April 11, 2013

Profits for Peace

Many of us in the world of economics and economic education have, surely, read Leonard Read’s I-Pencil. While the obvious lessons are recognizable at first glance; there is a deeper, more significant message hidden within the story of the pencil’s creation. Most can agree with Read’s assertion of the countless individuals that come together to deliver a simple pencil to its user. What’s even more amazing, though, is his assertion that no mastermind is needed to organize the countless efforts of all of these individuals. Similar to Adam Smith’s claim regarding and “invisible hand,” Read addresses the fact that, throughout history, without the use of coercion or central planning, individuals have contributed to the well-being of people whom they may not even know, by simply pursuing their own self-interests. Through competition and a desire to achieve individual wants and desires, people are drawn together in a massive network of social cooperation.

Imperative to this system of social cooperation, are entrepreneurs, and the signals that guide them. Entrepreneurs are the individuals who take risks by estimating the demands of future consumers, and allocating means of production accordingly. The signals that allow the entrepreneur to know whether he is allocating resources to be used in areas that are most useful to consumers are profit and loss. Mises describes profit and loss as “ever-present features only on account of the fact that ceaseless change in the economic data makes again and again new discrepancies, and consequently the need for new adjustments originate.” In this sense, profit is only achieved because the world is constantly changing. Resources are constantly being reallocated, and adjustments are constantly being made. Without any change in state of the world around us, profit would never be had. 

The role that profit plays in our society is crucial to social cooperation, peace, and prosperity. Mises defines profit as “a prize for removing maladjustments” from our economy. Profits are not the result of capital or labor, as Marxists believe. Capital can lay idol for decades without removing any maladjustment from the economy. Profits are a product of human ideas; ideas that are put into action, alongside capital, by entrepreneurs. As profits for some individuals increase, they are receiving the market signals that tell them to continue to allocate resources to the respective use because consumers are being supplied with what they most urgently want or need. It is, unarguably, within the best interest of the entrepreneur to continue to serve these consumers in their demands. It is profit, therefore, that causes the entrepreneur (as well as other individuals that he employs as factors of production) to cooperate, and go out of their way to provide each other with what each individual desires. This network of exchange begets value, and this creation of value begets continued cooperation by an ever increasing amount of indivuals who enter the network to reap similar benefits.

Without the signals that profit and loss precipitate, entrepreneurs are left without a light to guide their attempts to allocate scare resources to their most highly valued uses, and consumers are left without the goods and services that they most urgently need. Why then, would anyone want to interrupt these signals that are so crucial to the peace and prosperity of individuals throughout the network? A puzzling question indeed; yet legislators throughout the world continue to pass laws that do just that. They actually tax the monetary profit that is received for succeeding in the market!! In an attempt to extract profits from the entrepreneur and give them to the “workers,” legislators enact countless pages of tax laws and regulations without achieving their desired ends.

With savings and capital accumulation being crucial to future production, innovation, and increased prosperity; these laws do not help the non-entrepreneurs at the expense of the entrepreneurs. The taxes that, for example, Bill Gates has received throughout the years of his career have had very little effect on Bill’s personal well-being alone. Perhaps he was to be without a third yacht or an extra vacation home. The difference, nonetheless, is marginal for him, individually. It is the rest of society who must suffer the greatest discourse. The owner of the yacht business lost a large sale, as well as the real estate agent. These businesses lost out on potential savings for future investments that would’ve benefited themselves, employees, customers, etc. Bill Gates himself was not able to invest more into his company. Perhaps he would’ve invested more into R&D, and created a very innovative device that helped businesses and individuals throughout the world prosper and thrive at an increased rate. His charity, imaginably, went without more contributions or infrastructure to perform more efficiently. All of the stake holders in these areas are the individuals who suffered the greatest from the heavy taxes placed upon Microsoft and Bill Gates.  

These are the inevitable consequences of punishing individuals for the success in their efforts to provide consumers with resources they demand. The most disconcerting thing about the punishment for profiting is that a large number of individuals throughout the network of knowledge and peaceful cooperation will become further away from their potential maximum level of prosperity. If enough profit is punishable, then many will see incentives to leave, or be forced out of the network, thus decreasing their well-being, as well as the incentive to cooperate peacefully in the market institutions that allow for peace to flourish. If we are to create a society with a maximum level of peace, prosperity, and social cooperation, then we must recognize the important role that profits play, and allow individuals to enjoy the fruits of their labor. Progress, towards these ends, would be inevitable.


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