"Never speak to me of profit," mid-twentieth century Indian leader Pandit Nehru once said to an industrialist. "It's a dirty word."

American economist Thomas Sowell claims that attitude cost millions of people a better life.

When severe restrictions on Indian business were finally lifted, economic growth picked up. Incomes rose along with employment and tax revenues. “This poverty-stricken country could have had all those things 40 years earlier, except for a prejudice against a word,” Sowell says.

Opposition to profit reflects a fundamental misunderstanding of how the economy works, and how people's living standards are raised. The drive for profit provides us with jobs, goods, services and an industrial society more prosperous than anything our ancestors could have even dreamed of.

Profit performs two main functions. First, whether or not a business earns a normal profit indicates whether resources are efficiently allocated – whether the business is creating or destroying wealth. Sustained losses indicate society would be better off if the firm's resources were allocated to other uses or taken over by other managers.

Second, profit provides a reward for successful innovation. Most new products fail the test of the marketplace. Those that do succeed may earn temporarily high profits until other producers enter the market. The process drives prices down and increases consumer choice.

The economically illiterate see profits as unnecessary. They look at a company that makes a million dollars in profit, and deduce that its products could have been that much cheaper without the profit element. In reality, those products might have cost several million dollars more to produce without the incentives to be efficient created by the prospect of profits.

Many large fortunes have come from finding more efficient ways to produce a product or service at a lower cost, so that it could be sold at a lower price and attract more customers. Making a fortune does not represent greed, which we rightly condemn. It represents the reward for successful entrepreneurship, obtained by benefiting other people.

Individual companies are sometimes criticised for laying off staff or hiking prices to stay profitable. They are accused of putting ‘profit before people'. But consider the alternatives: a firm that fails to adjust will go out of business altogether, leaving its entire workforce without jobs. Small investors in the firm will lose their savings. The firm's profits belong to people – around half of us in New Zealand own shares, either directly or through unit trusts or superannuation funds.

If we care about people, we should beat up on loss-makers, not profit-makers. Adam Smith, who popularised modern economics, said of each member of society that, "by pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it."

Those who claim to promote a lesser role for profits or an end to global capitalism are actually advocating greater government control of resources.

If we learned anything from the twentieth century, it was that people's interests are better served by less government and by more market-based wealth creation. After socialising agriculture, countries which for centuries had exported food found themselves forced to import goods to stave off starvation. Soviet industry used far more resources to produce a given output than market economies like Germany , Japan or the United States .

Ask opponents of profits whether they would rather get dental work from a dentist in a capitalist nation or a socialist one. In the latter, the state rations out ‘free' healthcare services. The result is a lack of consumer choice and competition – the ingredients that provide an incentive to improve quality under a market system. Croatian author Slavenka Drakulic said after communism's fall in the former Yugoslavia that "dental care has been free for over forty years" with the result that "the whole nation had bad teeth." The outcome of socialism is the opposite of the intent.

Government provision in market economies is often not much better. In Canada the courts recently ruled that patients suffering from AIDS, cancer and other diseases are entitled to enjoy the benefits of ‘medical marijuana', supplied by the government health system. Of the first ten patients to be supplied with the government product, half claimed it was the worst pot they had ever smoked, and sent it back to Ottawa demanding a full refund. Commenting on this episode, columnist Mark Steyn said, “one of the reasons I'm in favour of small government is because there's hardly anything the government doesn't do worse than anybody else who wants to give it a go”.

What we call the market is really a democratic process involving millions, and in some markets billions, of people making personal decisions that express their preferences. Profits are a natural result of these individual decisions. Provided they are earned ethically and in competitive markets, they should be celebrated, not attacked by those with a prejudice founded on economic illiteracy.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz