Mises Daily Articles
The Ethics of Entrepreneurship and Profit
In the most fundamental sense we are all, with each of our actions, always and invariably profit-seeking entrepreneurs.
Whenever we act, we employ some physical means (things valued as goods) — at a minimum our body and its standing room, but in most cases also various other, “external” things — so as to divert the “natural” course of events (the course of events we expect to happen if we were to act differently) in order to reach some more highly valued anticipated future state of affairs instead. With every action we aim at substituting a more favorable future state of affairs for a less favorable one that would result if we were to act differently. In this sense, with every action we seek to increase our satisfaction and attain a psychic profit. “To make profits is invariably the aim sought by any action,” as Ludwig von Mises has stated it. (Mises, 1966, p. 289)
But every action is threatened also with the possibility of loss. For every action refers to the future and the future is uncertain or at best only partially known. Every actor, in deciding on a course of action, compares the value of two anticipated states of affairs: the state he wants to effect through his action but that has not yet been realized, and another state that would result if he were to act differently but cannot come into existence, because he acts the way he does. This makes every action a risky enterprise. An actor can always fail and suffer a loss. He may not be able to effect the anticipated future state of affairs — that is, the actor’s technical knowledge, his “know how” may be deficient or it may be temporarily “superseded,” due to some unforeseen external contingencies. Or else, even if he has successfully produced the desired state of physical affairs, he may still consider his action a failure and suffer a loss, if this state of affairs provides him with less satisfaction than what he could have attained had he chosen otherwise (some earlier-on rejected alternative course of action) — that is, the actor’s speculative knowledge — his knowledge of the temporal change and fluctuation of values and valuations — may be deficient.
Since all of our actions display entrepreneurship and are aimed at being successful and yielding the actor a profit, there can be nothing wrong with entrepreneurship and profit. Wrong, in any meaningful sense of the term, are only failure and loss, and accordingly, in all of our actions, we always try to avoid them.
The question of justice, i.e., whether or not a specific action and the profit or loss resulting from it is ethically right or wrong, arises only in connection with conflicts.
Since every action requires the employment of specific physical means — a body, standing room, external objects — a conflict between different actors must arise, whenever two actors try to use the same physical means for the attainment of different purposes. The source of conflict is always and invariably the same: the scarcity of physical means. Two actors cannot at the same time use the same physical means — the same bodies, spaces and objects — for alternative purposes. If they try to do so, they must clash. Therefore, in order to avoid conflict or resolve it if it occurs, an actionable principle and criterion of justice is required, i.e., a principle regulating the just or “proper” vs. the unjust or “improper” use and control (ownership) of scarce physical means.
Logically, what is required to avoid all conflict is clear: It is only necessary that every good be always and at all times owned privately, i.e., controlled exclusively by some specified individual (or individual partnership or association), and that it be always recognizable which good is owned and by whom, and which is not. The plans and purposes of various profit-seeking actor-entrepreneurs may then be as different as can be, and yet no conflict will arise so long as their respective actions involve only and exclusively the use of their own, private property.
Yet how can this state of affairs: the complete and unambiguously clear privatization of all goods, be practically accomplished? How can physical things become private property in the first place; and how can conflict be avoided from the beginning of mankind on?
A single — praxeological — solution to this problem exists and has been essentially known to mankind since its beginnings — even if it has only been slowly and gradually elaborated and logically re-constructed. To avoid conflict from the start, it is necessary that private property be founded through acts of original appropriation. Property must be established through acts (instead of mere words or declarations), because only through actions, taking place in time and space, can an objective — inter-subjectively ascertainable — link be established between a particular person and a particular thing. And only the first appropriator of a previously unappropriated thing can acquire this thing as his property without conflict. For, by definition, as the first appropriator he cannot have run into conflict with anyone in appropriating the good in question, as everyone else appeared on the scene only later.
This importantly implies that while every person is the exclusive owner of its own physical body as his primary means of action, no person can ever be the owner of any other person’s body. For we can use another person’s body only indirectly, i.e., in using our directly appropriated and controlled own body first. Thus, direct appropriation temporally and logically precedes indirect appropriation; and accordingly, any non-consensual use of another person’s body is an unjust misappropriation of something already directly appropriated by someone else.
All just property, then, goes back directly or indirectly, through a chain of mutually beneficial — and thus likewise conflict-free — property-title transfers, to original appropriators and acts of original appropriation. Mutatis mutandis, all claims to and uses made of things by a person who had neither appropriated or produced these things, nor acquired them through a conflict-free exchange from some previous owner, are unjust.
And by implication: All profits gained or losses suffered by an actor-entrepreneur with justly acquired means are just profits (or losses); and all profits and losses accruing to him through the use of unjustly acquired means are unjust.
