The Progression of Profitability; J. Wilke

Profit multiplies and spreads contagiously to everyone. You can't help but "catch it" - even if you're hundreds of miles away or hundreds of years. When one man profits, virtually everyone profits, and the spread ing circles keep expanding, inter acting and overlapping - all ways and always. The consumer benefits directly from the service or product he buys or he wouldn't buy it. By purchasing from the most .. efficient (profitable) producer he profits by making his money do more and go farther. Workers, distributors, suppliers and all secondary services such as tr~nsportation, utilities and so on profit from helping to provide the product. Miss Wilke is an advertising writer. 156 The wage earner's new profit ability enhances his marketahility so that he enjoys raises, profit sharing, vacation, insurance, pen sions and other forms of remun eration. All kinds of merchants and com munity services profit from the profits in all these other pockets in the form of wages, dividends, fees and the like - which in turn becomes wages.

And the profitable product of one company is often a profitable tool in the operation of another. How many businesses depend on the telephone and typewriter? And for want of a nail, how many businesses would be lost or not have materialized? And the winged nut? And the staple? And plastic? And everything we take for granted? Once inventions themselves, these things are now relatively cost-free factors of pro duction. Many are cost-saving fac tors of production, replacing less efficient methods and materials. So the profit of one company 1975 THE PROGRESSION OF PROFITABILITY 157 augments the profit of others and the efficiency is passed on to con sumers in lower prices as well as paying more wages, dividends, in terest - with all their correspond ing reverberations through the economy. Although the economy is called "competitive" and it is, it could more rightly be called a system of mutual profit. The nature of com petition prevents' any standing still or retrogression. Under com petition, the initial profit margin diminishes. As soon as the idea is exposed and is profitable, others compete to try to produce it better or at lower cost. The original com pany must either continuallyim prove its product or service to maintain leadership, lower the price or abandon the now un profitable item and produce some thing else that's more beneficial to society, which is to say more prof itable.

Only favors of governmental partisanship can disrupt this spi ral of progression, improvement and profitability. Profit is the incentive toward activity, the reward for the ac tivity and the means of accom plishing activity. The more an entrepreneur profits the more he is able to accomplish, and his· scale of profitable activity expands rap idly. One man starts out as a carpenter, builds a few houses and finds it so profitable he develops new mass-production techniques in construction to build faster and goes on to build whole communi ties of low cost homes. And this is real low cost housing, not high cost construction· offered at low prices with the difference paid by the taxpayer. A retired· southern gentleman takes a family recipe and in a fe,v years builds a multi-million dollar franchise operation creating busi ness opportunities for countless people, employing thousands and serving millions of low cost chick en dinners to budget conscious families. And this is really low cost food, not high cost food sold at low prices with the difference paid by the taxpayer.

A penniless young cartoonist draws an entertaining mouse whose. profits allow his genius to explode into myriad areas of mod ern technology, engineering, en tertainment innovation, film tech niques, scientific inquiry and com munity development. He is a true benefactor of mankind, his prog ress and vast accomplishments paid for by his past successes. It should be apparent that a tax on profit is a tax on the future an impediment to progress - a production-stopping, idea-blocking, paralyzing obstruction to the ad vancement of everyone.

158 THE FREEMAN March A product is simply an idea that has materialized out of profit one's own profit from previous success or the invested profit of others who see additional oppor tunity for profit. Only a profit economy can offer "something for nothing." And that ."something" is in virtually everything produced competitive ly. It's often the competitive edge. It is sometimes a premium or give away item. While it can be argued tha t the cost of the premium is in the price of the product, it is also true that the product still must be sold at a competitive price or with a premium so appealing that new value is created. Economic ally, that's as close to something for nothing as it's possible to get. Another of the universally prof itable aspects of an open, compet itive economy is that unprofitable activity diminishes, fails and dies out. The pruning of wasteful ac tivity is as necessary to the prof itability of an economy and soci ety as the profit of the successful ventures.

Besides, failure is experience gained, the storehouse of future success. And the "losers" still reap all the benefits of the other efficiencies in the profit economy. The overall efficiency bolsters ev eryone. A competitive, profit economy cannot be described accurately as the survival of the fittest. On the contrary, it is a matter of strengthening the weakest ... en riching the poorest ... upgrading the whole. We all have a vested interest in each other's profit because it al ways represents efficiency. Every efficiency is gained by all. Every waste is suffered by all. The currently popular term "ex cessive profits" is a madcap ab surdity in an open, .competitive market. No profit is too great when it represents efficiency and when it is the potential of the fu ture. The efficient producers are precisely the people society should want to profit the most so it can benefit from their activities in other ways. Applying the word "greed" to profit is another mala propism. It is far more appropri ate in describing the welfarists' drive toward expropriating the profits of others.

