People Before Profits
Since profit demagoguery is a deceptively appealing tool used by scoundrels everywhere, let's de-mystify the concept of profits.
Let's first get its definition out of the way. Profits represent the residual claim earned by entrepreneurs. It's what's left after all other costs - wages, rent, interest - have been paid. The entrepreneur is generally seen as the person who takes risks, innovates and makes decisions. It's important to recognize that profits are a cost of business just as are payments to labor, land and capital. If wages, rent and interest are not paid, labor, land and capital will not be offered; similarly, if profit is not paid, entrepreneurs wouldn't be seen either.
Roughly six cents of each dollar companies take in represent after-tax profits. By far, wages are the largest part of that dollar representing about 60 cents. As percentages of 2002 national income, after-tax profits represented about 5 percent and wages about 71 percent. Far more important than simple statistics about the magnitude of profits is the role played by profits, namely that of guiding resources to their highest valued uses, determined not by some tyrant but by ordinary people's wants and desires. Let's discuss just a few examples.
Remember when Coca Cola introduced the "new" Coke? Pepsi Cola president Roger Enrico called it "the Edsel of the 80's," representing one of the greatest marketing debacles of the 1980's. Who made Coca Cola Company bring back the old Coke? Was it congress, the courts, the president, or other government officials who claim to have our interests at heart? No way. It was the specter of negative profits (losses) that convinced Coca Cola to bring back the old Coke. Thus, one role of profits is to discover what consumers want and if producers make mistakes, correct them.
After the 1992 massive destruction caused by Hurricane Andrew, South Florida stores sold sheets of plywood for twice the price it had sold for prior to the storm. Escalating plywood prices brought charges of price-gouging and prosecutory threats. But look what higher prices and the potential for windfall profits did. Plywood destined to be shipped to the Midwest, West and Northeast suddenly was rerouted to South Florida. Lumber mills increased production. Truckers and other workers worked overtime so as to increase the availability of plywood and other construction materials to Floridians. Rising plywood prices meant something else. All that plywood heading south meant plywood prices rose in other locations thus discouraging "less valued" uses of plywood such as home improvement projects. After all rebuilding and repairing destroyed homes is a "higher valued" use of plywood.