Profits Mean Jobs

December 11, 1961

In the socialist attacks on the capitalist system, profits are the chief villain. They are portrayed as monopolistic, unfair, excessive. They are commonly thought to be achieved either by adding to prices or by squeezing down wages. The profits of the few are pictured as the cause of the poverty of the masses.

The truth is the exact opposite. In a competitive economy the highest profit margins go to the firms that through efficiency are most successful in reducing costs of production. Thus constant striving for maximization of profit reduces prices by reducing costs. The prohibition of profit would return the world to poverty.

The social function of profit and loss is (1) to maximize incentives for production; (2) to balance production among thousands of different commodities and services so as to supply them in the proportions most wanted by consumers; (3) to stimulate incessant improvements in efficiency, to reduce costs and so prices; and (4) to put capital and the direction of production into the hands of those who have shown themselves best able to serve the consumers.

In a massive, thorough, and desperately needed book, Understanding Profits (Van Nostrand, $13.75), the late Claude Robinson argues the case for the profit-and-loss system and endeavors to catch up with age-old misconceptions and slanders. His book is especially strong on the statistical side. Its appendix contains a hundred pages of tables analyzing the profits over long periods not only of industries but of every big corporation.

WHO GETS WHAT?

Robinson is concerned particularly to show how the extent of profit is commonly exaggerated. Thus he points out that in the ten years 1949 through 1958 the average profit of all U.S. manufacturing corporations was only 3.9 percent on total sales and only 8.6 percent on investment (in spite of inflation during the period). The apparel trades and meat packers made a profit of less than 1 percent on sales during the ten-year period.

As to the division of corporation income between employees and owners, he shows that for the 22-year period 1938–1959 employees got 84 cents out of every dollar available for both groups, and the stockholders only 16 cents. This 16 cents was in turn divided into 7 cents reinvested in the business and 9 cents paid out in dividends. Thus, year by year, the workers in the corporations got more than five times as much as was available for the owners, and more than nine times as much as the latter actually received. High corporation income, in short, is no less important to the workers than to the owners.

When a book gives so much information, it seems ungrateful to complain that it does not give more. But I wish it contained one table comparing corporate profits, employment, and wages year by year since, say, 1929. This would have shown how profits, employment, and wages go up and down together.

CREATING ABUNDANCE

Part of the function of profits is to direct production into the right products—i.e., those most wanted by consumers. In the ten-year period 1950 through 1959 leading drug companies on the average made 10.9 percent profit on sales and 20.5 percent on investment. This compared with an average of only 5.8 percent on sales and 12.6 percent on investment for leading companies in manufacturing. Such a result will be deplored only by those who fail to recognize its consequences. In 1948 the drug industry spent $30 million on research; in 1959 it devoted $170 million to research. Result? Not only the discovery of a multitude of drugs that prolong life and relieve suffering and pain, but also a sensational drop in drug prices. Penicillin was sold at $100 for 100,000 units in 1943 and for 22 cents in 1956. Cortone was put on the market at $200 a gram in 1949, and had been cut to $2 by 1957.

The supreme folly is to believe that politicians “protect” the consumer when they set an arbitrary ceiling on prices or profits. It is precisely high profits that stimulate the maximum investment, competition, and research to increase the output and bring down the costs of the things most wanted. It is the quest for high profits that brings abundance and low prices.