Maximizing Profits Is Good for the Economy . . . and for Reducing Poverty

In the course of criticizing Mitt Romney the other day, President Obama said that, with respect to private equity firms like Bain Capital, we must "understand that their priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers."  His comment reveals his own misconception, and a common one among Leftists, that profits can be "bad" for "communities or businesses or workers."  How are profits "bad"?  The unstated premise must be that to earn a profit one has to make someone else poorer, if not steal from them.  As Dwight Schrute might say, "False."

Putting aside situations where profits do result from stealing (or something close to it), profits reflect wealth creation, not only on the part of the corporation that "profits," but also by those with whom it deals--its customers, employees and suppliers.  An article in today's Wall Street Journal seeks to correct the President's misconception regarding the evil of profits, and comes close to making the point I make here.

Professor Paul Rubin, a professor of economics at Emory University, writes:

Consider what contributes to profit maximization. In simple terms, profit maximization means producing the products earning the highest returns, and producing these products at the lowest possible cost. Both are socially useful behaviors that benefit consumers.

His thesis is therefore that profits are good because they benefit not only the "profiter" but also those with whom it trades--consumers.  He concludes:

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against "profit maximization" is an argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an economy.   

"Consumer welfare" is just another way to say "wealth."  So Professor Rubin is saying, correctly, that maximizing wealth is the justification for an economy, and it should be the goal of political economy.  But I wish he and others defending free enterprise would make explicit that profits are good not only because they reflect efficient satisfaction of consumer demand, but also because they are the mirror-image of the "profit" or wealth-improvement that everyone else who dealt with the company must have realized in order for the profit to occur. Profits are good because they expand wealth, make the pie bigger, and destroy poverty.  They are the source of the torrent of prosperity that gushes when markets are free to operate.

By calling into question the good of profits, President Obama declares war on prosperity, as he has for the last four years. Is he winning that war? Look around you. And then decide whether you would rather live in prosperous country that blesses the profit-maker, or a destitute country that snipes at him.