The Profit Police

By Kevin D. Williamson

Monday, June 30, 2014

People intensely dislike profits. The belief that turning a profit is tantamount to operating some sort of con is disturbingly common. In their paper “Is Profit Evil? Associations of Profit with Social Harm,” Amit Bhattacharjee, Jason Dana, and Jonathan Baron asked research subjects to guess at the profitability of certain firms (e.g., Visa, Barnes & Noble) and certain classes of firms (e.g., oil companies, professional sports teams), and to estimate the social value of those companies and enterprises. The findings were not qualitatively surprising — the bias against profit in popular thinking is well-established — but they are quantitatively surprising: The correlation between perceived profitability and perceived social value was negative .62 for individual companies and negative .67 for classes of companies. (The always-insightful Bryan Caplan’s thoughts on the matter are here.) Identical economic tasks were judged very differently when the actor in question was identified as a nonprofit rather than a for-profit firm. It is worth noting that the anti-profit bias generally persists across party identification and political affiliation.

There are a few obvious potential explanations for why this might be. It could be popular culture, in which the world “corporation” is practically a synonym for evil, in spite of the fact that the power of individual corporations is in rapid decline. (It seems likely to me that the corporation as currently organized will not exist in 50 years. More here.) It could be envy; anything ancient enough to make the list of Seven Deadly Sins and to form the basis of a hundred thousand cautionary myths is bound to have some explanatory power. But we should consider the possibility that it is simply the result of an intellectual error.

Properly understood, all economic values are subjective. Some items have useful applications, but the relative value of those applications is itself subjective; there’s nutritional value in a pound of cauliflower, and there’s nutritional value to an ounce of Beluga caviar, and the difference in the price between the two is based on no objective criterion. Even scarcity does not explain the difference: There are more diamonds in this world than there are autographed photos of Anthony Weiner, but try giving your wife the latter for your anniversary and you’ll get a short and possibly violent lesson in the subjectivity of value. In fact, it is the subjectivity of value that makes exchange possible — if our values and preferences were perfectly aligned, we’d never trade anything for anything else, because we’d all value every item and service at precisely the same level, and there would therefore be no incentive to engage in commerce. That our preferences should be non-uniform ought not be surprising — our lives are non-uniform, too. If I operate an apple orchard, I am probably not going to buy apples from you at any price, unless perhaps they are a different sort of apple than the ones I grow. The rancher and the fisherman each assigns a different value to beef and fish than does his opposite number. Disagreement is fundamental.

The crude version of exchange — which is, unhappily, the common version — is inclined to suspect that there is an objectively correct price for a good, and that profit comes from duping somebody into paying more than the correct price for it. That error is fundamental to Marxism and other anti-capitalist philosophies, and it is implicit in such social phenomena as the anti-advertising movement, “Buy Nothing Day,” and similar political tendencies. But that bias does relatively little harm in the heads of greying Marxists, peddlers of “profit is a crime” banalities, and Occupy riff-raff. Where it is truly destructive is in the disorganized thoughts of the large majority of ordinary people with no particularly strong political commitments or economic orientation. Consider these phrases: “An honest day’s work for an honest day’s pay,” “just wages,” “fair price,” “obscene profits,” “price gouging,” “excessive executive compensation.” For any of those phrases to have any intellectual content, then there must be a price that is in some non-subjective sense the correct one. But if economic values are subjective — and they are — then “an honest day’s work for an honest day’s pay” can only mean one thing, that being the payment of an agreed-upon wage for an agreed-upon performance of labor, with “honest” referring only to the fulfillment of the agreement and saying nothing substantive about the terms of the agreement itself.

The Left often tries to explain its objection to free prices and wages in terms of asymmetrical economic power, and that analysis is not without some practical meaning: If you have been unemployed for six months, have $20,000 in debt, and are down to your last $4, then you are in a pretty poor negotiating position vis-à-vis most potential employers. But what is true at the anecdotal level is not true at the aggregate level: In spite of a lot of lamentably flat-earth commentary to the contrary, large, powerful firms such as McDonald’s and Walmart are effectively unable to raise prices, and firms such as Goldman Sachs and Wells Fargo are unable to dictate wages. While individual circumstances obviously vary, every potential buyer and seller, and every potential employer and employee, has precisely the same power in the market: veto power. McDonald’s would love to charge you $50 for a hamburger, and Goldman Sachs would love to pay a lot of people a lot less than it does. Neither firm can get away with that, because potential buyers and potential workers will walk away — that’s the upside of having lots of buyers and sellers in the marketplace.

Why this never occurs to, say, would-be health-care reformers is puzzling: In a market in which licensing rules and other regulations ensure that most states have only a handful of major policy sellers in the health-insurance market, and in which the outmoded model of employer-based health insurance means that there are a limited number of buyers, you’d think that the most popular policy would be radically increasing the number of buyers and sellers — and you’d be wrong. What we get instead is extraordinarily primitive thinking about the role of profit in the health-insurance business (an evil, and a deduction from the sum of the public good), price-fixing schemes, and the like. All of which is based upon the idea — the superstition — that there exists a right price or a right profit for this or any other good.

In the entire history of economic thought, nobody has ever been able to demonstrate that there is an objectively “right” price for anything separate and apart from the subjective valuation that happens in the marketplace. Progressives like speeches about diversity, but they loathe the actual diversity of views and desires, especially the idea that prices should be sorted out according to the billions of subjective valuations in the marketplace through a process that nobody is in charge of. (In Dante’s Hell, the engraving reads: “Abandon Hope All Ye Who Enter Here.” In Ezra Klein’s Hell, the engraving reads: “Nobody In Charge.”) Implicit in this belief is that most people — consumers and workers alike — are too stupid or too weak for us to allow them to act on their own subjective valuations, that we are compelled by . . . justice, efficiency, expert opinion, whatever . . . to substitute our own judgment for theirs. And then all you need is two government studies and a rent-a-philosopher writing in the New York Times to proclaim that there is some real-world basis for your own preferences as compared to those of the rabble on whose behalf you have just deputized yourself to organize the world. The language of “social justice” is largely a sort of moral minstrel show designed to distract from the real argument, which is: “You’re too stupid to be entrusted with your own life.” Something close to the entirety of the progressive agenda (apart from sexual license), from wage rules to health care to “investments” in modish fantasy projects to industrial policy, assumes that that metaphysically correct price is out there, simply waiting for the right people with the right ideas in service of the right policy to discover them, or at least to approximate them.

We should not continue to let them get away with that, whether we charitably consider it sloppy thinking or less charitably judge it to be outright intellectual fraud. You can have the Congressional Budget Office model your magical, metaphysical prices however you like, but what’s happening is nothing more than the sneaky insertion of a set of unsubstantiated moral principles disguised as math into an issue without any more inherent moral aspect to it than the fact that some lumps of carbon are cheap by the ton while others are tens of millions of dollars an ounce simply because they have a prettier crystal lattice.

If the Left is going to argue that profit is a scandal, then we should at least make them do the math and show their work.