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What Every Debater Should Know About Economics

#6 Profits direct businesses toward activities that increase wealth.

"Profit" is often considered to be a derogatory term today, especially when it's referred to as a motivation for human activity. It is fashionable today to talk about the need for business to temper its pursuit of profits by being more socially or environmentally conscious. The concern that business people behave responsibly and with all due awareness of the ways their decisions affect other people is certainly noble and good. But the implication that pursuing profit is socially irresponsible is based on economic misunderstanding.

Profits are not snatched from the mouths of hungry children by greedy businessmen, they are earned by people who provide a product or service that other people are willing to pay for. More accurately, they are earned by the people who most creatively and judiciously employ their resources to satisfy the needs of others. The pursuit of profit demands the imagination and alertness to anticipate those needs, and the wisdom to meet them without wasting scarce resources. Even if the entrepreneur's immediate goal is making money, the economic criterion for doing so is to help others accomplish their own goals.

There is nothing automatic about this process. Many business people suffer losses because the cost of the resources (labor, capital, materials, etc.) was higher than anticipated or they were inefficient in employing them. Others lose money because the demand for the product was insufficient. In all these cases, losses signal the entrepreneur that the resources would be more valuably employed in a different manner. Those entrepreneurs who persist in losing ventures eventually lose their businesses and the resources are freed up for other more socially beneficial lines of production. While sad for the owner who must sell the business, this process is beneficial for the public as a whole since scarce resources are conserved for only the uses that consumers value most highly.

"Corporate downsizing," the practice of trimming excess workers and managers from company payrolls to lower costs and increase profitability, is often described as a symbol of weakness or corruption in our economy. This is because people judge only by the obvious visible consequences without tracing the invisible ones -they ignore Hazlitt's Lesson. What is seen are people losing their jobs. What is not seen are the new goods and services which the economy can now produce because this valuable labor and know-how is available for starting new businesses. This is one reason why this period of corporate downsizing has corresponded with very low rates of unemployment, rapid innovation, and low prices for consumer goods.

Internet businesses have been vilified of late for trampling consumer privacy by tracking consumer behavior and sometimes sharing the information with other businesses. The fact that some of this is actually beneficial, on balance, to consumers has already been discussed. The more interesting story, perhaps, is the extent to which the profit incentive has forced businesses to regulate their own use of consumer information and offer convincing assurances that they are respecting the privacy of consumers who are sensitive to this issue. It is the interest in profit that has drawn software companies into the market for technologies that afford greater privacy protection, not just a sense of moral obligation to the public. Profits encourage people to cooperate in providing what other people want and are willing to pay for.