The Dangers of Profit Control

August 6, 1951

Nothing in recent years has more clearly signaled the imminent danger to our whole system of private competitive enterprise than a few passages in the President’s Midyear Economic Report to Congress.

Mr. Truman assumed the tone of a high authority on economics lecturing to a Congress that would be irresponsible and unpatriotic if it did not adopt without criticism, change, or delay all of the “sound and strong” legislation that he himself is recommending. Yet on Nov. 9, 1946, it was Mr. Truman (as the Mansfield, Ohio, News-Journal reminds us) who said: “The law of supply and demand, operating in the market place will, from now on, serve the people better than would continued regulation of prices by the government. . . . Accordingly I have directed immediate abandonment of all controls over wages, salaries, and prices.” Whereas on June 14 of this year he declared: “These people who say we should throw out price controls and rent controls are wrong. They are just as wrong now as they were back in 1946.”

What is most serious in Mr. Truman’s economic report, however, is his proposal for government control of all business profits through discretionary price control. “As a general rule,” he declared, “price increases should not be approved, even where some costs have risen, if the industry is earning a fair and equitable level of profits.” He added: “Some rollbacks will be needed in selected cases, for example, where prices or profits are excessively high.”

Though he himself once failed to make a success of a haberdashery business, Mr. Truman now seems to have taken over the naïve assumption of many labor leaders and bureaucrats that profits are something that occur automatically, and that the chief task of government is to prevent them from becoming “excessive.” This ignores the whole way in which a free market and a competitive system work. Profits are never automatic, never guaranteed, and never uniform. The rate of profit is different for every firm, even within the same industry. In 1947, the latest year for which statistics are available, 169,000 active corporations reported a loss compared with 382,000 that showed a profit.

And the margin of profit does not depend merely on luck. It depends on whether an enterpriser is making a product that consumers really want, and on whether he is making a better or worse product, or making it more efficiently or less, than his competitors. Present and prospective relative profits (and losses) are, in fact, the great guides to production. They determine what commodities and services are produced, exactly how much of each of these thousands of different commodities and services is produced, and how it is produced. The differences between profit margins are both the measure of, and the constant spur to, economy and efficiency. To impose on all firms some bureaucrat’s idea of a uniform “fair” profit would be to destroy the whole complex and delicate mechanism of incentives and deterrents which determines the ever-changing balance of production in a private competition system. It would force the substitution of a totalitarian system as crude and clumsy as it would be intolerable.

The President still does not realize that the real cause of inflation is the increase in money and credit brought about by his own policies. He even rebukes the Federal Reserve System for its timid efforts to halt this increase. “General credit measures,” he says, “do not discriminate between activities which should be supported, and those which need to be restrained.”

The implication of this is that Mr. Truman’s political appointees, and not the consumers of the country, should have the right to say what production is good and what is bad, what should be subsidized at the taxpayer’s expense, and what should be forbidden. This would be still another way, even more direct than profit control, to give the government life-or-death powers over every firm and business. It would be a long step down the road to economic serfdom.