Acton Institute Powerblog

Why we need the profit system

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There is a paradox when it comes to profits, says economist Arnold Kling: while the profits that accrue to any given individual may be unjust, the profit system itself is necessary in order to have a modern, progressive society. There is no simple way for us to enjoy the benefits of the system while overcoming all of the instances of injustice.

Yet despite the injustice, says Kling, the profit system is the most effective, humane way to organize economic activity. The reason is because the requirements of a modern economy requires “bosses and profits“:

In a modern, large-scale economy, coordination takes place through a combination of bosses and profits. Bosses order people to undertake particular tasks. Profits and losses provide incentives to engage in certain economic activities and to curtail others.

Within any one organization, you take orders from a boss. Your only alternative is to leave that organization and find another boss or start your own organization.

Profits determine the success or failure of different organizations. Organizations that earn profits can continue to operate. Organizations that fail to earn profits have to go out of business, unless they can survive on donations or subsidies.

The profit system helps to discipline bosses. Really bad bosses, who use resources inefficiently (including mis-use of workers), tend to perform poorly in terms of profits. This poor performance eventually gets weeded out, either by the boss’s boss or by the inability of a poorly-performing firm to stay in business.

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Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

Comments

  • A good way to explain profits is that they are compensation for opportunity costs. It’s the same for interest.

    I disagree with Kling that luck can make profits unjust. There is some luck in all profits. That doesn’t mean we don’t deserve them. Also, the salaries of his new bosses weren’t profits but corruption, or as economists say, rent seeking. Large corps get unjust profits through rent seeking by means of the oligopolies that regulations create, through patents, and through the inflationary policies of the Fed that favors certain large banks.

  • A thought: If a profit system necessarily produces at least some injustices, then it is necessarily or intrinsically unjust. If a modern progressive society necessarily requires a profit system, then such a society necessarily requires some injustice. Such a society is therefore necessarily unjust and therefore undesirable irrespective of its benefits.

    • Not necessarily. Profits are payment for opportunity costs in a free market. In a controlled market, such as we have today, people earn money through rent seeking, not profits. What Kling calls unjust profits should be called rent seeking. That’s the way most economists use the terms. Rent seeking is using the power to the state to force others to give you money without having earned it. An honest term for it is just theft. Profits, as historically understood, are always earned. Money coming from luck, such as winning the lottery, were never called profits.