Profits—Good, Bad, and Obscene [Good Life series]

Nobody likes to lose money, but profit generates polarized attitudes. As with most morally-charged phenomena—competition, wealth, poverty, property—getting past the often confused discussions requires some subtle distinctions.

Let’s approach profit by way of an example of its opposite—an accidental destruction of property. Suppose that I’m careless and drive my car onto your yard, tearing up some grass and killing some flowers. What should happen next?

Obviously, I should take responsibility for my actions and compensate you for your loss. So we get an estimate from a landscaper for $900 to restore your yard and add $100 for your frustration and loss of time. I then give you $1,000, your yard is fixed, and compensatory justice has been achieved.

Note that this example connects cause and effect with responsibility and justice.

Note that this example connects *cause and effect* with *responsibility* and *justice*.

My poor driving is the cause. The ruin of your yard is the effect. I am responsible for the cause and the effect. So the just thing for me to do is to restore your yard. To achieve justice, we measure the destruction of value and I compensate you that amount.

Profit is the positive flipside of the above example. When my actions (cause) lead to the creation of value (effect), I am responsible for the cause and the effect, and the just thing is for me to be compensated. That is to say, profit is a deeply just phenomenon.

Suppose that I grow vegetables in my yard and offer them for sale when I harvest them. You own a grocery store and offer me $2,000 for my crop. My time and other costs have been $1,000. So I have acquired a net $1,000 — my compensation for producing something of value.

To make a profit is to receive the reward of value creation. To make restitution is to pay the price for value destruction. Both profit and restitution are species of justice.

The points that hold for material values — wallets, cars, vegetables — also hold for psychological values.

Suppose that your daughter studies hard and earns a perfect score on a math test. Her experience of pride is the deserved result, as is praise from her teachers and parents. The child’s studying (cause) led to the test performance (effect). The child is responsible for both cause and effect, and the pride and praise are her just rewards. By contrast, undercutting her accomplishment or only grudgingly saying something nice would be acts of injustice.

Or suppose that your teenage son throws a tantrum over a trifle. He will learn (hopefully) to experience shame, and he has earned some measure of disapproval or blame from others.

Just as taking another’s material property is an injustice, taking credit for another’s earned accomplishment is an injustice—e.g., when a subordinate does good work on a project but you claim it as your own when reporting to your boss. And just as shifting to another the financial costs of your own misdeeds is unjust, shifting the blame for your mistakes to another is unjust.

The point: Profit and justice are tightly linked. Creating value is the core morally-relevant fact; justice is recognizing the cause-and-effect responsibility of those who create value; and profit is one form of rewarding those who create value.

On the flipside: the destruction of value is also morally-relevant; and justice requires recognizing the responsibility of those who do so; and loss is one form of penalizing those who destroy value.

On the flipside: the destruction of value is also morally-relevant; and justice requires recognizing the responsibility of those who do so; and loss is one form of penalizing those who destroy value.

One fun implication: Profits can never be too large or “obscene,” because one can never create too much value. The billionaire who became so by getting $10 for each item she sold to 100 million people — added at least $10 worth of value to each of those customers. And if another 100 million people also want that item, the billionaire will become a multi-billionaire, and so on unendingly as long as she is making her customers’ lives better.

But a complication: Measuring the creation or destruction of value accurately can be enormously difficult. If I work independently as a vegetable farmer, then relatively easily I can count or weigh my harvest and calculate how much valuable food my efforts have yielded. But if I have co-workers, it becomes more difficult to measure the value-added of each worker’s contributions. How much of the value of the resulting crop was due to the two guys who did the planting? the three who did the weeding? the four who did the harvesting?

And in a modern division-of-labor economy, hundreds or thousands of workers may contribute to the making of a specialized product like an airplane or a movie. So mismeasurements become easier and, as a result, misallocating the profits also becomes easier. Some can get more or less than they deserve, and that is bad.

So good profit is when we accurately assess each person’s creation of value and reward them appropriately. Bad profit is when we try to reward value creators but misjudge—and the bad is the amount that is over- or under-rewarded.

And there is a sense in which “profit” can be obscene—when we consider some of those who acquire money without creating value. If I mug you and take your wallet with $100 in it, or if I steal your car and sell it to a chop shop for $5,000, or if I am a politician who demands $10,000 bribes from productive businesspeople — then in all cases I become richer and “profit”—but clearly my actions do not create value and I have no intention of creating value. My actions are unjust because they intentionally separate the creation of value from its reward.

Helpful here is the distinction sometimes made between accounting “profit” and economic profit. If we look only at accounting ledgers of the mugger, car thief, or corrupt politician, then each has acquired more money from his actions, so he has “profited.” But if we also look at accounting ledgers of their victims, the victims have lost. In those cases, no value creation has occurred, only a win-lose redistribution.

Economic profit is different. If we look at the ledgers of both the vegetable grower and the grocery store owner, for example, both show an increase. Value has been added to both parties’ situations. A win-win transaction has occurred.

It’s the difference between makers and takers. Makers create value, while takers merely redistribute existing value created by others.

Both makers and takers are responsible for their actions. So the just consequence is that makers receive the profits and the honors that are their proper reward for adding value to the world—and that the takers be penalized, both materially and psychologically, for the damage they do.

[This article was originally published in English at EveryJoe.com and in Portuguese at Libertarianismo.org.]

[Related: The full archive of my articles in The Good Life series.]

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