Liberty Movement HQ

The common argument for the government to do anything all comes back to the concept of profit. Private businesses invest in “profitable” ventures to make money. The basic argument for government is that it is not the job of the government to profit off of the people. Therefore, if you eliminate profit then you save everyone money.

Most people have argued this about the current health care costs, but Mark Perry over at Carpe Diem shows that the argument is weak, at best:

“Update data are now available for Q4 of 2009, and the Health Care Plan industry (includes Humana, Aetna, WellPoint, Magellan, UnitedhealthGroup, etc.), and the health insurance industry slipped to #88 with a profit margin of 3.4%. Actually, that industry profit margin was boosted by WellPoint’s 18% profit margin for Q4 2009, which was due largely to a one-time sale of its Pharmacy Benefit Management division. Without that sale, WellPoint’s profit margin would have been only 3.9%, the industry average profit margin would have been closer to 3%, and the ranking for the industry would have fallen a few places down to #92.

…

So even if we could strip away 100% of the health insurance industry’s profits, it would only save patients between $100 and 200 per year in health insurance costs.”

But the real question is what is profit and what happens if we were to eliminate them?

When most people think of profit they think of the classic accounting definition which is simply total revenue minus total cost. This gives people the wrong idea that profit is somehow created by people pricing something too high.

But what people should be paying attention to is the Austrian Economist Ludwig von Mises’ definition of profit:

“What makes profit emerge is the fact that the entrepreneur who judges the future prices of the products more correctly than other people do buys some or all of the factors of production at prices which, seen from the point of view of the future state of the market, are too low. Thus the total costs of production — including interest on the capital invested — lag behind the prices which the entrepreneur receives for the product. This difference is entrepreneurial profit.”

In other words, when a business satisfies consumer demands the best and most efficiently, it earns a profit. The business owner has taken a risk on investment and decides to produce a product that may or may not sell. If it doesn’t he gets a loss; if it does he makes a profit.

Take for example, the iPod by Apple. Plastic, wires, and rubber were all materials that were available to the public when the iPod was being thought of. The current prices of the above items only reflect the current demand from other companies that make other products already in existence. So when Apple is designing a product the hope is that they will be able to buy the material necessary at a low enough price that they can sell the iPod at a reasonable price and not take a loss.

When Apple puts these raw materials together to create a iPod, they have “judge[d] the future prices of the products more correctly than other people d[id].” This allows them to make a profit. These profits then are then reinvested in the company so that they can stay ahead of the curve.

So what happens if government tries to remove the profit? You get little investment in the future.

For example, in 1938 Mexico nationalized its oil production and now today they are seeing massive declines in production.

This from the Economist:

“Mexico’s state-run oil company, Pemex, is accustomed to being the victim of ill-concerting, probably because it provides close to 40% of the government’s revenue. It is also in decline. Since 2005, daily production has dropped more than 300,000 barrels per day, or some 10% of the total. Reserves have been falling since the mid-1980s.”

And in another Economist article:

“To reverse this course, Pemex needs to explore for new reserves in its deep waters in the Gulf of Mexico, but lacks the financial resources and expertise to do so.”

Not to mention, Pemex, which is the name of the government-run oil production company, hasn’t built a new refinery in over 20 years.

Simply put, if you remove profits and let the government run any industry, all future planning will be killed of and all innovation stifled.

If profits only went to the “fat cat” at the top then they would lack the competitive edge to stay in the market and end up like the government ran company Pemex. But through stocks and board of directors this is prevent as it is destructive to the company.