Wednesday, June 09, 2021

Profits over People or Primacy of Profits?

The favorite refrain—ad nauseam, actually—of the communist-fascist left is that capitalism and its representatives, entrepreneurs, care nothing for people.* Profits are all that capitalists seek, exploiting both workers and customers.

In response to such Marxist blather, let me just say that profits are sales minus costs and the only way to earn a profit under true capitalism is to create and deliver a product (a good or service) to customers at a price that exceeds its cost. To do so, the created value must meet a need (a requirement for the improvement of the customer’s life) or want (an optional value that a market segment likes and wants, though not everyone has to like or want it) of the entrepreneur’s prospective customers.

Contrary to “profits over people,” this is the meaning of profits through customer satisfaction. Everyone in the company from CEO (the market entrepreneur) to lowly stock person must first consider the customer’s needs and wants before making any decision or taking any action. Most small businesses, as examples of this practice, face significant competition because they suffer fewer government regulations and enjoy fewer favors than their larger counterparts.

In today’s non-capitalistic mixed economy of government privileges and punishments for the favored and unfavored, the paperwork of bureaucratic management requires that entrepreneurial attention be turned away from customers to the government in order to comply with the imposed rules and regulations and for the profits the (political) entrepreneurs can acquire (not earn) through government-granted privileges.

This is one source and meaning of profits over people, because, in a government-by-lobby mixed economy, (usually big) businesses vie with one another for government favors. Customers, as a result, may be thrown an occasional crumb, maybe even a product improvement if it will keep the government happy, the taxpayer money flowing, and the competition at bay. Think in particular of the many occupational licensing monopolies (ranging from hair stylists to hospitals and insurance companies), public utilities and schools, and all broadcast, cable, and social media.** Today’s big businesses in general.

The more serious issue, however, when talking about profits is whether or not profits are a deduction from worker wages. Both Adam Smith and Karl Marx say they are. This primacy-of-wages doctrine led Marx to develop his exploitation theory asserting that capitalists—for the sake of profit—reduce workers to subsistence living. Hence, the major source of modern blather from the many historically and economically ignorant who mouth the slogan “profits over people.”

Economist George Reisman takes this issue head on and provides a strikingly clear and revolutionary identification of profits as the original and primary form of income, disagreeing with both Smith and Marx. Reisman writes (p. 19***):

Capitalists do not create profit and subtract it from wages. On the contrary, they create wages and the other costs which are subtracted from sales revenues, and thus the capitalists reduce the proportion of sales revenues that is profit.
Profits exist prior to capitalists. Reisman cites Adam Smith’s example of poor people who collect Scotch Pebbles on the shore of Scotland, then sell them to stone cutters. All receipts, states Reisman, are profits, because the collectors have no costs. Sales revenue of the pebbles is all income, not wages as Smith contends (p. 15; Smith, p. 33).

Sole proprietors of retail stores who work the stores entirely by themselves do have costs (rent, cost of goods) and the difference between sales and costs is the their profit. When the proprietors hire helpers, they pay a wage, which further reduces their profit. This is how profit and wages come into existence, both made possible by the capitalists.

Since wages are payments made in exchange for the performance of labor, “capitalists do not impoverish wage earners, but make it possible for people to be wage earners” (p. 19, Reisman’s italics). Reisman supports this statement by quoting F. A. Hayek’s Capitalism and the Historians where Hayek writes that the so-called proletariat created by capitalism “was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided” (Hayek, p. 16, my italics).

Thus, Reisman concludes that “between wage earners and capitalist there is in fact the closest possible harmony of interests,” not exploitation (p. 21). And by extension, since workers are also customers, we can conclude that there is not a clash but the “closest possible harmony of interests” between capitalists and customers.

Adam Smith observed that the rate of profit is lower in wealthier countries (Smith, p. 159). Reisman points out that this is because a greater percentage of total national income is spent on research and development, buildings and land, parts and materials—and wages—than in poorer countries. Workers, as consequence, should lobby for a greater, not lesser, degree of capitalism. The greater the degree of capitalism, the wealthier the country, which means higher wages and standard of living for everyone (pp. 20-21).

Capitalism brings into existence not just a proletariat that did not exist before, but an entire middle class that did not exist at all before the rise of capitalism.

Far from seeking “profits over people,” capitalists put labor and customers front and center. Capitalism, as Reisman argues, is run for the sake of the masses.

How does the communist-fascist left, i.e., socialism and its variants, view the people? Socialism, says Reisman, “is run for the benefit of the ruling elite at the cost of starvation wages” (p. 55). The socialist totalitarian state is a giant monopoly akin to the post office, as Lenin envisioned, which means only one employer in the economy and no competition for labor. Thus, the incentive for the elite is to keep the citizenry—the masses—alive, barely, at minimum subsistence. The only exceptions often are for those who help maintain the elite’s power, such as the secret police and its intelligence services, the military, and perhaps star athletes, dancers, and actors who bump up the dictators’ frail egos.

Capitalists, one might say, to borrow a word from the Marxists, are in the vanguard of progress!

The elite of the communist-fascist left, in contrast, are the ones who put dachas and several million dollar chateaus over the people.

* In an earlier post, I wrote that the designation communist-fascist left “works because differences between the two systems are superficial and Marx, Engels, and Lenin considered communism and socialism to be synonyms. ‘Left’ on the political spectrum means total control of life and economy.” Thus, the word “totalitarian” is redundant when speaking of the totalitarian left, though perhaps “totalitarian” should be used interchangeably with “communist-fascist.” Both communism and fascism are consequence and goal of progressive ideology.

** For the distinction between market and political entrepreneurs, see last month’s post and Burton Folsom’s The Myth of the Robber Barons.

*** All subsequent free-standing page references are to Reisman’s 114-page monograph Marxism/Socialism, A Sociopathic Philosophy Conceived in Gross Error and Ignorance, Culminating in Economic Chaos, Enslavement, Terror, and Mass Murder: A Contribution to Its Death. This work easily could and should be used as a text or supplement in high school and college economics classes. For a fuller treatment of this issue, see Professor Reisman’s magnum opus Capitalism: A Treatise on Economics, especially pp. 473-85 and throughout chap. 11. For a summary presentation of his theory of aggregate profit, see my article “Reisman’s Net Consumption, Net Investment Theory of Aggregate Profit” in the American Journal of Economics and Sociology, July 2004 (available here).

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