All government controls-wages, prices, tariffs, subsidies and the rest - are all forms of profit c:on trol. As such, they are curbs on efficiency. Since every product is a service of some kind, what is taxed is the ability to provide a service. And it is deducted from future efficiency in producing the service. What is being deducted from society in a cumulative and accelerating way, is efficiency it self.

1975 THE PROGRESSION OF PROFITABILITY 159 Tax is paid on what a company has. It is deducted from what it could be. It is paid on what it has produced. It is deducted from what it could produce. When people tax a company in a competitive economy, they are taxing themselves - everyone - in many ways. Not just in adding to the cost of the product. Not just in dollars. In jobs in efficiency ... in initiative in opportunities in convenience, comfort, fun a myriad of inconceivable, unpredictable things. They are being taxed in ideas. When we tax profitable com panies and subsidize unprofitable ones, we are paying for square wheels with money that could be buying not only round wheels, but as yet undeveloped methods of travel. In a controlled economy, we're all losers. We can't even be aware of all we've lost. We're· not taxed in dollars, we're taxed in things that might have been. The dollars paid in taxes in 1940 would have bought clothes lines, wringer washers, block ice for the ice box, and radios. The dollars paid in taxes today will buy color television, microwave ovens, telephone answerers and video tape casettes.

If our economy were completely controlled, we'd still be paying our taxes in clothesline money. If our economy were completely free, there's no telling what still unde veloped marvels you could have in your hOqle for the dollars you're paying in taxes. The dollars are nothing - it's the things we're losing. If the man who invented the wheel lived un der the system of distribution we are giving way to, everyone would be sitting around looking at his spoke and no one would have a car. It's profit that makes the world go 'round - and if that isn't love, it's at least enough appreciation of others to allow them to profit, and in so doing, to profit oneself. A profit economy is nothing more than an open entry, private contract economy with no licens ing, permits, trade barriers, sub sidies or other governmental re straints, privileges or controls. Its basis must include the reali zation that one's own progress ma terially, intellectually and in many ways, is advanced by the progress of others. , PAUL L. POIROT IT'S A VERY NICE THING to be a businessman who earns a profit through his efficiency in using scarce resources to serve custom ers. Nice, because profit, in the 160 THE FREEMAN March strict economic sense, is. some thing for which consumers pay without its costing them anything.

Profit accrues to the efficient pro ducer who manages to cut costs; it is taken out of costs, not some thing added to the price. Prices in a free market, with freely com peting buyers and sellers, are de termined by supply and demand. And a given market price may af ford one or more sellers a hand some profit while other sellers may be taking a loss. It depends on the efficiency of the seller as to whether he makes a profit; it doesn't cost the buyer anything. So much for the economics of profit. But that isn't the point of this story. The point is that in today's mail were two laments that "business must make a profit" from entirely opposite views. One was a businessman's con tention that he was entitled to a fair profit in order to acquire the capital to stay in business - so he could continue to pay high taxes, among other things. True, he's en titled to all the profit the market price will afford him, which means that he will have been more effi cient than some of his competi tors in that field. If consumers are not willing to pay a price that yields a given supplier a profit, then he's free to cut his costs or go out of business or whatever; but he's not entitled to a profit unless he earns it in open compe tition. And if he earns a profit, it's no one else's business whether he uses it to increase his capital investment, or to pay his taxes, or to support his church, or to keep up with the Joneses.

The other lament that "business must make a profit" came from a misguided socialist who seemed to think that meant "the government could do it cheaper." He couldn't know, of course, unless his so called government exercised no powers of coercion and behaved as just another competitor in the market. In that case, assuming a strong market demand, any sup plier who could "do it cheaper" would thereby earn a profit. So what really perturbs the social planner is that businessmen will not attempt to do things that are unprofitable. In that case, if it's going to be done at all, the gov ernment will have to force some one to do it - which only seems to be cheaper than paying free mar ket prices for the scarce resources used in the process. Another word, more descriptive of that govern mental process, is w-a-s-t-e - just plain waste! And that's the story. Profit is a fine and honorable reward for ef ficient service - and no wicked and slothful servant is entitled to it.

~ NONEW URBAN JERUSALEM BENJAMIN A. ROGGE IN THE PARAGRAPHS to follow you will find me critical of most of the work now being done on the nature of the urban crisis and equally critical of the public poli cies proposed to ease that crisis. To compound my sin, I offer no alternative scheme by which the New Jerusalem can be erected on the shores of the Hudson or Lake Michigan or Lake Erie. I intend to argue that no one even knows how to define the New Urban Je rusalem, let alone construct it. In all of this, I will be utilizing no special knowledge of urban processes but rather the simplest of analytical and evaluational con cepts of economics. In so doing I am acting upon my firm belief that a handful of hypotheses about human action are sufficient for most, if not all, decisions on economic policy. I would be pre pared to argue that the practice of breaking up this useful disci pline into agricultural economics, transportation economics, develop ment economics, labor economics, urban economics, and the like, has been productive of much mischief.