In Defense of Profits
Updated: Mar 15, 2020
The substance of Senator Bernie Sanders's central campaign arguments mostly consists of villainizing “billionaires and corporations” as well as promising free public goods such as healthcare, housing, and college.
In this respect, Mr. Sanders is not just a self-proclaimed socialist but a revolutionary seeking to overthrow our economic system. His message has the potential for broad appeal because it speaks to the status of the masses. Ninety-nine percent of Americans are not CEOs or Wall Street tycoons so naturally, it is far easier to perpetuate a narrative of economic disenfranchisement and victimhood instead of defending the “1%”.
But despite Sanders’s redistributionist policies and collectivizing the means of production by government fiat, capitalism says that wealth and economic value are created by the entrepreneur’s efficient organization of land, labor, and capital for the purpose of either creating or meeting market demands for new products and services.
The focus on producing products and services that add value to people’s lives is why computers today are not only better but cheaper than when you were born. This is because people like Bill Gates and Steve Jobs invested in creating new software technology and business models to support the sale and distribution of their products.
Workers help create wealth on account of what they are producing with the factors of production. Amazon delivery drivers are able to do their job because they utilize capital in the form of vehicles and proprietary technology that allows them to deliver goods accurately and timely. The more innovation in land and capital there is, the more that will be demanded of workers who, in turn, will make themselves marketable by acquiring the appropriate education and skills. They hold greater value to their employers when they can work with factors of production that demand specialization. To invest in labor means paying salaries or wages based on an individual’s tangible and intangible skills in relation to the means of production and their execution of some portion of the business model. It is because of this investment that a labor market exists where workers compete by acquiring training and skills to do jobs in demand. This is another crucial feature of capitalism that Senator Sanders does not consider when he rails against profits and wealth creation. Without the innovation of entrepreneurial capitalists, workers have no incentive to acquire better skills and raise their own economic prospects.
It is worthwhile to note that the entrepreneur also endures substantial risk when trying to organize land, labor, and capital. If their investments are poor then they suffer the consequences of their business shutting down which means that they lose their means of production and the time spent organizing it becomes worthless. By contrast, a worker will lose their job but not experience the pain of starting over and either finding more capital or facing financial ruin. If they have valuable skills that are applicable to certain means of production then they can shop their labor around and compete with other workers in the job market.
Finally, it is important to emphasize that a firm’s profits belong to the owners. They may be shareholders, private equity, or an entrepreneur. They are entitled to the profits because they are the ones who own and organize the factors of production, a basic tenet of property rights in a free society. Of course, owners of capital have contractual obligations to pay for interest, overhead costs, and salaries and wages but their fiduciary obligations extend no further. As economist Milton Freidman pointed out 50 years ago when he argued that a firm’s responsibility is to its shareholders:
“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom… Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money.”
If profits are used outside of paying for interest, overhead costs, and salaries and wages, then it can only be justified in that it is in the firm’s interest to do so as it will further increase profits down the line. As Friedman explained:
“it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.”
Bernie Sanders makes his case in pseudo-moral terms but his attacks on wealth creators distort the true nature of capitalism. His demands that corporations redistribute their gains violates a core pillar of a free society, the right to private property, and is in itself a form of theft. Equally distressing is that his economic philosophy of massively redistributing wealth crushes the incentive for workers to acquire skills that increase the value of their labor so as to match innovations in land and capital which then allow entrepreneurs to develop new products and services. This would inevitably eliminate competition which, by virtue of the price mechanism, raises the standard of living for consumers by providing cheaper and better products and services.
It is easy to villainize the rich but the truth is that they are the ones who create economic value for millions of people every day through their organization of land, labor, and capital in a free economy. Profits are good for workers and good for society. Let’s hope one of our presidential candidates doesn’t plan on using the federal government to wage war against them.