Excess Losses; J. B. Colburn

J.Brooks Colburn EXCESS LOSSES ALL OF us are familiar with the phrase ((excess profits," used so fre quently today as an epithet directed at banks, oil companies, and other corporations. However, paradoxical as it may seem, no profits are exces sive but all losses are. To under stand why, we need to examine these corollary concepts, profit and loss. Profit is any surplus over cost of production which accrues to the pro ducer ofa commodity. The cost of the commodity, whether it be a good or service, will include such expenses as those required for the raw mate rials needed to produce it, the amount paid for the labor which was employed, and, of course, the charges for whatever capital goods-plant and tools-were uti lized. Thus the cost of producing a simple wooden chair includes what ever was paid out for the wood (raw rna terial), the wages of whoever planed, cut and assembled the wood (labor), and the price of all the tools utilized in the labor process (capi tal). If the sum of his per unit costs is less than his commodity's per unit price, then the producer generates a profit.

The claim that profits are exces sive can be interpreted either of two ways: (1) it can mean that all profits, simply by their nature, are excesDr. Colburn is a Professor of Philosophy, deeply concerned with the principles of business manage ment and public relations. 367 368 THE FREEMAN June sive; or (2) it can mean that only some profits are excessive. Those who accept the first interpretation are usually Marxists in fact, if not in name, because their argument rests on Marx's labor theory of value. Ac cording to it, the surplus of return over cost which constitutes profit comes from not paying the laborer what his labor time is ~~worth." To rebut the labor theory of value is far beyond the scope of this paper, and, more important, would be redun dant given the classic refutations of Bohm-Bawerk (Capital and Interest) and von Mises (Human Action, Socialism). Besides, it is the second interpretation which is the more in teresting because it is so much more common than the first.

How Much Is Too Much? Anyone who holds the second interpretation-that some profits are excessive, others not-must de termine the standard by which the excess can be measured. What might that be? One common sugges tion is that it should be whatever is the average profit within the indus try. Anything above that would be excess. A major problem with this is its vagueness: what is meant by ~~the industry"? Are the profits of our chair maker to be compared with those of all furniture makers, or with those who make only chairs, or with those who make only wooden chairs? How similar to the commodity of the entrepreneur in question must be the commodities which con stitute the standard class, Le., ~~the industry"? Since there are an unlimited number of possible standards for measuring alleged profit excesses, we cannot examine each of them. However, if we could show that they all shared a certain serious weak ness, regardless of where exactly they drew the line for establishing excess, we would have reason for rejecting all of them. That, in fact, is the case.

Consider our chair maker. In order to stay in business, he must satisfy some demand. People must want his chairs. If there were some unit for measuring demand, and ifit could be shown that by producing chairs more demand was being satisfied than if they were not pro duced, then, according to that stan dard, our chair maker would have increased the sum of social utility by increasing the amount of satisfied demand. He would, in other words, be justified in producing chairs. There is such a measuring unit: the medium of exchange, money. Each dollar bid on a commodity is an indicator of demand. The more of a scarce resource offered for some thing, the more valuable, relative to that resource, the thing is. And, as we all know, money is indeed a scarce resource .. The costs our chair maker must 1979 EXCESS LOSSES 369 pay for his raw materials, labor, and capital constitute the measure of demand for those resources prior to their embodiment in his chairs.

That is, had he never begun produc tion, those resources would still be worth the cost he was forced to pay for them. But in fact they are trans formed into his chairs. Since the chairs sell per unit at a price greater than their per unit cost, more de mand (measured in dollar v'otes) is satisfied than if the economic re sources constituting them had not been combined into chairs but sim ply allowed to remain as they were when they commanded the lower costs our entrepreneur paid for them. A Measure of Efficiency The overage between the price and cost-profit-is the measure of how much greater is the demand being satisfied by chairs than by the wood, labor, and tools, prior to their utilization by our producer. It at tests to the entrepreneur's ingenuity and efficiency in adapting scarce and valuable resources to better serve willing customers. The more profits generated, the greater de mand satisfied. Therefore, so long as we want our economic demands satisfied, no profits can be excessive.

With losses, the situation is reversed. If the price per chair is less than the per unit cost, then there was greater demand for the economic resources prior to their embodiment into chairs. In produc ing chairs, the entrepreneur has caused less demand to be satisfied than if he had produced nothing. Therefore, all losses are excessive because they are indicative of hav ing introduced disutility in the form of less satisfaction of demands. In short, profit signifies that a val uable social function has been performed, and the larger the profit the greater is the satisfaction of economic demand. We have offered an argument which proves that, prima facie, unlimited profit should be encouraged while any loss should be discouraged. Our argument places the burden of proof upon those who would restrict profits. They would have to show that re striction, despite its minimizing of demand satisfaction, would never theless be a good thing. To do this, they must meet the same stan dards of argument that we met: de termine a criterion of value to re place ours of demand satisfaction, and then indicate their method for measuring the presence or absence of that criterion, as money bid in the marketplace measures ours. It's up to them. ® THE NATURE OF WORK WORK means the application of one's energies toward the accomplish ment ofa given task. In a sense, the application of one's energies, even when there is no task to be per formed, is a kind of work. We could say, for example, that a man who is lolling under a shade tree is ttemployed" in day-dreaming.