This analysis applies in full also to the case of the entrepreneur in the term’s narrower definition, as a capitalist-entrepreneur.
The capitalist entrepreneur acts with a specific goal in mind: to attain a monetary profit. He saves or borrows saved money, he hires labor, and he buys or rents raw materials, capital goods and land. He then proceeds to produce his product or service, whatever it may be, and he hopes to sell this product for a monetary profit. For the capitalist, “profit appears as a surplus of money received over money expended and loss as a surplus of money expended over money received. Profit and loss can be expressed in definite amounts of money.” (Mises 1966, p. 289)
As all action, a capitalist enterprise is risky. The cost of production — the money expended — does not determine the revenue received. In fact, if the cost of production determined price and revenue, no capitalist would ever fail. Rather, it is anticipated prices and revenues that determine what production costs the capitalist can possibly afford.
Yet the capitalist does not know what future prices will be paid or what quantity of his product will be bought at such prices. This depends exclusively on the buyers of his product, and the capitalist has no control over them. The capitalist must speculate what the future demand will be. If he is correct and the expected future prices do correspond to the later fixed market prices, he will earn a profit. On the other hand, while no capitalist aims at making losses — because losses imply that he must ultimately give up his function as a capitalist and become either a hired employee of another capitalist or a self-sufficient producer-consumer — every capitalist can err with his speculation and the actually realized prices fall below his expectations and his accordingly assumed production cost, in which case he does not earn a profit but incurs a loss.
While it is possible to determine exactly how much money a capitalist has gained or lost in the course of time, his money profit or loss do not imply much if anything about the capitalist’s state of happiness, i.e., about his psychic profit or loss. For the capitalist, money is rarely if ever the ultimate goal (safe, may be, for Scrooge McDuck, and only under a gold standard). In practically all cases, money is a means to further action, motivated by still more distant and ultimate goals. The capitalist may want to use it to continue or expand his role as a profit-seeking capitalist. He may use it as cash to be held for not yet determined future employments. He may want to spend it on consumer goods and personal consumption. Or he may wish to use it for philanthropic or charitable causes, etc.
What can be unambiguously stated about a capitalist’s profit or loss is this: His profit or loss are the quantitative expression of the size of his contribution to the well-being of his fellow men, i.e., the buyers and consumers of his product, who have surrendered their money in exchange for his (by the buyers) more highly valued product. The capitalist’s profit indicates that he has successfully transformed socially less highly valued and appraised means of action into socially more highly valued and appraised ones and thus increased and enhanced social welfare. Mutatis mutandis, the capitalist’s loss indicates that he has used some more valuable inputs for the production of a less valuable output and so wasted scarce physical means and impoverished society.
Money profits are not just good for the capitalist, then, they are also good for his fellow men. The higher a capitalist’s profit, the greater has been his contribution to social welfare. Likewise, money losses are bad not only for the capitalist, but they are bad also for his fellow men, whose welfare has been impaired by his error.
The question of justice: of the ethically “right” or “wrong” of the actions of a capitalist-entrepreneur, arises, as in the case of all actions, again only in connection with conflicts, i.e., with rivalrous ownership claims and disputes regarding specific physical means of action. And the answer for the capitalist here is the same as for everyone, in any one of his actions.
The capitalist’s actions and profits are just, if he has originally appropriated or produced his production factors or has acquired them — either bought or rented them — in a mutually beneficial exchange from a previous owner, if all his employees are hired freely at mutually agreeable terms, and if he does not physically damage the property of others in the production process. Otherwise, if some or all of the capitalist’s production factors are neither appropriated or produced by him, nor bought or rented by him from a previous owner (but derived instead from the expropriation of another person’s previous property), if he employs non-consensual, “forced” labor in his production, or if he causes physical damage to others’ property during production, his actions and resulting profits are unjust.
In that case, the unjustly harmed person, the slave, or any person in possession of proof of his own un-relinquished older title to some or all of the capitalist’s means of production, has a just claim against him and can insist on restitution — exactly as the matter would be judged and handled outside the business world, in all civil affairs.
Complications in this fundamentally clear ethical landscape arise only from the presence of a State.
The state is conventionally defined as an agency that exercises a territorial monopoly of ultimate decision-making in all cases of conflict, including conflicts involving itself and its agents. That is, the state can legislate, can unilaterally make and break law; and by implication, the state has the exclusive privilege to tax, i.e., to determine unilaterally the price its subjects must pay it to perform the task of ultimate decision-making.
Logically, the institution of a state has a twofold implication. First, with a state in existence all private property becomes essentially fiat property, i.e., property granted by the state and, by the same token, also property to be taken away by it via legislation or taxation. Ultimately, all private property becomes state property. Second, none of the state’s “own” land and property — misleadingly called public property — and none of its money income is derived from original appropriation, production, or voluntary exchange. Rather, all of the state’s property and income is the result of prior expropriations of owners of private property.
