How Obscene are Profits? H. Hazlitt

But one criticism that was surHenry Hazlitt, a frequent contributor to The Freeman, has a long and distinguished career as an economist, journalist, editor, and literary critic. Best known of his numerous books is Economics in One Lesson, originally published in 1946and since translated into ten languages with sales of more than 700,000cop ies. The recently revised edition is once more avail able in inexpensive paperback. 630 prisingly not in his list of ten is probably the most frequent of all. It is made every day by at least some politician, or some TV program, or some newspaper, charging that as a result of "unrestrained" capitalism this or that person or firm has just been caught making "obscene" prof its. Or it is charged that under cap italism profits are in general inex cusably high and wages shamefully low. One reply to the first of these charges is that it is very fortunate in the long run that profits are sometimes extravagantly high, be cause this incites more people to be come entrepreneurs, stimulates in creased production in the line in which the high profits exist, and eventually brings down the relative price that consumers have to pay for that product.

As for the general charge about HOW "OBSCENE" ARE PROFITS? 631 the relation between wages and prof its, it is easily shown that the truth is the exact opposite. In 1982, ac cording to the calculations of the U. S. Department of Commerce, the U. S. national income amounted to $2,436.6 billion, the wages and sal aries of workers to $1,856.5 billion, and corporate profits before taxes to $174.9 billion. In other words, wages were more than ten times as great as corporate profits. The comparison is much the same if we consult Table B-12 in the latest Economic Report of the President (February, 1983). This table pre sents the "gross domestic product of nonfinancial corporate business" for 46 years, including 1929, 1933, and every year from 1939 on. If we take 1981, the last year for which final figures were available, we find that these corporations paid in that year $1,150.1 billion as compensation to their employees, had left profits be fore tax of $186.6 billion, and paid their stockholders $52.9 billion in dividends. In other words, the wages paid by these corporations were six times as great as their profits, and twenty-one times as great as the amount paid out to their stockhold ers.

I find I was also calling attention to this typical distribution in an ar ticle in The Freeman in August 1979, in which I presented tables of both the dollar and percentage distribu tion of corporate earnings for the years from 1949 through 1978 inclu sive. (In the last ten years of this comparison, employees got an aver age of 90.2 per cent of the combined total available for division between the two groups, and stockholders an average of only 9.8 per cent-a 9 to 1 split.) But in view of the persis tence of the Marxian myth that the workers are mere "slaves" of the bourgeois class, are systematically "oppressed," and are subjected to "naked, shameless, direct, brutal, exploitation" (in the words of The Communist Manifesto), the real dis tribution cannot be presented too of ten. Concerning the Accuracy of the Statistics Before I go further, I should say a word about the official figures I have just been citing. Are they accurate?

My reply is that I believe them to be careful and conscientious. Espe cially when we consider that all val ues are ultimately subjective (as the "Austrian" economists have re minded us) there are basic questions to be raised about the validity and meaning of estimates of such things as total national income. Questions about legitimacy are much less serious when we are deal ing with such smaller and more ex plicit figures as the total of money wages and corporate profits and div idends. But even such estimates have to be extrapolated from smaller 632 THE FREEMAN October samples. For example, the Depart ment of Commerce estimates of the total net profits of some 2.7 million corporations are based on the total net profits reported to the Internal Revenue Service by only 85,000 of the largest corporations (including all with assets of more than $25 mil lion). But I have neither the detailed knowledge nor the statistical skills to second-guess the Department's official figures, so I am assuming them-with one reservation-to be good enough for our present pur poses.

That reservation concerns not the government compilation, but the ac counts of the individual corpora tions. In an inflationary period such as we have been having, net profits are likely to be systematically over estimated, because costs, for exam ple, are likely to be systematically underestimated; Depreciation is apt to be written off against acquisition cost, rather than against present or future replacement cost. There remain further questions to ask about profits. What per cent are they of the total national income? What is the net burden that they impose upon the consumer? Let us take these questions in or der. First, let us look again at the official estimates of profits. The na tional income for 1982 is estimated at $2,436.6 billion and corporate profits before taxes at $174.9 billion. But we must also add to this second figure the profits of small unincor porated business-the farmers, gro cers, butchers, drug stores, indepen dent gas stations, and so on. We find these estimated under "proprietors' income"-for farms $19 billion, for nonfarms $101.3 billion. From this we get a total of $295.2 billion. This would come to about 12 per cent of the national income.

