The Invisible Hand in 1980; W. Peterson

William H. Peterson The Invisible Hand PITIFULhelpless giant. Is that what America is becoming, wracked by inflation, energy con strictions and an unfolding reces sion? If so, it's all, I submit, for want of understanding the ramifications of one little word: profits. The immediate problem may have started last March when a 26 per cent advance in fourth-quarter 1978 corporate profits (over fourth quarter 1977 profits) was greeted by Administration spokesmen as a ((catastrophe," as putting ((business on trial," as Hunnecessarily high." Then, later in the year, the as sault turned on ((already enormous" oil profits. In a television address to the American people, President Car ter demanded a ((windfall profits Dr. Peterson Is the Scott L Probasco, Jr., Professor of Free Enterprise and director of the Center for Economic Education at the University of Tennessee at Chattanooga. 176 1980 tax" to curb those who would ((cheat the public and ... damage the na tion" via ((unearned billions of dol lars."

Catastrophe? Unearned? Cheat? Damage? What goes on here? This is not the place to engage in extensive statistical rebuttal. Enough to say that inflation causes plant and equipment to be under depreciated and inventories under valued, due to IRS rules and regula tions. Profits become overstated, exaggerated. Remove the resulting phantom profits, and corporate prof its are indeed what they have been for a long time, a ((catastrophe"-a catastrophic low: for example, a 5.5 per cent return on assets in 1978 against 7.6 per cent 10 years prior. So talk nowadays of ((record profits" is really an inflationary mirage, a national delusion. One result of this prolonged profit THE INVISIBLE HAND-1980 177 famine has been a drop of the cur rent Dow Jones Industrial Average by more than half in real terms since hitting 1,000 in February 1966. Another result has been pro longed weakening in the rates of personal saving, business invest ment and productivity growth rates now about the lowest in the Western industrial world, even though they represent pathways to job creation and rising living stan dards, and offsets to inflationary pressures.

Enough to say, too, that oil profits, when measured as a return on sales or equity, were less than industrial profits as a whole in 1978, that, as President Carter himself concedes, oil price controls-read oil profit controls-have failed, that they have caused domestic oil production to lag almost every year since they were first imposed in 1971. Profit Controls Why, then, the masochism in de nying ourselves desperately-needed domestic oil supplies via a tax on ~~windfall profits"? After all, it is profits, or rather, the lure of profits that induces production, not prices. The bigger the lure, as a rather strict rule, the greater the produc tion. This logic is now officially rec ognized for heavy oil-why not for all oil? And in view of the overall anti ~~big profits" campaign (supermarket operators and meatpackers have also been singled out), with its veiled implication that perhaps profit itself is somehow unethical, the larger question is: Just what is profit and how, if at all, is it earned?

Critics from antiquity on have equated profit with greed and self ishness. In a typical vein, Cicero wrote in his De Officiis: ~~Those who buy to sell again as soon as they can are to be accounted as vulgar; for they can make no profit except by a certain amount of falsehood, and nothing is meaner than falsehood." In 1704 Bernard de Mandeville saw profit as vile in origin but positive in effect in his Fable of the Bees: Pri vate Vices, Public Benefits. Man deville's idea was that not only wealth but also the arts and sciences-indeed all civilization-is the result of not the nobility of man but rather his baser nature. In other words, Mandeville labeled as vices normal longings for the good things of life-luxury, comfort, well-being and all the other pleasures stem ming from man's natural wants. And more recently, to cite another example, in the introduction to the Modern Library 1937 edition of Adam Smith's classic Wealth of Na tions (1776), Max Lerner called Smith u an unconscious mercenary in the service of the rising capitalist class," and held that he gave eta new dignity to greed and a new sanctifi cation to the predatory impulses."

