What does “Profit” mean?
Traditionally, “profitable” means “beneficial”, so “profit” means something good. These days, financial profit just means “making money”.
Politicians and left-wing ideologues love to invoke the word “profit” – always as a weapon to clobber private companies, libertarian economics, and entrepreneurship.
In political rhetoric, the word “profit” is used to imply abusive exploitation, whilst “salary” or “wage” is used to suggest deservedness. But why is that?
Profit is always used to suggest that profit-making is unfair behaviour by companies, either by paying their employees an unfair wage, or by overcharging their customers. However, who is forcing employees to work for that employer? Who is forcing customers to buy a product at a certain price? If you think a product is too expensive, you can choose to not buy it. If you’re unhappy with what your employer is paying you, you can quit, or even retrain. I hear the building trades such as carpentry pays quite well for comparatively little training (certainly no university degree required).
Employees who are getting paid means employment is profitable to the employee. Entrepreneurs making a profit means their hard work and investment paid off. Companies making a profit means they have managed to balance the cost of their operational expenses against sales to customers. The only difference between corporate profits and wage is that profiteers have to take the risk that customers do not want to buy their product, whilst a wage is paid regardless of whether the company makes no profit or a large profit.
Certain politicians and ideological activists have resorted to use the slippery term “excess profits” to indicate undeserved windfall or bumper profit. A windfall simply means “unexpected”. It does not mean “unfair” or “undeserved”.
We have seen this recently, when the sudden reduction in supply of gas from Russia caused the global price of energy to skyrocket. The costs of energy production hadn’t changed, but the sudden reduction in supply meant that demand far exceeded supply – prices had to go up to reduce consumption against available supply, otherwise we’d have to enter a period of rationing or even blackouts. This increase in global energy prices resulted in most energy companies receiving a bumper profit this year.
There were calls for government to tax this unexpected windfall, or even confiscate. But why is that fair? If you have been working hard on a project, and eventually a turn of events meant that the project suddenly bore fruit, why should the fruit of your labour be confiscated? Bear in mind that even windfall profits are taxed already, so if a windfall quadruples the companies’ usual income, the tax take is also quadrupled.
Even if you could justify it, how would you determine what level of profits are in “excess”? You cannot use a company’s past performance, because past performance will vary all the time. Additionally, most business are investing all the time. Sometimes they pay off, sometimes they don’t. Nobody can know for sure, they can only make forecasts. Meaning, you cannot assess the non-excess profits coming from a company’s investment in productivity initiatives, such as developing technologies, building factories, etc.
Some businesses, such as in the retail sector, make a vast profit in the months leading up to Christmas, but struggle to break even the rest of the year. Others, such as technology or manufacturing, may be operating at a loss and not see a return on their investment until many years later, when profits will jump possibly to unexpected heights. Amazon spent almost two decades making a loss before it became the vast profit-making machine it is today.
Any attempt by the government to determine the level of profit a business deserves to receive means that the government is dictating how much a business can earn. It is a condition worse than employment, because the government takes the profit whilst business owners take the risk. Business owners will be disincentivised from starting businesses, ownership of businesses will fall, and the economy will decline.
When interest rates fall on my mortgage, the jump in my disposable income can be considered a bumper profit on my income. Or maybe I received a salary raise from a promotion after years of hard work. It would be unthinkable for the politicians to consider taxing the profits we reap from such events, because we understand that it is unfair and abusive. Yet the average voter does not consider it unfair for the government to treat businesses so abusively. This is because the propaganda from the media, from activists, from politicians, have persuaded us that businesses are not human, and that business owners are greedy inhumane people.
“Not for profit”
The NHS is often used as a paragon of “not for profit”. We are told that we shouldn’t be profiteering from human lives. But “profiteering” in what sense? Medical doctors and surgeons are usually paid handsomely in the healthcare sector. Privately-owned General Practices also reap generous operational profits from the healthcare funding they receive. So why shouldn’t businesses be paid for providing facilities and healthcare services?
it has puzzled me for a long time why businesses are discouraged from investing in facilities and staff in order to provide a better patient service. Modern healthcare isn’t a charity. Doctors and surgeons invest many years to qualify. Facility providers, equipment manufacturers, pharmaceutical developers, invest many millions and billions to develop, produce, and maintain the supplies, facilities, and staff that drive the healthcare sector. Most will not do it without the profit motive.
Many argue that it is immoral to profit from people’s poor health. If it is not immoral for doctors and surgeons to get paid, why is it immoral for facility providers to be paid for providing their services? If the healthcare sector were to be truly not for profit, then healthcare providers will be run only by charities. We would go back to the early days of the hospitals where only churches and similar organisations operated hospices out of genuine altruism.
