PROFIT!!

No other concept is misunderstood more widely (or as badly) as the concept of profits. So let us dive right into it:

Profits is a term related to the study of money (rather than economics, which is a more relevant field for all of us). Profit basically implies that a person with a said sum of money is able to trade goods or hire people to perform services (and sell those services) in such a manner as to end up with more money than he started out with. Let us try to gain an understanding of profits from an economic perspective.

Where do profits come from?

One of the most pervasive myths in the popular psyche is as follows: Since there is a finite amount of money to go around, a profit for one person is an obligatory loss/deprivation for another person. Let us see if this concept holds true for the following example:

Imagine an Entrepreneur with a million dollars uses it to lease a piece of land and a tractor, buy seeds and hire a farmer to operate all of the equipment. At then end of the year, he is able to sell the produce for ten thousand dollars more than a million and therefore gain a profit. Where is this profit derived from? Did he milk it from the farmer or the customers in the market? It is easy to recognize that these profits represent the production of grains by the entrepreneur that year. There is nobody who was deprived even a cent for the entrepreneur to make a profit.

But what about the service industry owners? Like Jeff Bezos? What is he producing? Well, you will have to think about his produce yourself, but the point here is that his profits are not derived from you or me in any way. If his profits are derived from you and me, would we be richer if his company started having a loss from this year on? Would we be better off if every company in the world was a loss making entity? If not, then clearly we are mistaken to believe that profits by the entrepreneur is necessarily a loss for us.

So where exactly is our Myth above wrong in it's logic? It is the premise (that there is a finite amount of money) that is wrong. Money is printed at the pleasure of the Government bureaucrat. Do not let the myth of fiat currency make you think that you cannot also profit while another person profits. The truth is that profits are created by people themselves!

What do profits represent?

'Profit' is a monetary equivalent to, what in economics would be considered, growth - the increase in value of the total resources, goods and services in a society. 'Loss', on the other hand, would represent destruction - Utilization of resources to create a product that is valued at less than the resources (including labor) that went into producing it. In our examples above, note that the entrepreneur earns a profit after he/she has paid everyone else for their labor, capital investment, marketing, etc. Therefore, profits really  represents new value created. 

Why is it important to preserve profits?

Free enterprise is often conflated with a 'for profit' system. This is an incomplete picture of it. Free enterprise is a 'for profit, loss avoidance' system. It is important to maintain the penal nature of losses to prevent people from engaging in destructive activities. This invariably necessitates preserving the rewards of profit to incentivize people to engage in productive activities.

This implies that we should aim for all activities in a society to be profitable. because this ensures that people are utilizing resources available to them to create even more valuable goods and services. Given the inherent tendencies of people to profit, a free enterprise system works well in this regard.

Contrast this to the numerous economic systems where profits are curtailed by 'public investment', subsidies and provision of free goods and services to the people. People are free to engage in loss making enterprises in these economies without constraints. In fact, as pricing mechanism is distorted, it is not even possible to tell if the collective enterprises are running at a profit or a loss. The result is increasing destruction of resources in loss making entities that results in increasing poverty. 

Who benefits from the profits?

Since profits are a monetary phenomenon, it is important to realize that a entrepreneur does not earn a profit till he/she parts with the tangible good/service of value that they created. In return, they receive nothing except fiat currency (which represents a claim to another good/service that may be produced in the economy). Therefore, a profit is most immediately beneficial to the customer (rather than the person who earned the profit)!

Are profits moral?

Profits are a monetary phenomenon. The question of morality does not apply to them. Profits may be considered immoral when they are obtained by stealing, extortion or a slew of other immoral acts (including crony government regulations). One thing that we should be clear about is that the magnitude of one's profit does not make them immoral per se. If you steal ten dollars, or a million - it is immoral either ways. However, if a person has honestly labored to earn his profit - it should not be called immoral. 

Comments welcome!