This figure may seem modest enough, compared with most popu lar assumptions, but now we have to ask a further question. Is the esti mate too high? The answer turns partly on what we decide to call a "profit." Econo mists-including those in the De partment of Commerce-now con ventionally divide the sources of personal income into wages, rent, interest, capital consumption, and profit. ProfitsTend Toward Zero With the exception of a few social istic writers, economists have sel dom deplored profits. Adam Smith, the father of classical economics, viewing the problem historically, looked forward to a time when prof its would tend to diminish. John Stuart Mill, in his Principles of Po litical Economy (1848), wrote a spe cial chapter on "The Tendency of Profits to a Minimum" -though his conception of "profits" included what economists are now careful to. sepa rate as "interest." Since a little after 1983 HOW "OBSCENE" ARE PROFITS? 633 the appearance of Alfred Marshall's Principles of Economics in 1890, an increasing number of economists have even agreed that under condi tions of perfect competition pure profits tend to fall to zero.

This conclusion will amaze most laymen, but there are economists who go even further. Frank H. Knight, in his book Risk, Uncer tainty, and Profit, which appeared in 1921, concluded that "pure" profit is probably a negative sum: "The wri ter is strongly of the opinion that business as a whole suffers a loss" (p. 365); and "It seems probable that with society and human nature as they are, the individual not only charges nothing for this [risk-tak ing] service, but pays something for the privilege of rendering it-on the average" (p. 368). The entrepreneur did this, Knight believed, not be cause he was an altruist, but be cause he was an optimist. The typi cal entrepreneur not only believes that the business on which he has embarked will enjoy higher than av erage profits, but he tends to be ov erconfident about his own abilities. Can we reconcile such a conclu sion-or even the conclusion that profits tend to be nonexistent on the average-with the Department of Commerce profit figures that we have just been citing?

Let me remind the reader that what we are now discussing is not the total amount that the typical entrepreneur receives, but what he re ceives in the form of "pure" profit. Part of his income in anyone year may consist of what he receives for his managerial labor (or would re ceive as salary if he worked for somebody else); part of it may rep resent the equivalent of interest on his investment; part of it what he might otherwise have received in rent on his buildings; and part of it capital consumption, represented ei ther by insufficient write-offs for de preciation or withdrawal of previous savings. So there is no irreconcilable con tradiction between the positive fig ures of corporate and individual "profits" that the government com piles and the conclusion that on the average "pure" profits may be zero or even a negative sum. We need merely recognize that corporations tend to earn, for the most part, little more than the equivalent of interest on their investment (even though it is called "earnings" or "dividends") and that entrepreneurs, on the av erage, tend to work for less than they might otherwise have received from others in salary.

So, finally, what should be the buying public's political attitude to ward the profit-seeker, the entrepre neur? Broadly speaking, it should be just the opposite of what it actually is. All entrepreneurs are trying to meet better than others the needs or 634 THE FREEMAN wants of the consumers. If, under competitive conditions, one com pany is making greater profits than others-even "inordinate" profits it means that it is serving the wants of consumers better. Either it is sup plying them, in their own judgment, a product superior to that of its com petitors, or it is supplying them with it at a lower price. (It could not be selling it to them at an obviously higher price, for they would not buy it.) It is selling the product at a lower price, or making a greater margin of profit at the same price, because it has learned how to cut costs below its competitors. So profits, under free competition, cost the consumer nothing-or less than nothing.

If the consumer ought to get mad at somebody, it ought rationally to be at the unsuccessful competitor, the company that is losing money. For Profit and Loss such a company is wasting re sources. The value of the resources it is pouring into manufacturing and selling a product is greater than the value for which that product can be sold. True, the losses fall in the first instance on the unsuccessful com pany itself, but in the long run its failure tends to impoverish the rest of us, because it has wasted capital that could have been employed in supplying something at a lower cost that was more needed. It is not rationality that leads pol iticians to denounce what they call "obscene" profits, but an appeal to envy. Their denunciations lead to the conclusion that profits deserve to be punished by heavy taxation. But as Ludwig von Mises once put it: "Tax ing profits is tantamount to taxing success in best serving the public."

IDEAS ON LIBERTY AN excess of the total amount of profits over that of losses is a proof of the fact that there is economic progress and improvement in the stan dard of living of all strata of the population. The greater this excess is, the greater is the increment in general prosperity. Entrepreneurial prof its and losses are essential phenomena of the market economy. There cannot be a market economy without them. The entrepreneurial function, the striving of entrepreneurs after prof its, is the driving power in the market economy. Profit and loss are the devices by means of which the consumers exercise their supremacy on the market. The behavior of the consumers makes profits and losses appear and thereby shifts ownership of the means of production from the hands of the less efficient into those of the more efficient. LUDWIG VON MISES A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Healing America IN 1965 a young man named Rich ard Cornuelle, who had studied with Ludwig von Mises and worked for Garet Garrett, wrote a book called Reclaiming the American Dream.