Profit, like sausages… are esteemed most by those who know least about what goes into them.
— Alvin Toffler
Profit is one of many economic terms whose meaning is cloaked in mystery. It is referred to either as one of the greatest gifts to mankind or a terrible scourge that embodies pure evil, often in the same discussion. It is hidden at tax time and exaggerated at board meetings.
Profit, although also vaguely defined economically, is an accounting term. Bean counters tell us it is the difference in total cost between that which is produced or bought and its selling price. The difference between what the seller paid when he bought or produced a good and what the buyer paid to the seller for the same item.
While this definition is practical and helpful, it doesn’t really reach the core of the concept. From what source did profit originate? Knowing this would certainly give us a better understanding of how our existing capital economy works and maybe how the economy might work under conditions of greater freedom.
The argument as to whether one can profit from barter has been waged since the initial days of barter. It would seem that absent force or great need, both parties probably engage in barter because they believe they will be better off with what they receive from the exchange or they have little concern for what they are exchanging and don’t mind actually being a bit worse off. So, without claiming to have settled the dispute, let’s take up where barter leaves off.
If we take some simple examples, we may be able to unearth the source of profit. Say one of our early ancestors procured a limb from the forest and carved it into a walking stick. He has gathered the wood at no cost and carved it with his own labor, using a sharp stone he also found. He sells it to a local walker for a small amount. Has he profited?
In this transaction, the only “cost” is the woodworker’s labor. All materials and tools were “free” and he has been compensated enough to relinquish the stick. If there is profit, he must be able to “profit” on his own labor; the labor cost must be less than the compensation received. If we hold that the worker owns his own labor, that he is not enslaved, then his labor is his own and has no cost to himself other than time. For the worker to profit on labor that is his own, he would need to be two people rather than one. There is no profit.
If we assume a further “division of labor” and in time he must “pay” to acquire his wood from a worker who collects wood and provides it to the woodworker, then procuring the material or resource now has a “cost”. Is it possible for the woodworker to profit by “marking up” the cost of the stick or resource, selling it for more than he paid the wood collector?
As long as there is equal access to the purchase of the resource, wouldn’t free competition in a pure market allow another carver to then “mark up” the wood material a bit less, therefore underselling the original worker until the wood again reached its lowest price? After all, the carvers already feel they are receiving their due for the labor involved, any amount above the labor compensation would be gravy.
Other than the effort to purchase the stick and transport it to his workplace, what other compensation would carvers as a whole demand to be included in the final cost? Unless competition between carvers can be lessened or eliminated or access to the wood suppliers restricted, the carver must pass on the wood at cost or very close to cost to remain competitive. He will look to the value he receives from his labor instead, as the means of his living, and allow the wood collector to look to collection for his. This does not preclude a carver from also being a collector, simply permits the choice to be made.
Tools and implements fill a vital role in an economy. Can the carver pass on a greater amount than the actual cost of his tools? The same above principles apply; free competition will force down the “mark up” of tool costs to the minimum that is necessary to maintain most efficient production, in fact, the “means of production”. The producer of our walking stick sees no sustained profit in his enterprise from procuring the tools and machines necessary to provide his product, simply because what is available to him in a true free market, which unlike our present system would be free of force, should be available to all.
The initial availability of a tool that speeds up production may allow a short lived spike of profit. The first worker to attain the new tool will be able to sell his product at the old price until the tool is acquired by his competitors. Once a number of producers attain the labor saving tool, then competition will again drive the price down and profit will diminish.
This ever present competitive force that seems to drive prices and cost down to their very minimum might be looked upon as a detrimental force to labor, but in a true free market, that would not be the case. Production that increases over the same output of labor may appear to only lower price but is actually identical to raising the value of labor. In a free economy, they would be virtually one and the same. Labor value increases as product value declines simply because those that produce also consume.
But through this example of production tools, it is very easy to see how profit can be created by prohibiting the distribution of the means necessary to produce, as it is within our present controlled economic system. It is not “ownership” of the means that creates monopoly as Marx stated, but the use of force to slow or prohibit the free appropriation of the means throughout the economy. Any “barrier” to ownership will limit competitive forces and create profits based on ownership, rather than value created through utility.
Land rent is a fee for the use of land. People have always valued premium land sites and if more than one party desires the same site and views it as valuable to them, then they must agree on a method of distributing the site. Rent is the economic alternative to rocks, sticks or a big gun.
Who the rent goes to has been a continuous discussion. Georgists favor returning the rent as a social dividend, Marxists favor the controlled ‘society’, and some free market activists favor the “first come, first get the rent” scenario, while others dissolve the concept of rent entirely. Our existing status quo gives the rent to the same folks who create the money, the banksters and their buddies.
When land has rent, the woodworker producer must now “pay” to occupy the land beneath his workspace. What determines the “cost” of this rent?
In a free economy, the amount of rent levied would simply be the result of the “supply and demand” of rent receivers and those who utilize the land. As long as access to land is freely available, the rent will be based on the amount above and beyond the return to those who utilize the land.
