Profit Sharing; P.L. Poirot

To demonstrate why that is so requires careful analysis and un derstanding of the profit and loss features of the market process. And we start with the fact that numerous individuals are compet ing for possession and use of scarce and valuable resources. There simply isn't enough of any economic good or service to cover all the uses anyone might desire. So the problem is to use these resources as efficiently as possible, avoiding waste, and letting the willing customers judge what is efficiency and what is waste. If the customer is to be the judge, this means that no seller can know precisely in advance what a given item may bring in the market. If he is a grower of potatoes, for instance, he knows 1973 PROFIT SHARING 735 there will be the costs of owning or renting a plot of land, a supply of seed potatoes, of fertilizer, of tools and labor for planting and cultivating and harvesting and preparing the potatoes for market.

But he doesn't know precisely in advance the amount of each of these costs. He doesn't know what the weather will be; or how much of what quality crop the harvest may yield; or what customers will be willing to pay, for his potatoes in particular or for potatoes gen erally, at any given time during the marketing season. In other words, he is an entrepreneur, bid ding for scarce and valuable re sotirces for conversion to a prod uct which he hopes customers will want at a price high enough to cover all costs,· including his own labor and other investment, and still leave him a profit. If not, his is the loss. In other words, profit is the re ward willing customers· accord an entrepreneur who efficiently uses scarce resources to satisfy their wants .. And the amount of the profit, or loss, is never known un til after the fact - .after all the results of the production and mar keting operation are complete, having been carried out in open competition with the producers and consumers of all other goods and services.

A moment's reflection must reveal how nebulous and uncertain a thing is entrepreneurial profit as thus identified. It reflects a man's superior skill at seeing and exploiting new or better oppor tunities to utilize resources to serve consumers - seeing a need and doing a job faster and better than others! For the moment com petitors discover the opportunity and exploit it to any great extent, then the margin for profit will largely have disappeared. Then, perhaps one or a few of the most efficient competitors may still earn a. profit; but most will only re cover costs; and more and more will be driven by competition into the loss column or toward other lines of production. Thus is the opportunity for profit closed al most as rapidly as it appears in a competitive market situation; and in general it seerns safe to say that more productive business activity merely breaks even (cov..; ers costs) or results in loss than yields an entrepreneurial profit.

What Kind 01 Profit? Let it be clearly understood that we are not discussing here the terms profit or loss as customarily used in business accounting and measured by "the bottom line." What the XYZ Company reports as "profit" or "income after taxes" might possibly be made up in part of true entrepreneurial profit; but 736 THE FREEMAN December it most certainly consists in large measure of interest, for out of that "income after taxes" must come any return on a stockholder's investment. If he doesn't recover the going rate of interest - either in dividends or in added value of his share - his investment has yielded a loss in the sense that he might better have invested else where. So, when the idea of "profit sharing" is proposed, the thought ful proponent surely can not be thinking of sharing the interest portion of returns to investors. If they can't earn interest, they'll abandon that investment and seek another repository for their sav ings - with the result that the employee's job disappears to the extent that he takes a share of the return that should have gone to the investors who provided the savings (the tools) upon which the job depends. Nor is this a con sequence of some arbitrary deci sion rendered by a greedy capital ist - his determination to grind poor workers to the bone. On the contrary, the decision is rendered by consumers and their purchases - or their refusal to buy.

When all the facts are in, the consumers will have made known to the entrepreneur what pro:fit~ if any, his efforts have yielded. He will have been free to ignore the market, of course. He could have borrowed funds at twice the market rate of interest if he wanted to. Likewise, he could have paid two or three times the market wage rate to workmen. But it seems inconceivable that he could behave so magnanimous ly for very long· without seriously depleting his personal savings and setting the stage for competitors to drive him out of business. "Good guys" aren't all that pop ular; consumers pay willingly for efficiency, but have to be coerced into paying for anything else. Incentive Pay The proposal to share profits with employees is often justified on grounds of the extra productiv ity men generate as a result of "incentive pay." That is a cogent argument; payment of workers on a piece-work basis was being practiced successfully long before "profit sharing" came into vogue.

Indeed, this is the principle under which the "cottage industries" operated at the beginning of the industrial revolution, various jobs being "farmed out" for comple tion in the worker's home at so much per unit of product. In a sense, the worker in that case is his own entrepreneur; the more he produces, the more he earns. However, as production methods become more sophisticated, with more complicated and more expen1973 PROFIT SHARING 737 sive machines and assembly-line operations, cottage industries give way to the factory system and a tendency to pay workers by the hour rather than by the piece. Labor unions have encouraged the trend away from payment on a piece-work basis or incentive pay ments in general, despite protes tations that union demands can and should be met out of company profits. As previously suggested, where several companies have entered into competition in a given indus try, producing the same or similar products, the likelihood is that only Company A - or a compara tive few of those companies - will show any entrepreneurial profits that conceivably could be shared with workers or customers or in vestors. The greater number of competitors will barely yield the going market rate of return on investment, or even show a loss.

