Winners and Losers; W. Nelms

Willie E. Nelms Winners and Losers CRITICS of the free market are hard to please. While they may applaud the opportunities offered and praise entrepreneurial effort, they frown upon the person who gains success. Charges of monopoly, price gouging, and sel fishness are leveled. Envy of the competitor who succeeds in the market leads to calls for higher tax ation and confiscation of profits. Many critics assume that the suc cessful businessman must have cheated in order to gain his reward. Conversely, we find persons equally critical of the leveling force of the market which drives out of business those who cannot compete. This may have been the experience of the critics themselves, or they know friends who have failed in business. And such a somber lesson always raises cries about the cru elty of capitalism and calls for government subsidies for failing ventures. Mr. Nelms is a professional librarian in Virginia.

752 In the final analysis, market crit ics are satisfied with neither the op portunities for success nor the pos sibilities for failure. Instead, some type of equilibrium is sought, where all will be secure, where none can fail. They ask, ~~Why must some pro fit and others fail?" They call for a system where opportunities for great wealth may no longer exist, but at least the possibilities for fail ure will be eliminated. It would be nice to live in a world where no one fails. But a close anal ysis reveals what a dull and impos sible situation this alternative of fers. 1f the chances for success and failure are destroyed, the end of progress and prosperity is inevita ble. An examination of the market process reveals the necessity for profit and loss in a healthy society. The incentive for profit and oppor tunities for success encourage im provements in life. This chance at wealth is a strong attraction which carries with it the possibility of loss.

WINNERS AND LOSERS 753 One is not available without the other. In order to allow the maxi mum degree of consumer satisfac tion and productivity, people must be free to succeed or fail. Protecting us from ourselves will only inhibit the satisfaction of all concerned. Let's look at the profit incentive for a moment. The prospect for wealth encourages new people to enter the market with new products and new ideas. These entrepreneurs consider the risks, often using all their savings, and borrowed capital as well, to begin an enterprise of their own. Yet, they are willing to take these chances for the opportu nity of bettering themselves. Even though the vast majority of new ventures fail, the incentive for profit still causes an increasing number of people to compete in the market. These businessmen offer new products, new services, new competition for the consumer's pat ronage. The only way they can suc ceed is by offering the consumer a product for which he will willingly trade other valuable resources.

The possibility for profit is the reason that people like Henry Ford, Cyrus McCormick, and Chester Carlson risked .their own capital to test new ideas in the market. With out the profit motive, the world might not have known the automo bile, the grain reaper, or the inex pensive photocopier. Taking away the prospect for profit may soothe someone's sense of envy, but it re tards the development of new products and diminishes consumer satisfaction. Another key feature of the profit system is that it keeps producers on their toes. Entrepreneurs are constantly seeking new fields in which they can maximize their prof its. If they see a line of business where profits are high, this is a key for them to enter with a competing product. In this manner, the market encourages new competitors, which tends to lower prices and to discour age monopolies. Our market critics often grant that a «reasonable" profit is all right, but that cCexcessive"earnings should be taxed away and used to help the less fortunate. In this argument, they fail to see the real purpose of profits. If a producer knows that his earnings will be taxed away when they exceed a certain level, he will not strive to be more productive.

It should be clear that the profit system is of benefit to everyone. Pro ducers are given the chance to real ize earnings, new goods are devel oped, new jobs are created, and the consumer gains a product suited to his needs. Without this incentive, why should anyone wish to risk his time, labor and talent to enter business? But what about the other side of the coin? Surely, something should be done to prevent the thousands of 754 THE FREEMAN December business failures each year. Think of the poor man who fails 'and is obliged to sell out to a more successful com petitor. It is important to realize that the market economy must be a profit and loss system in order to function effectively. The market insures that those who meet the consumers' needs will succeed. Competitors who do not meet these needs will not be able to continue in business very long. This prospect of failure is a stern reminder that efficiency and productivity are required .. If failure is not allowed, businessmen can be come lackadaisical with the knowl edge that they will not have to face the consequences of their unproduc tivity.

