Tuesday, November 24, 2009

The Profit "Motive", ObamaCare & Corporatism

Reason TV asks; "Would ObamaCare kill medical innovation?"

At Reason.TV

I think the answer to their question is that, in fact, yes it will... But that, to me, is not necessarily the most interesting aspect of this discussion. I tend to think that it's really the root problems that need to be addressed in these situations, and in this case - as the above video makes quite clear - the root of this problem is the confusion so many people have with the concept of profits, and what their function actually is.

For so many out there, "Profit" has become some kind of a curse-word. This largely stems from the fact that far too few people actually understand what profits are, and what they actually do within the context of markets. I suppose that some people believe the word is synonymous with "greed", although in truth greed and profits are quite distinct from each other. To paraphrase something Thomas Sowell used to say;
"I'm one of the greediest people around, and yet my salary is no better for it!"
A person can be as greedy as he could possibly be, and yet that has no bearing on the profits (in Sowell's case: annual salary) that he might earn. This is because profits aren't a function of a person's motives or desires, but a function of a person's (or a company's) ability to serve the general consumer's wants & needs! If you do a good job of serving and providing for those needs - for example, by creating and offering a new cancer drug that is saving millions of people's lives - the market will reward you for this as people bid up the monetary price for each unit of your product in order to access it, thus raising your profits.

To quote one of my economist heroes, Walter E. Williams;
"One of the wonderful things about free markets is that the path to greater wealth comes not from looting, plundering and enslaving one's fellow man, as it has throughout most of human history, but by serving and pleasing him."
In turn, the higher profits being made encourage you as the producer to make more of your product, to expand your business, and thus to employ more people. Additionally, high prices & profits going to one person's business encourage savvy competitors to move into that part of the market and compete for some of those high profits (provided that they are allowed to by government - which unfortunately in the case of health care, as a result of protectionism & bad IP law, is often not the case). As a result, world prosperity improves; in this case because more and better cancer treatments are widely available to the mass public.

This is an incredibly good thing!!

However, if you produce something that the general consumer is not interested in... For example, if you decide to commit your resources towards producing a new line of Hitler Bobble-Head Dolls... The average consumer will not buy your product, and thus you will experience losses. If you make the wrong decisions consistently, then continued losses force your company out of business and you go bankrupt.

Profits and losses are the way individuals, dispersed across a very wide - even global - marketplace can tell whether or not they are doing things that serve the public's interests, and which things do not. To take a longer excerpt from another one of my favorite economists, Steve Horowitz (from his brilliant article in the Freeman; "Profit: Not Just A Motive" - Emphasis added):
"Suppose for a moment that we try to take the profit motive out of health care by going to a system in which government pays for and/or directly provides the services. Suppose further that we could, somehow, ensure that the political officials would not be self-interested. For many critics of the profit motive, the problem is solved because public-spirited politicians and bureaucrats have replaced profit-seeking firms.

Well, not so fast. By what method exactly will the officials know how to allocate resources? By what method will they know how much of what kind of health care people want? And more important, by what method will they know how to produce that health care without wasting resources? It’s one thing to say that every adult should, for example, have a checkup every year, but should it be provided by an MD, an LPN, or an RN? What kind of equipment should be used? How thorough should it be? And most crucially, how will political decision-makers know if they’ve answered these questions correctly?

In markets with good institutions, profit-seeking producers can get answers to these questions by observing prices and their own profits and losses in order to determine which uses of resources are more or less valuable to consumers. Rather than having one solution imposed on all producers, based on the best guesses of political officials, an industry populated by profit seekers can try out alternative solutions and learn which ones work most effectively. Competition for profit is a process of learning and discovery. For all the profit-critics’ concern—especially but not only in health care—that allocating resources by profits leads to waste, few if any understand how profits and prices signal the efficiency (or lack thereof) of resource use and allow producers to learn from those signals."
And this is the fundamental point here: Profit is not just a motive! It's one of the most important ways information can be acquired in a market economy. More to the point, the absence of this information makes economic calculation impossible for governments and other monopoly providers of service.

Misunderstanding this point can lead some people to confuse profits with "greed". Greed is a motive, profit is a data gathering method.

Now... If you are both greedy, and intelligent, you can use the data available by generating higher profits to obtain that higher salary. You can do this by being creative, savvy and recognizing the trends in consumer preference and then positioning yourself in such a way that you (as opposed to your potential competitors) are the person who is providing that thing that most people want. The thing is though, "greed" isn't really a prerequisite here! Sure, greed is one motivator - and it's a motivator for a lot of people, no doubt - but the question is always, "Greed for what, exactly??"

Greed for money is the typical evil most people point to - and is assuredly the one being vilified by the protesters in the Reason.TV video. But it's my suspicion that that particular type of greed is largely a myth. Money is a means to an end. As Ayn Rand put it:
"Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver."
While there are certainly many people do not understand this point, I do think on some level the majority of us do. I also think that the majority of people who are wealthy absolutely understand this point... Especially if they built their own financial success. Inherited wealth is a different matter perhaps, but everyone from Napoleon Hill & Andrew Carnegie to Robert Kiyosaki & Donald Trump have constantly pointed out that increasing one's wealth isn't about the "money", but about the kind of life that money affords. It's about the dreams and goals that people can achieve which would have otherwise been outside their reach... Not simply about the amount of money being amassed or "hoarded".

