud.
This is always the reason that government pays less for management expenses than private enterprise (if it doesn't in fact pay more). It merely omits some expenses from the accounting.
August 11, 2015, 9:47 pmvikingvista:
Free market profit is the businessman's share of the increased abundance he brings to the market. It is also the signal for others to bring more abundance.
It is odd to even think of free market profit as a cost, since it is an afterproduct of increased abundance, exists only with increased abundance, is only a small portion of the increased abundance, and is the very incentive for increased abundance. Profit only occurs when benefits exceed it, so there is never a net cost with it.
August 11, 2015, 10:14 pmobloodyhell:
}}} Think about any non-profit you have ever been a part of. Could they consistently run a 24/7/365 service operation to high standards?
LifeSouth Blood Center.
They siphon off the excess into the pockets of various people, but it's still a nominal non-profit that does generate an excess of funds. And no, you couldn't run it to higher standards of service.
August 11, 2015, 11:31 pmStephen:
What the discussion misses is that capitalism has losses as well as profits. Profit and loss is the mechanism, derived from market prices, that determines which enterprises may continue serving consumers. It is the loss part of the equation that counts as much as profits, and is the part almost universally ignored.
August 12, 2015, 4:09 amCraig Loehle:
The tendency of the government is to try to freeze everything: prices, markets, innovation. Look at the response to Uber. Under the Ming Dynasty in China everything was dictated: styles of clothing, design of houses. And worse, following the great explorations of the early 1400s they closed China to the outside world. The government in France (and Germany and...) dictates when stores and restaurants can be open.
August 12, 2015, 6:15 amCraig Loehle:
Hit enter too soon: Without profit there is no money to invest in new business. This is one of the big reasons high tax rates cause stagnation.
August 12, 2015, 6:16 amIt is just so bizarre that so many people hate the very system that makes them comfortable.
vikingvista:
Good socialists should be happy to starve to death knowing that at least the system that is killing them is fair.
August 12, 2015, 10:27 amBill:
Normal profit is a cost. It represents the rate of return resources could earn in their next best alternative employment. Having these resources employed by government or by non-profits doesn't eliminate these opportunity costs.
August 12, 2015, 11:47 amMJ:
You beat me to it. Opportunity cost is the most fundamental concept in microeconomics, yet it is wholly absent in the arguments of these Forest Service types. In their defense, they're hardly the only government bureau that ignores or simply denies the existence of opportunity cost.
August 12, 2015, 12:02 pmbigmaq1980:
"profit is a price paid for efficiency"
Consider single payer systems for medical care... wherever they exist, invariably, one of the non-monetary costs that goes up is waiting time.
In those countries, no doubt, the proponents of socialized medicine cheer on the "fairness" of their system, while they await three months for their MRI, or six months for their bypass surgery. (Actually, they complain bitterly - blaming all sorts of things, but rarely consider a market solution).
August 12, 2015, 3:38 pmAnn_In_Illinois:
Excellent point! In communism, the people wait in the stores for the goods to arrive, while in capitalism, the goods wait in the stores for the people to arrive.
August 12, 2015, 7:51 pmtommy:
Obloodyhell,
August 16, 2015, 8:34 amI have been the vampire victim of LifeSouth Blood Center for 20+ years.
They do not post the correct start times for the drives.
They do not honor appointments.
They do not post correct locations.
All of these things happened. And they still call after telling them I don't want phone calls.
On several occasions, they have poked me in both arms, making me look like a punching bag.
You never know if the phlebotomist will be successful, and some will dig around in your vein looking for blood.
The donors are not treated with respect.
When I go to donate, I want to minimize my time, so I make an appointment in most cases. Victims are lined up in rows of chairs with nothing indicating that people with appointments are to have their time honored. Go to the end of the line and wait.
I no longer do that.
Their mobile collection buses are in need of refurbishment, and their attendees should recoginze that people are donating time in addition to blood/products. Respect them? Ha.
They DO have room for improvement.
ScienceABC123:
Capitalism, even with its uneven distribution of wealth, provides a better life for all the people than any other economic system known to man.
August 25, 2015, 4:07 amWWhiskey:
Giving of their own free will is great, but being forced by the government is slavery
August 29, 2015, 5:09 pmDa St:
That's not all they miss. Nonprofits are only non-profit by designation of revenues. Nonprofits simply account their revenues under different names. They don't operate for less and just give up the revenue they could have. Profit is a residual left after costs have been accounted for from revenues. Nonprofits simply give that to someone. They don't lack the residual (if they're well run; just like for-profits); they just don't call it a profit.
Lefties (and intuitive economic commentators like the people who criticize your operations) think that profit is simply an amount of money that businesses add to the "true" costs of goods and services, rather than what is (businesses hope) a residual from revenues after costs have been covered. They believe businesses decide how much they want in profit and add that on, the intentional theory of prices. (They believe the same thing about advertising--that advertising raises prices, because it must be covered by the price of a good or service.)
August 29, 2015, 9:41 pmDa St:
You guys are all nuts. Socialism is far more successful--the store shelves are empty most of the time, and if that doesn't show that socialism sells things much more successfully than capitalist stores, I don't know how to get through to you. Walk into any capitalist retail store--you'll see that the store is failing: The shelves are FULL of unsold goods.
August 29, 2015, 9:45 pmDa St:
Sowell doesn't miss the point, though. It's a significant theme in the book.
August 29, 2015, 9:46 pm