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The Profit Motive

2009 Apr 19

Why do we need profits? Let us examine the origin and need or greed for profits.

Imagine that a land owner rents his land to a farmer and demands rent in the form of so many bushels of wheat or so many kilos of potatoes - whatever produce the farmer grows. The farmer can work the soil and make a subsistence living by producing enough crop in order to feed his family, cover his expenses and pay the rent. We say he makes ends meet - he breaks even. Whether the produce is traded by barter or is monetized by conversion to currency does not matter.

For the farmer to garner a profit, whether for discretionary spending or saving for the future, he would have to produce a surplus. When the farmer returns the land to its owner we may assume that there is no gain or loss in the value of the property, barring loss of soil fertility, top soil, land improvements or degradation. By collecting rent on the property, the owner has realized a return on his capital. This return, together with the farmer's savings is generated by the farmer's surplus labour and efficiency of production.

Now let us examine another typical transaction. A homeowner or landowner buys and then resells his property. No value has been added to the property in the duration of ownership. However, owing to favorable market conditions, the owner realizes a profit on the sale of the property in addition to the commission to be paid to two sales agents. One has to question what basis is there to support an increase in evaluation of the property and who pays for this profit? The only logical answer one can arrive at is that additional funds for the profits must be derived from the aggregate economy as a whole.

In order to make this conclusion clearer, imagine four colleagues sitting around a card table engaged in a friendly round of poker. The total amount of capital is fixed. Thus at the end of the evening, any monetary gains of one player is realized at the expense of another. If every player were to come out ahead, this would be nothing less than a miracle, or somebody was secretly injecting additional funds.

In our current global monetary system, both of these are in effect. Not only are we continuing to inflate the money supply without increasing the value of underlying assets, but also we continue to demand profits at the expense of the masses.

Total world debt today is 100 trillion dollars. Future generations will be paying off this debt for a long time to come. How do we know that today's workers are not paying off financial follies of time long past? Are we still paying for the South Sea Bubble of 1720 or the Exxon Valdez oil spill in 1989?

Paying modest profits with no underlying value-added surplus is one problem. Paying for obscene and grotesque profits only multiplies the problem way beyond proportion and carrying capacity. And this reaches the pinnacle of capitalism when it is practiced in the arenas and at the altars of capitalism in the money markets, trading of capital, stocks, derivatives, hedge funds, etc. Furthermore, financial markets have overwhelmed and hijacked the real economy to the point where so-called wealth created is nothing short of a pyramid scheme that has no underlying fundamental asset or value.

There is a huge difference between making a decent living and making a decent profit. A farmer may be able to produce enough to feed his family. However, to cover all his expenses he may have to labour a bit longer. How much longer? How long is a reasonable working day? Is it 8, 10 or 12 hours? When a farmer, labourer or worker has to work significantly longer hours in order to make ends meet, one can only arrive at the conclusion that workers are being overworked and underpaid. When you consider that, collectively, farmers have to provide food for all of society, it is no wonder that farms have turned into huge agribusinesses in order to benefit from economy of scale.

Thus the explosion of capital markets to cover compound interest and feed the greed for profits come on the backs of the working class who have to labour longer to avoid insolvency. Obscene profits breed earnings and wage disparity and social inequity. The rich become richer and the poor get poorer. This is nothing less than modern day slavery.

No person should be worth more than three others of his own kind. No person should be rewarded more than three times the average salary.

There are those such as Milton Friedman (1912-2006), who preach the efficiency of the free market system, the ability of the forces of supply and demand to find the right operating level of price and wage, and the protection of the rights of the individual.

The danger is that in a highly monetized system, where return on investment or capital is all that matters, it opens the door for greed, where one person takes more than his or her share, where the individual takes precedence over society and profits over the natural world and environment.

When you begin to monetize the trading of commodities, you open a Pandora's Box where the quest for return on capital becomes the ultimate motivating factor with total oblivion of underlying surplus and value.

In conclusion, a positive return on investment, interest on loans and profits can only be supported by a growing economy, increases in the money supply and inequitable redistribution of wealth. All of these are clearly not sustainable. In a steady-state economic world, profits must be reflected in increased value of underlying real assets, in real surpluses and by increases in productivity.

 


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