In Robert Kiyosaki's (actually really fun!) financial literacy game, "Cash Flow 101", the objective of the game is not to be the first one with the most amount of property or money as it is in the Parker Bros. classic, "Monopoly". The objective in Cash Flow is to be the first player to get out of the "Rat Race" and fulfill a pre-defined "Dream". These dreams vary and can be anything from touring the world on a yacht or dinner with the President, to founding an educational organization for the 3rd world or establishing a large rain forest reserve in Ecuador.

And that, I believe, is much more reflective of real life. There is no meaningful division between "rich" and "poor"; we're all people. We all have goals and aspirations, and I suspect that only a rather small percentage of us want to roll around in big piles of money all day. What most of us really want is to achieve some meaningful dream. Sometimes these dreams are small, requiring modest means, like having a family or building your neighborhood's finest treehouse. But sometimes, the dreams are bigger, sometimes - like in the case of Richard Branson - the dream is to fly into space. And yes, sometimes the dreams are darker and more disturbing such as becoming a king or a President and ruling over other people.

The point is that people can be "greedy" for any number of things - mostly good, sometimes bad, and if they're savvy, they can obtain the means to their ends through properly reading the signals provided by profits & losses.

And in fact, most people do make their living based on their company's successful navigation of price signals as the result of voluntary, and mutually beneficial exchanges in a mostly free enterprise economy. In this system, companies compete for scarce resources by offering the best deals they can on products people support - and regular consumers win big. Profits & losses are crucial to this process, and it's high time everyone actually understood that!

So... That's the good news...

* * * * *
What is a problem, however, is that we do not actually have a mostly free enterprise economy with respect to many industries... Especially our most socially important ones - such as health care, finance, heavy manufacturing, housing, food production and many others. Instead, we live in an ever-increasingly corporatist economy where profits can be obtained by government favors, circumventing consumers entirely. In a nation where so many big companies use government to either stifle their competitors through onerous legislation, get government to force consumers to buy what they sell, or simply lobby for massive subsidies, funneling money into their coffers by force - we have no free market. As a result, for a few (and I really do need to stress that this reflects only a very small number) people with the right connections, profits and losses are meaningless and provide no information what-so-ever.

No matter the motivation - be it greed for money, lust for power, or merely the intellectual laziness that leads some people to think it's ok to simply take what they want - the problem is always one of government authority being used as a means of 3rd party theft to sidestep competing free enterprise and obtain profits without actually offering something that people would actually buy under their own volition.

There are far too many examples of this... For instance, a recent Citizens' Group Report from the National Taxpayers Union has revealed that each car General Motors has sold since the government purchased majority shares has cost the American taxpayer on average $12,200. GM's business model was not producing cars people wanted at a price they were willing to pay. There's plenty of blame to go around on that score - from bad management decisions to out of control unions forcing massively higher labor costs onto the company. No matter what the cause - the automobile consumer had spoken... GM lost, their competitors won.

But that wasn't the end of the story!

Instead of going bankrupt as their corporate decisions would have warranted, GM managed to cash in some favors with their friends in government to work around the voluntary choices of individual auto consumers. So now, regardless of what you, or I, or anyone else decides for ourselves, we have no choice but to support General Motors. The signal provided by the market (losses) was that GM didn't serve their fellow man in a way that they valued. The reality is that for a company with political connections in a corporatist environment, that signal doesn't always matter - thus allowing favored firms to continue operating in ways that waste resources on products too few people want to buy.

If this doesn't outrage you at your very core - it needs to.

But make sure you direct that outrage at the right place! It's not the corporation that has the power to demand your money and collect it upon threat of jail. The Government does. Business leaders like the GM management have every incentive in the world to protect their interests - and rightly so, since their success or failure can have a massive impact on thousands of their employee's lives! So it is, and should be, no surprise that they will use every means at their disposal to protect themselves - even at the expense of the general taxpayer.

So it makes no sense at all to complain about the corruption at General Motors in all of this. After all, they are ultimately doing the best job they can to enrich their employees & shareholders. The problem, is that government has the power to take the products of your labor redistribute them to their friends in big business... The way the entire economy of a corporatist (or socialist, fascist, or communist, or any other centrally controlled) system is set up is tailor-made to mitigate individual choice and funnel resources from the bulk of the population right into the hands of the favored few.

In other words, hate the game, not the player. People desperately need to realize that giving government even more authority over the economy only gives big business even more ability to rig said game in their favor. So far from vilifying corporate profits, or greed for that matter, people need to be vilifying the power that allows their money to be handed over to people who haven't earned it. It's definitely time for institutionalized theft to end.

So, sadly, that's the bad news - and right now, it's only getting worse. With the continued interventions into the market, and massive public confusion in economics - we're not likely to see any more freedom of enterprise in the near future. However... With some education, a bit of luck and better media, I still think we can turn it around.

Ok... Maybe it'll take more than just "a bit" of luck...

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