...and the Profit Motive

So, following on from trying to explain to fellow liberals why they should not misunderstand, and fear, the idea of "markets in everything" there's another demon that often accompanies phrases containing "markets" that needs slaying: "profit".  For very many social liberals in the modern Liberal Democrats "profit" and its ability to incentivise choices and actions, a.k.a the "profit motive", is as dirty a phrase as "free market".  

It is another off those words/phrases that conjure up in many something to do with exploitation, greed, and for those of us of a certain age, again, the seeming obsession with material wealth and in particular making money that characterised the 1980s at least in popular culture.  Think profit and people think of Gordon Gecko in "Wall Street" or Harry Enfield's ugly caricature "Loadsamoney".

It came up the other day in a thread on Andrew Lansley's proposals for the NHS on LibDem Voice.  I suggested that it was economic naivety to think that any organisation could know whether it was on the right track, being successful, sustainable and efficient and putting its resources where they are most wanted, without "profit".  I was almost instantly bombarded with suggestions that, for example, we don't need "profiteering" but just sound democratically decided aims and just incentives.  As if, somehow, "profit" is neither democratic nor a just incentive.

As a strong supporter of social enterprise, mutualism, charitable aid rather than state welfare and so on, I hate to hear many such organisations described as "non-profit" or part of the "not-for-profit sector" again, with the implication that profit is all rather seedy, greedy or just plain bad.  It is not.  At its simplest, "profit" is the essential market signal that tells people and organisations either that what they are already doing is sustainable or that what they propose to do is likely to be worth the effort and resources put into it.

In fact, just as I suggested that there are "markets in everything" so there has to be "profit in everything".  Of course, profit need not be valued in monetary terms, but the singular advantage monetary profit has is that it is much more objective than any "softer" profit, especially for any transactions involving more than just one individual and another swapping something they each value less for something they value more.  But the essential point is that in a truly free competitive market both parties to a transaction must feel they are benefiting - feel that what they are getting is worth more to them than what they are giving up to get it.

Again in a truly free and competitive marketplace, profit should tend toward some minimal return needed to keep production going.  If competitors or potential competitors see another making high profits, it signals that, for example, there may be an undersupply of whatever good is being produced and that they could share in some of that profit, particularly if they could just be marginally more efficient, or shave costs just a little.  Or it might indicate that there's some new technology being used that has enabled a competitor to produce at lower cost whilst still selling at a price dictated by thee less technologically advanced producers' costs.

So why do we seem to have such a problem with "profit" - such a problem that even the Tories ruled out having "for profit" companies taking on their free schools?  After all, many of the adjectives often accompanying "profit" are essentially used negatively, pejoratively - "excessive profit", "monopoly profit" and similar.

Well, such phrases indicate above all an unfree market.  And, whilst there may be many factors that make a market unfree, for the most part they can be traced back to some kind of state interference.  

Most obviously, of course, state monopolisation or near complete dominance of a market, such as with, say, education, healthcare or roads in the UK, where they can ignore the price mechanism and profit-related signals about financial sustainability, by passing laws to force us all to share the costs through tax.  Then there's subsidy to one producer rather than another.  Regulations that one sort of producer is able to absorb more than others.  Regulations explicitly designed to restrict competition.  

Even some things that we often regard as "natural monopolies" can be greatly exaggerated by state interference.  Planning restrictions on land, for example, greatly benefit the owners of those locations that already have permission for use by one type of producer, effectively preventing other competitors entering a market and increasing the "scarcity rent".  State enforcement of intellectual property, particularly in the form of patents on new technology helps those who have the technology maintain its exclusivity and therefore charge "scarcity rent" over competitors.  Even welfare policies that subsidise unemployment, whilst well meaning, will depress the costs of labour as there will always be a pool of labour able to undercut those already in employment.

And there may be even more subtle interferences that are hardly noticed.  Since the real costs of roads, for example, are spread amongst all users, whether they use this "essential public infrastructure" every day or once a month are effectively a subsidy to those organisations that can afford to make the most use of this essentially "free" resource.  You can think of big retailers whose supply chains are large enough to be constantly in motion as having rent free state provided warehouse space - on wheels, permanently trundling around the roads.

Furthermore, as I said in the piece about freed markets, the state cannot help but operate this way, democratic or otherwise.  In fact, democratic states are the worst of the lot in some respects, because the very model of presenting competing platforms to get elected, and that the "winner takes all" and can implement their policies favouring one interest group over another and claiming the legitimacy of a "democratic mandate" stifles criticism.  The cronyism of a tyrannical state can at least be criticised (by outsiders if not by the oppressed citizens) as overt favouritism and corruption.

There may be good arguments that justify some kind of collective action to assist people genuinely unable to afford something that we feel is necessary for a decent quality of life (I don't think there are, but that mutual self help and non-state charitable aid can perform the same function perfectly adequately) but that does not, for example, justify state monopolisation of a particular good.  

Take Lloyd-George's welfare reforms a century ago.  At the time of the 1909 budget he was citing examples of how so many people were already covered, through mutuals and friendly societies and the like, for unemployment through sickness and wanted to find a way of using that competitive market for those the state might need to assist.  In the end, we have a state monopoly of welfare that has crowded out most of the market competition and which we can no longer really say for sure whether it is efficient, sustainable or competitive or not.

We should not criticise or fear profit in itself, but we should eradicate the state interferences in free markets that distort markets and give advantage to some producers over others.  For, as Kevin Carson says in his preface to his book "Studies in Mutualist Political-Economy":

...coercive state policies are not necessary to remedy the evils of present-day capitalism. All these evils--exploitation of labor, monopoly and concentration, the energy crisis, pollution, waste--result from government intervention in the market on behalf of capitalists. The solution is not more government intervention, but to eliminate the existing government intervention from which the problems derive. A genuine free market society, in which all transactions are voluntary and all costs are internalized in price, would be a decentralized society of human-scale production, in which all of labor's product went to labor, instead of to capitalists, landlords and government bureaucrats. [Carson, Kevin A., "Studies in Mutualist Political Economy", Preface]