Many people today view profit as a dirty word. With the rise of so-called Democratic-Socialism, and the move by Millennials to focusing on a non-profit model, the value of profit seems diminished. Today’s blog discusses just how important having something left over is. I’ll address the subject from two directions. The first direction involves the basic mechanics of capital accumulation. In other words, I will describe, with the help of Jeffry Sachs, the value associated with economic development. The second direction is from a stewardship perspective. If I start a business and try to use my resources to the best of my ability, then I would not only run my business well, but also have something left over to give raises, buy new equipment and support the community around me. This is what free market economics is all about. Creating enough profit that all people benefit.
To begin this discussion I’d like to explore Jeffry Sachs’ incredible book, The End of Poverty. In this book he describes how a basic economy works. On page 247 of his book Sachs has drawn four rectangles, two that are horizontal to each other, and two that are perpendicular. All four create a crossroads. The left rectangle is labeled Household Income. Then there is a line drawn from that rectangle to the one horizontally on the right side of the page. The line is labeled Household Savings. The line has an arrow head that points to the rectangle on the right which is labeled Capital Per Person. Obviously when capital per person is increasing, the economy can be assumed to be thriving. When the capital per person is low, the opposite is occurring.
Sachs has another line proceeding diagonally up to another rectangle. This one is labeled Economic Growth. This results from a thriving economy. As households save money, it goes in the bank, banks loan out the money, which businesses borrow to invest. Another line is drawn from the economic growth rectangle to the Household Income rectangle, which demonstrates how people get raises when the economy thrives. As growth occurs households have more money, and they then save more. This in turns creates a larger Capital per person, that creates a positive multiplier.
I have only described three of the rectangles. The last one is on the bottom of the graphic. It is labeled Public Budget. There is also an arrow connecting the Household Income rectangle with the Public Budget rectangle. The line is labeled tax payments. When households are doing well, they are paying taxes into the public coffers. The Public Budget is used for public investment. This public investment in roads, etc. then helps to create more Capital per person. This is a great description of how Capitalism works.
However, some nations, and communities in the United States, experience a Poverty Trap. This happens when Household Income is depressed leading to zero Household Savings. This also leads to zero tax payments. The lack of savings leads to a decline in Capital Per Person, and the zero tax payments lead to a zero Public Investment Budget. Both of these lead to Negative Economic Growth.
Jerry Sachs describes a solution to the poverty trap. Official Development Assistance (ODA) via either humanitarian relief or microfinance that helps with the deficiencies in Household Income and Public Budgets. I think he is on to something here. However, this implies that there is something left over someplace else to be able to apply that surplus value to ODA. You see, without profit, there is nothing left over to help those who need assistance.
A good example of what not to do is Venezuela. They are stuck in a Poverty Trap. There is nothing left over, so all they do is print more money. There is no wealth to redistribute creating the need to print. This creates hyperinflation that creates more impoverished households. If they only had surplus value that could be used to create ODA.
My second point is really looking at business as a provider to the community. George Gilder is huge proponent of the “morality and compassion of the free market.” His 1981 book, Wealth and Poverty, convinced Ronald Reagan to pursue his economic strategy, while arguing the “most important event in the recent history of ideas is the demise of the socialist dream.” Gilder likes to use a phrase “Google Marxism.” According to Gilder Marx believed that the Industrial Revolution solved all challenges associated with production. In other words, Capitalism erased the feudal system, therefore “human beings would focus on redistributing wealth among the classes rather than creating it.” Marx thought 19th century manufacturing was the final stage of social evolution, thus initiating a new Communist era. Obviously, that was an incorrect assumption.
In a side note, Google Marxism is used by Gilder to describe what he thinks Google’s beliefs are about the current economy. “Google believes capitalism is at an end. . . with the current group of capitalists being the end of an era. Google thinks that Information Technology will overtake human ingenuity, creating wealth, which all human beings need to do is collect their Universal Basic Income.
I have digressed a bit from my original point, but I will need to develop this concept a bit more. Getting back to my point, running a business and creating profit is a good thing for the community. That is if I look at it from the perspective of a steward. Wealth, excess value, is best used for the good of all. None of us want to be given something. We want to earn it. Therefore, as I run my business in a way that creates profit, I can replace equipment that is depreciating, I can give raises to my employees who earn it, I can hire more employees, and I can provide resources for the community my business is operating in. This is how is it is supposed to work.
To close, I want to reiterate. Profit is a good thing, greed is not. Universal Basic Income is not a good thing, but a helping hand is. When we have something left over, profit, we can use it to benefit the community both economically and socially.
And that is my thought for the day!