(Bear in mind that one can never be certain just what portion of a company's "income after taxes" is strictly entrepreneurial profit and what portion is a necessary return to investors to induce them to leave their capital in that busi ness.) But if Company A is in a posi tion to offer its workers a profit sharing plan, then immediately the other competing companies would have to grant comparable wage increases or stand to lose employees to Company A. Obvi ously, some of the other compa nies would be driven out of busi ness. The question then arises: Is Company A in a position to take on an uncertain number of additional employees and still of fer its profitsharing plan? If not, what becomes of those unemployed workers, except that they must tend to drive wage rates down ward as they seek other jobs? What Should Be the Price? So, let us return to the basic premise of the market process: that numerous individuals are competing for possession and use of valuable resources. And the ob ject is to determine how scarce and how valuable! Wha.t should be the price that most accurately re flects the supply-demand situation, leaving the ultimate choice to the consumer? In other words, we're discussing the role of business in a system of voluntary exchange, as distinguished from government regulation and control - compul sory collectivism.

Without market pricing, there is no reliable system of economic calculation or business accounting, no way for competitors to know how well each is doing. For in stance, reconsider the potato grower. How is he to know whether to use more land, or more 738 THE FREEMAN December seed and. fertilizer and tender lov ing care per acre, to produce po tatoes most economically? He looks to the market prices of these various productive resources to help him to a decision - and per haps prays for rain and a good crop. Or, suppose a person is seeking a job. He will be interested in knowing what other workers are earning in that job or in similar lines of work. And, of course, pro spective employers are continuously checking to see what wage rates are being paid by other employers for comparable jobs. Neither the prospective employee nor the pro spective employer really wants to wait until the end of the year or the end of a season when profits might be known - to find out what wage rate should have been paid.

Each prefers to know what the market rate is as of now, a figure that enables him to say yes or no, to do business or -not. Will the job pay $3.00 an hour, or is it to be $2.50 now and a chance for a share of profits later - if the project shows a profit? What wages are other employers paying? How many other workers are on a cash wage, and how many are willing to wait for a share of profits? What is the market situa tion? What is the going price for labor? The fact is that the profit sharing system affords no way to know the market price, no method of economic calculation or busi ness accounting, no reasonable basis for reaching a business deci sion. And this is true, not only of profit sharing with employees, but also of the consumer cooperative idea of profit sharing. Either way, were the .practice made universal, the market would be unable to provide a firm price structure that could .be used for business accounting and upon which busi ness decisions could be based.

From that predicament, it would be a very short step for some to press the conclusion that the gov ernment should make that deci sion - manage· the business whether or not it could show a profit. The problem is that there is no way to show a profit, or to know the cost, or to find any other basis for a business· judgment, if the market is not allowed to per form its vital function of price determination. Sharing with Government Until now, we have been dis cussing the profitsharing idea as proposed or applied within the so-called private sector - sharing with employees, or consumers, or investors. But as intimated ear lier, these are merely phases of or steps toward government man agementand control of business 1973 PROFIT SHARING 739 compulsory collectivism. Another way to look at it is from the view point of "pr'ofit sha,ring" with gov ernment - and this is the real problem.

The trend is well established. Businesses must pay income taxes graduated to fall most heavily on any company that appears to be operating profitably. "Excess pro fits" are subject to special taxa tion. And graduated personal in come taxes are designed to sop up any profit that otherwise might have leaked out of the business into the pocket of some individual. Meanwhile, various governmental relief and welfare programs op erate to reward those individuals and business ventures that the market had designated as losers or failures because of their ineffi cient and wasteful performance. Beyond all those tax and wel fare interventions with business activities and market pricing is the most serious political disrup tion of all: government designa tion of what traders may use as "legal tender," the manipulation and control of money and credit-in a word, inflation. This is the ulti mate in "profit sharing," the proc ess by which governments claim title to scarce and valuable re sources in defiance of all attempts by the market to channel the own ership and control of scarce re sources into the hands of the most efficient users, the successful in novators and entrepreneurs, the ones who best serve the choices and desires of consumers. By its control of money and credit and its inflationary policies, the Fed eral government effectively closes the market and defeats the market function of price determination.

Inflation disrupts the means of business accounting and economic calculation to the point that con scientious entrepreneurs are led into serious malinvestment and waste of scarce resources. When entrepreneurs are thus condi tioned to rely upon government intervention for their opportuni ties to earn a profit, the market economy is foreclosed and the people doomed to serfdom under socialism. What hope is there to avoid this course toward certain disas ter? It depends on the willingness of individuals to understand that traders know best what they want to use as money, that "legal ten der" laws hamper the market de termination of prices, and that any form of profit sharing which rewards failure rather than suc cessful business practice is license . rather than liberty. Unless con sumers are permitted to decide how much entrepreneurial profit goes to whom, there can be no free and prosperous common wealth. I) ~: (\~ '* I ~.~ ., ~ .~.. Am I ResponsIblefor ; .. .