There’s No Conflict Between Profit and “Social Responsibility”

Mises Institute

The slogan People over Profits once again is being heard in Washington and elsewhere in the country. This time, however, the sloganeering doesn’t come from Jane Fonda or Bernie Sanders but rather from business sources themselves. « These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans». «This new statement better reflects the way corporations can and should operate today,» added Alex Gorsky, Chairman of the Board and Chief Executive Officer of Johnson & Johnson and Chair of the Business Roundtable Corporate Governance Committee.

Profits themselves in this view are an extraction of wealth from the community, something that «responsible» businesses try to mitigate by ensuring that «stakeholders» are not neglected. Thus, by seeking to do something other than just be profitable, businesses become «responsible corporate citizens». For all the self-congratulations members of the Business Roundtable are heaping upon themselves for this supposed newly discovered role for private enterprise, a few things are in order. First, business executives in 2021 are more than a century late in the «We want to be respectable» sweepstakes.

The progressives more than a century ago sought to make «big business» respectable and shake the «robber baron» image that had been a staple in the press since the late 1800s. The simple acts of producing goods and selling them, according to progressives, can be interpreted as a forced extraction and, thus, coercive and violent. Conversely, progressives refer to state action as democracy in action, implying that such action toward regulation of business firms is done to protect people from private sector predations. If one concludes that businesses in a market system operate in a setting in which they cannot coerce buyers and suppliers, but must depend upon voluntary contracts and trust, then the popular descriptions of their activity using terms related to violence simply don’t fit.

Nonetheless, our leading institutions, from education to media to religion to government, portray markets as coercive and exploitative, earning profits at the expense of the well-being of others. While Karl Marx claimed that profits were unjust expropriations of wealth from labor, most of the modern criticism of private enterprise is less systematic and, frankly, less sophisticated than any analysis that Marx might have undertaken. Some critics claim that profits create higher prices, which the Jimmy Carter administration believed when it laid out its wage-price-profit guidelines in the late 1970s. In fact, any firm that had profit margins of greater than 6 percent could be declared ineligible to receive federal government contracts.

Firms that wished to do business with the government first had to demonstrate their «anti-inflation» credentials by raising prices and wages by six percent or less annually and by earning six percent or less in profits. In other words, according to Kahn, «high» business profits significantly contributed to inflation. The first thing to remember is that profits do not come about because businesses charge exorbitantly high prices but rather because entrepreneurs have successfully found ways to lower potential costs.

Peter Klein in The Capitalist and the Entrepreneur points out that uncertainty is necessary for profitability in a market system

The anticapitalist critics would pounce here, claiming that the greedy capitalist had «underpaid» factor owners to gain profits. There is a major weakness in that argument, however, and while the critics never will move past their own anticapitalist assumptions , they assume that the entrepreneurs know that labor is «underpriced» ex ante. Yet, as Klein and Rothbard point out, because entrepreneurs operate within the arena of uncertainty, they only can surmise that at least some factors are underpriced, since they only can know for sure ex post. Furthermore, since entrepreneurs also experience losses, factors owners are overpaid in those situations, and that includes labor.

Note again that the critics of capitalism hold that it is naturally exploitative and that unless government steps in to force employers to pay «just» wages, employers will force employees to work for substandard wages. In the capitalist economy in which we live, the labor market and wages are matters of profound inequality, exploitation, and injustice. Markets by their very nature involve voluntary action by consenting parties, which by definition is nonexploitative. Profits in a free market system exist, because entrepreneurs have made correct predictions about future consumer choices and acted on their beliefs.

This is not profits over people, but rather profits benefitting people.

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Source: William L. Anderson | Mises Institute 

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