The· fact is that businesses fail for many reasons-undercapitaliza tion, poor management, inadequate planning, just to name a few. The market allows a means for the un successful·competitor to liquidate his business and to cut his losses. His tory records many stories about peo ple who failed in one area but were able to realize success in other :fields. The market afforded these jndivid uais a means of selling their stock and moving on to try their hand at more productive ventures. But why should someone benefit at the cost of the poor businessman who must sell out? In a market economy, a person will trade only if he believes it is in his best interest. Thus, the man who goes out of busi ness has the choice of continuing his present line or selling his assets. If he chooses the latter, it is because he deems it to be in his bestinterest. The buyer of his property is the one person offering him the most attrac tive deal.

The market provides signals for a person to know when to expand or to contract or to go into another :field. If a business is consistently losing money, this is a sign either to re vamp the organization or to sell the business. A person who ignores these signals does so at his own risk; the person who buys such a business when it is offered for sale is actually helping the loser cut his losses in retiring from this segment of the market. The alternative to allowing busi ness failure in the market is sub sidy. We are all familiar with such subsidies that have become a part of the American scene over the years. They require that people who are productive and have met customers' needs-plus consumers themselves -must give part of what they have earned to support the less produc tivebusinessman. In this way, the inevitable collapse of the subsidized business is delayed, and the market process is circumvented. Ultimately, everyone pays for this inefficiency with higher prices and a distortion of the signals that the market is sues.

1980 WINNERS AND LOSERS 755 Whenever government steps in to protect individuals from failure, it hampers the working of the market process. Instead of allowing the en trepreneur to see that he must change his practices to meet con sumer needs, subsidies allow him to dwell in a dream world, where fail ure never comes. In essence, what happens when government enters the market is a distortion of reality and the·. crea tion of a vicious cycle. To insure that no one fails, others must be ordered to sacrifice the fruits of their labor. To keep the productive from earning their rewards, the incentive to cre ate and develop new products-with new jobs-is removed. If our critics are concerned about the plight of the small businessman, they can best help by removing gov ernment regulations which place an oppressive burden on any small en trepreneur. A variety of laws, from building codes to zoning regula tions, retard the ability of business men to face the requirements of the market.

The producer who risks his capi tal and goes out to borrow from oth ers to realize the goal of owning his own business deserves better than the present state of affairs. He gen erates a product, for which people are voluntarily willing to exchange their own goods; he offers this at a competitive price; he employs work ers at a wage for which they are willing to trade their labor; and he adds to the overall wealth of his community. In exchange, he is forced to collect sales taxes, keep various records for the government, observe licensing requirements, and pay taxes of differing degrees on his earnings. The profits earned are the seeds from which progress grows. Profits encourage efficiency of production and the expansion of industry. Con sumer needs are met as buyers are allowed to purchase the goods they wish in free exchange. Jobs are cre ated, which help to meet the needs of workers. All of this is possible only through the workings of the free market. Winston Churchill once observed, UPrivate industry runs at a profit and uses the profits to ex pand producing capacity. Govern ment industry runs at a loss, and taxes the substance of the people to pay for its inefficiency."

In reality, our critics who seek equilibrium must understand that such a state of affairs is both impos sible and undesirable. Human na ture dictates that we constantly strive. The chance for profit must be available as an incentive for men to reach higher. Likewise, the market records a loss for lack of productiv ity and it affords the least painful way for people to move from one business to another. If profits are not possible, we all lose; if failure is not allowed, none of us can win. , A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN THE NEW CLASS? THE late Richard Weaver, who wrote a book to prove that ((i~eas have con sequences," knew that the efficacy of a concept often has nothing to do with its truth. To pick a most horrendous illus tration, there is the Marxist theory of the class war. The so-called di alectic of the class struggle is re sponsible for the Russian Revolu tion, but if it hadn't been for Lenin's professional mechanics of the arts of incitement and propaganda Cagit prop") the idea that the Russian pro letariat was bound to take over would never have become more than a slogan exploited by a minority in a St. Petersburg parliament.