In other words, the productive sector would freely receive its proportionate share based on land which is freely available in contrast to premium land. Why would one opt for “premium” land if that choice would lower the return one received for the same amount and quality of work performed on freely accessible land?
Land, while valuable in countless other ways, has no economic value until labor is applied. Due to this condition, the non productive rent receiver, whether an individual or group, will accept the very minimum that the productive sector will pay for the use of freely available land.
The rent receiver who is also a producer on his land has the advantage of not owing rent to anyone but himself. This also helps drive down the overall cost of land rent, since he is able to “discount” the cost of his rent when he prices his product, therefore restricting land rent profits and speculation through competitive product pricing. Either way, it is labor that enables land to produce and in a system of true free exchange this will be reflected in the “affordability” of land rents. Rents will obviously be “economical” by nature, since unproductive land, while having maintenance costs that at present are subsidized and socialized, would generate no rent.
Would any of the rent received be considered “profit”? If rents are competitive, then it would stand to reason that land that had value would have a “competitive” value. Free exchange would force the ownership price of the land to be driven down to the lowest amount that one would pay to entail the responsibilities and returns of ownership. This relationship of “value” to rent would prohibit speculative land profits.
Since that “return” is fundamentally based on the utilized value of the land, what is left over for the ownership sector would be the least amount owners would accept to perform the tasks of ownership. In that sense, free exchange would allow the “value” of ownership to be determined on the value that others placed on ownership, rather than on coercive laws and regulation that imposed false monopoly value. In true competition, the more value all placed on ownership, the more actors would move toward ownership driving that value back down. Equilibrium is attained.
Rack rents would be impossible without coercive land monopoly, even though land itself exists in limited form. The productive sector would simply abandon the rack rents and land would lay unproductive, forcing owners to lower rents to obtain tenants. In this sense, within the freedom of true exchange, the barriers that currently exist between those who own and those who rent would all but disappear. Ownership might be considered a convenience to those who rent rather than a privilege to those who own.
When our original producer, the woodworker, has sold a number of his walking sticks, he may have accumulated a surplus beyond what he requires for a living or what we commonly refer to as “capital”. He might use this to “hire” a worker or two to do the actual production work while he carries on the “business” and organization of his enterprise. Is it possible, as Marx observed in the monopoly capital system, for him to “profit” in this manner on the labor of his employees?
If all avenues of the economy are free and open, this “profit” on labor would be demanded by other employer/entrepreneurs and soon the “profit” would be driven down to the “wage” necessary for our woodworker/employer to complete his new tasks. This employer wage would also be dictated by supply and demand and the amount of work that an employer took to task. Adam Smith recognized and described this organizational function in The Wealth of Nations. It is only our present lack of free exchange that creates the false impression that the role of employer differs markedly from the employed.
Since our woodworker now has possession of capital, which is his basis for funding his future operations, is it possible for him to draw “interest” on this capital if he finds he has a surplus? Does it have value to others and if it does, is its value over time greater than its “principle”, providing a “return”?
It certainly would have a value to those who lack their own capital and wish to perform a similar economic function. The “rate of interest” is somewhat limited as any “borrower” of capital must also compete with those who are “self-capitalized”, reinvest their own production capital and have no interest payment. Self-sufficient producers have a greater control and flexibility with overall product cost due to lack of interest liabilities, which would be in direct competition with a borrower of capital and the rate of interest. The woodworker creditor would need to loan his capital at such a rate that the producer borrower could still compete with non leveraged producers. High returns would be extremely unlikely in all but the riskiest ventures; those ventures as likely to produce no return as a high return.
Much has been made in our present economy of the great “expansionary” power of Capital, but if we are to recognize the all encompassing role of competition in a pure free market, then rather than “expansion” of capital, we would most likely witness dispersion and dilution. If capital cannot be produced without labor, then it only seems natural that labor would have much more say in its direction absent the monopolies and force that currently hold court.
Our simple examples have brought out a few points: profit in a pure free market seems to be sporadic and short lived. Premium land may generate rent, but rents are based solely in economic realities and competitive factors. Land is ultimately reliant upon labor and production. Capital may draw interest dependent on its ability to aid the production process. Interest would be solely economically based and must compete in the market place with self financed production, keeping rates at low levels and putting the debtor at advantage.
Of particular note is profit drawn from employees, Marx’s pebble in the shoe. Not only would free access to economical capital allow the competition among employers to forbid wage profiteering, but the free access to productive capabilities and the marketplace, itself, would allow any worker receiving less than real value for his role in production to seek his solution through his own production or that of another producer. It is force that creates barriers between value produced and value received; not natural economic conditions.
None of this stuff is groundbreaking. Most all economists admit that profit diminishes the closer we approach free competition. Real profit, not to be confused with compensation for true economic labor, rent and interest, is the difference between all costs and selling price. If we take that real profit apart and analyze it and find out that no real value exists there, then real profit is simply the coercive exchange of actual value for nothing.
That is a condition that free people simply wouldn’t put up with.