The state, then, contrary to its own self-serving pronouncements, is not the originator or guarantor of private property. Rather, it is the conqueror of private property. Nor is the state the originator or guarantor of justice. To the contrary, it is the destroyer of justice and the embodiment of injustice.
How is a capitalist-entrepreneur (or anyone, for that matter) to act justly in a fundamentally unjust, statist world, i.e., confronted and encircled by an ethically indefensible institution — the state — whose agents live off and sustain themselves not from production and exchange but from expropriations: from the taking, redistributing and regulating of the capitalist’s and others’ private property?
Since private property is just, every action in defense of one’s private property is just as well — provided only that in his defense the defender does not infringe on the private property rights of others. The capitalist is ethically entitled to use all means at his disposal to defend himself against any attack on and expropriation of his property by the state, exactly as he is entitled to do against any common criminal. On the other hand, and again exactly as in the case of any common criminal, the capitalist’s defensive actions are unjust, if they involve an attack on the property of any third party, i.e., as soon as the capitalist uses his means to play a participatory role in the state’s expropriations.
More specifically: For the capitalist (or anyone) in the defense and for the sake of his property, it may not be prudent or even dangerous to do so, but it is certainly just for him to avoid or evade any and all restrictions imposed on his property by the state as best he can. Thus, it is just for the capitalist to deceive and lie to state agents about his properties and income. It is just for him, to evade taxfpayments on his property and income, and to ignore or circumvent all legislative or regulatory restrictions imposed on the uses he may make of his factors of production (land, labor, and capital). Correspondingly, a capitalist also acts justly, if he bribes or otherwise lobbies state agents to help him ignore, remove or evade the taxes and regulations imposed on him. He acts justly and above that becomes a promoter of justice, if he uses his means to lobby or bribe state agents to reduce taxes and property regulations generally, not only for him. And he acts justly and becomes indeed a champion of justice, if he actively lobbies to outlaw, as unjust, any and all expropriation, and hence all property and income taxes and all legislative restrictions on the use of property (beyond the requirement of not causing physical damage to others’ property during production).
As well, it is just for the capitalist to buy state property at the lowest possible price — provided only that the property in question cannot be traced back to the expropriation of some specific third party that still retains title to it. And likewise is it just for the capitalist to sell his products to the state at the highest possible price — provided only that this product cannot be linked directly and causally to a future act of state aggression against some particular third party (as may be the case with certain weapons sales).
On the other hand, apart from any violation of the just mentioned two provisos, a capitalist acts unjustly and becomes a promoter of injustice, if and to the extent he employs his means for the purpose of maintaining or further increasing any current level of confiscation or legislative expropriation of others’ property or income by the state.
Thus, for instance, the purchase of state-government bonds and the monetary profit derived from it is unjust, because such purchase represents a lobbying effort on behalf of the continuation of the state and of ongoing injustice, as interest payments and final repayment of the bond require future taxes. Likewise and more importantly, any means expended by a capitalist on lobbying efforts to maintain or increase the current level of taxes — and hence of state-income and spending — or of regulatory property restrictions, are unjust, and any profits derived from such efforts are corrupted.
Confronted with an unjust institution, the temptation for a capitalist to act unjustly as well is systematically increased. If he becomes an accomplice in the state’s business of taxing, redistributing and legislating, new profit opportunities open up. Corruption becomes attractive, because it can offer great financial rewards.
By expending money and other means on political parties, politicians, or other state agents, a capitalist may lobby the state to subsidize his losing enterprise, or to rescue it from insolvency or bankruptcy — and so enrich or save himself at the expense of others. Through lobbying activities and expenses, a capitalist may be granted a legal privilege or monopoly concerning the production, the sale, or the purchase of certain products or services — and so gain monopoly profits at the expense of other money-profit seeking capitalists. Or he may get the state to pass legislation that raises his competitors’ production costs relative to his own — and so grants him a competitive advantage at others’ expense.
Yet however tempting, all such lobbying activities and resulting profits are unjust. They all involve that a capitalist pays state agents for the expropriation of other, third parties, in the expectation of higher personal profit. The capitalist does not employ his means of production exclusively for the production of goods, to be sold to voluntarily paying consumers. Rather, the capitalist employs a portion of his means for the production of bads: the involuntary expropriation of others. And accordingly, the profit earned from his enterprise, whatever it may be, is no longer a correct measure of the size of his contribution to social welfare. His profits are corrupted and morally tainted. Some third parties would have a just claim against his enterprise and his profit — a claim that may not be enforceable against the state, but that would be a just claim nonetheless.