Mises Wire

In a Crisis, the Most Innovative Entrepreneurs Make the Most Money. That’s a Good Thing.

Quick, what do Amazon, Gilead, and Netflix have in common? Obvious answer: they are getting valuable, even lifesaving, goods to people stuck in their homes; working hard to develop treatments and cures for the new strain of coronavirus; and helping relieve the tedium of government-enforced lockdowns. What a privilege to live in a mostly capitalist society, in which the pursuit of profit, rather than government directive, leads entrepreneurs, inventors, workers, and investors to move resources to higher-valued uses.

If you’re Berkeley economist and Bernie Sanders advisor Gabriel Zucman, the answer is different: they’re making too much money.


According to Zucman and his regular coauthor Emmanuel Saez, these companies are making more than their “fair share” of profits, all because they provide goods and services that are particularly valuable under current conditions. In a misleadingly titled New York Times op-ed (“Jobs Aren’t Being Destroyed This Fast Elsewhere. Why Is That?” ), Saez and Zucman go full Rahm Emanuel in calling for a tax on “excess profits,” defined as profits above some arbitrary threshold. To be fair, they also call for socializing business losses through a massive subsidy program (even more than the bailout and stimulus package recently passed by Congress). In normal times, Saez and Zucman’s version of the profit and loss system is a corporatist economy in which the government covers the losses and takes the winnings. In tough times, they turn it up to 11: “The big battles—be they wars or pandemics—are fought and won collectively. In this period of national crisis, hatred of the government is the surest path to self-destruction.”

Murray Rothbard argued, in contrast, that it is precisely during a crisis that private property, the price mechanism, and the profit and loss system are most important, and when the government can do the most damage. In Power and Market he discusses the harmful effects of the excess profits tax:

Of all the possible types of taxes, the one most calculated to cripple and destroy the workings of the market is the excess profits tax. For of all productive incomes, profits are a relatively small sum with enormous significance and impact; they are the motor, the driving force, of the entire market economy. Profit-and-loss signals are the prompters of the entrepreneurs and capitalists who direct and ever redirect the productive resources of society in the best possible ways and combinations to satisfy the changing desires of consumers under changing conditions. With the drive for profit crippled, profit and loss no longer serve as an effective incentive, or, therefore, as the means for economic calculation in the market economy.

It is curious that in wartime, precisely when it would seem most urgent to preserve an efficient productive system, the cry invariably goes up for “taking the profits out of war.” This zeal never seems to apply so harshly to the clearly war-borne “profits” of steel workers in higher wages—only to the profits of entrepreneurs. There is certainly no better way of crippling a war effort. In addition, the “excess” concept requires some sort of norm above which the profit can be taxed. This norm may either be a certain rate of profit, which involves the numerous difficulties of measuring profit and capital investment in every firm; or it may refer to profits at a base period before the war started. The latter, the general favorite because it specifically taps war profits, makes the economy even more chaotic. For it means that while the government strains for more war production, the excess profits tax creates every incentive toward lower and inefficient war production. In short, the EPT tends to freeze the process of production as of the peacetime base period. And the longer the war lasts, the more obsolete, the more inefficient and absurd, the base-period structure becomes.

In other words, what is most urgently needed now are changes in production: more investment in COVID-19 treatments, increased hospital capacity, more respirators or masks, and so on. In a market system, the profit motive leads entrepreneurs to make the necessary adjustments to the production process. A state-controlled economy suffers from the economic calculation problem first identified by Ludwig von Mises. Without prices, state decision-makers have no way of adjusting the structure of production to meet the desired goals.

It’s not surprising that Saez and Zucman have little understanding of the entrepreneurial role in production. Curiously, however, they also dismiss the issue of moral hazard: “Government support, in the case of a pandemic, does not create perverse incentives.” On the contrary, there is substantial evidence that government disaster-relief programs encourage people to build houses in flood zones and wildfire areas. The rash of business failures from government-imposed lockdowns has been partly blamed on small and large businesses failing to keep enough cash on hand to weather revenue shocks. Might this have something to do with a long-term environment of near-zero interest rates, the result of the money presses going burr, night and day?

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