178 THE FREEMAN March In truth, profit does extend be yond business and finance. It is, frankly, gain, advantage, self interest; and it applies to every man, woman and child-even to the al truist, who seeks to profit others. It can parade under other colors wages, salaries, fees, interest, tui tion, rent and so on. It can be seen in the winning of nonfinancial re wards-say, the captaincy of a foot ball team, a prize in a bridge tour nament, a jury's verdict of ((not guilty." (Conversely, not winning these things involves losses in one degree or another.) A Natural Motive The profit-and-loss idea can be readily inferred from the writings of philosophers from Aristotle to San tayana' of psychologists from Freud to Skinner. It can be seen in all human motivation, in every human action, said Austrian economist Ludwig von Mises, holding that profit and loss are ultimately psychic phenomena.

Broadly speaking, I think that what every individual really wants is, in the word of early 20th century labor leader Samuel Gompers, ((more"-more as the individual sees it. More happiness as a rule. And more is but another name for profit. Again, I think that given the primordial economic law of scarcity, of the universal urgency to allocate limited resources, including time, man must seek the most for the least, to maximize gain, to minimize loss. Profit-seeking is part of human nature. Nobody is exempt. Adam Smith saw the immensity and pervasiveness of human incen tive, of self-interest, of the profit motive in human affairs when he wrote in The Wealth of Nations: ~~It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own neces sities but of their advantages."

This is not to glorify profit. Like sex, the profit drive is subject to abuse. When profit overrides indi vidual rights as in fraud or force, obviously the social fabric is torn. The mugger in Central Park, for example, is obeying his self-interest but to the detriment of his fellow man. But in any free exchange both parties profit or expect to profit, else the exchange would not take place. Advantage is two-way. Gain is mutual. Moreover, it invariably in volves service to the other or others, and it is immediately reciprocated. It is, in this sense, the Golden Rule in action. The exchangers-buyers and sellers-are saying to each other, in the words of Adam Smith: ~(Give me that which I want, and you shall have this which you want."

1980 THE INVISIBLE HAND-1980 179 The profit motive is also a great civilizer. It promotes not only civil ity and individual responsibility but division of labor and specialization, social cooperation and still more ex changes. Hence productivity im provement emerges as does in time an economic surplus beyond mere provisioning of necessities. Hence the surplus permits the flowering of charity, religion, music, painting, literature, education, science. Hence-if I may accelerate the thought-Western Civilization. So Montaigne and Marx had it all wrong when they argued one man's profit involves another man's loss, that production for profit is at var iance with production for use. The Market at Work The fact is that the prospect of profit-along with its magnitude motivates and activates producers, steering production into those uses most demanded by consumers, i.e., into products broadly considered to be the most useful. This is supply and demand in action, the market place at work. As University of Chicago economist Yale Brozen and others have noted, production for profit is production for use.

Indeed, the genius of the free en terprise system is that it can take the profit motive-this innate, ines capable and potentially destructive human trait of self-interest-and peacefully, harmoniously and, above all, voluntarily convert it into con structive channels of human effort, cooperation, service and advance ment. Are profits, then, earned? Most assuredly, yes. In this light the concept of a ~~windfall" profits tax on oil becomes, however inadvertently, a great deception-a tax ultimately borne not by the companies but by the American consumer, a tax that will hamper the discovery and develop ment of new domestic oil supplies. Windfall? Again, it is the U.S. Gov ernment itself that has repressed oil prices, beginning in 1971. To be sure, repressing and decon trolling prices and then taxing ~~windfall" gains are done under the name of the public interest. But self-interest in a market system usually advances the public interest more than those who profess to serve the public interest (apart from their own inevitable personal interest).

As Adam Smith observed, the indi vidual ((neither intends to promote the public interest nor knows how much he is promoting it.... By ... directing (his) industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." Energy availability. Inflation al leviation. Economic growth. Profit motive. All are of one piece. ® Leslie Snyder The administration of a republic is supposed to be directed by certain fundamental principles of right and justice, from which there cannot, because there ought not to, be any deviation; and whenever any devia tion appears, there is a kind of stepping out of the republican prin ciple, and an approach toward the despotic one. -Thomas Paine * * * JUSTICE is the only foundation upon which a society of free and indepen dent people can exist. Justice is a concrete, recognizable, and objective principle. It is not a matter of opin ion.