The introduction of capitalism and the profit motive vastly amplified the provision of healthcare to masses far beyond the original charity-based provision. It spurred the development of drugs and equipment far beyond what was imaginable a mere 100 years ago.
Underneath all this anti-profit rhetoric lies two assumptions:
- People are unwilling to pay to have good health.
- Businesses contribute nothing but abusive exploitation.
Neither are true. People pay to go to the gym, to be taught how to exercise, to have better diet, to be taught how maintain a good mental state. There’s a vast health industry out there which is not actually essential for good health, but people do pay for it. How much more then, will they pay for services which are actually essential for to your health and life?
Businesses are operated by people. Businesses do not get funds from nowhere, and they want to make money from the work they do. If you disincentivise profit in healthcare, you’re just discouraging people from investing in healthcare.
Profit vs waste
Profit is just the difference between what you are paid and what you pay out. A profit margin does not necessarily mean you are being exploited. In a competitive market, businesses want to reduce the price of their services to be attractive to customers – the lower the price, the more customers who are willing to pay for their services. This means profit margins are usually very slim. They can further afford to reduce prices only if they reduce their operational costs. Employees need to be paid, and employees with skills and qualities they need will also have other employers willing to pay for their services. That means competitive businesses will need to learn to minimise operational waste.
On the other hand, what happens when profit is not a motive? Operational waste is a non-issue. If somebody else is paying for it, it doesn’t matter to the managers how cost-effectively the organisation is run. In the NHS, I have literally seen:
- 12 absorbing bed pads (costing £4) used to soak up a water spill on the floor instead of simply using a mop.
- 2 tubs of emollient cream (£8 each) provided by a prescription when I needed less than half a tub.
- 3 tubs of non-dairy formula (£18 each) provided by a prescription that my infant son never consumed because he didn’t like the taste of the first mouthful. They cannot be returned because they have been prescribed, and they have now expired.
- New uniforms for non-clinical administrative staff for no other reason than because the manager didn’t like the old ones.
This is just a small sample of the waste I have witnessed in the NHS in just the last 3 years. The stories I hear from every family and friend who work in the NHS are many times greater than what I’ve described here.
Using real world examples, it is very easy to understand how operational costs can run away when cost is not on everybody’s mind. The assumption is that is that profit drives up costs, when the reality is that non-profit drives up waste, which ends up multiplying costs far beyond what a small profit margin would ever add to the consumer price.
Unfortunately, the NHS is a government monopoly. Due to a combination of zero price effect and the heavy regulation of the healthcare sector, we have very little choice when it comes to alternative healthcare providers. Thus we are all subject to the poor standard of service provided by this “Not for profit” but hugely wasteful public service.
Is it not possible for unscrupulous traders and businesses to rip-off unknowing customers? Yes, absolutely possible. Then surely this is why we need to regulate the prices and profits? To every solution, you need to answer two questions:
- How successfully does it solve the problem?
- And what will the side effects of doing it be?
Say we have a builder who is charging rip-off prices for substandard work. Indeed the UK does seem to be plagued by a phenomenon called “cowboy builders”. How will the government actually prevent this? Will they even be able to limit profits? In order to do this effectively, the government might have to set up a registrar of builders who all have to pay a licence in order to be a registered builder – where your licence to operate can be revoked if you were found to be abusive. Then to prevent overcharging the government will have to put in place pricing guidelines. Which would be next to impossible given how customised the nature of the building trade is. Even if they managed to set a pricing standard, what will happen? Builders regardless of quality and experience will all have to charge the same price. A reputable builder with too many customers cannot raise his prices to reduce the demand for his services. An inexperienced builder will not see any worth in undercutting the expensive competitors because that will undermine his reputation for choosing to price below what has been standardised by a regulatory body. All this will come at great cost to both builder and customer.
Instead, all we need to do is advise customers to get several quotes for the same work. A builder who’s already got too many customers can choose to quote high. An inexperienced builder with not many customers might choose to undercut by quoting low, for low-paid work is better than no work. And the customer can then take the risk between waiting and paying high prices for a reputable builder, or takling the risk and paying low prices for a less established builder. Either way, both customer and builder can choose the level of risk they will accept. This solution still costs time and effort, but significantly less than the cost of regulation, and vastly more effective at moderating the market.
Likewise, for every industry, the cost of regulating profits is rarely ever considered, whilst large profits are assumed to be undeserved and should therefore be confiscated for the greater good. Therein lies the path to totalitarian communism. It is exactly why the following economies fell apart despite their starting size: the Soviet Union, Maoist China, Cambodia under Khmer Rouge, and more recently Venezuela under Chavez and Maduro. Time will tell if other countries fall prey to the trap of victimising corporate “profit”. Keep an eye on Brazil under Lula.