Mises Wire

There’s No Conflict Between Profit and “Social Responsibility”

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The slogan People over Profits once again is being heard in Washington and elsewhere in the country. This time, however, the sloganeering doesn’t come from Jane Fonda or Bernie Sanders (although both have used that mantra for many years) but rather from business sources themselves. From the US Chamber of Commerce to the Business Roundtable, we are being told that private enterprise has “discovered” that “social responsibility” should be the key to running a business, not profitability:

“The American dream is alive, but fraying,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”

“This new statement better reflects the way corporations can and should operate today,” added Alex Gorsky, Chairman of the Board and Chief Executive Officer of Johnson & Johnson and Chair of the Business Roundtable Corporate Governance Committee. “It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”

The new rhetoric we hear from business leaders such as Tim Cook from Apple and Jamie Dimon from JPMorgan Chase seems to be in line with the Build Back Better slogan of the Joe Biden presidential campaign and the Great Reset that seems to be the rage today with the Bilderberg crowd. The idea seems to be as follows: capitalism unleashes uncontrollable forces that while creating new wealth also create problems such as air and water pollution, along with climate change, and the process of making some people wealthy also means many others are thrown into poverty.

Profits themselves in this view are an extraction of wealth from the community, something that “responsible” businesses try to mitigate by ensuring that “stakeholders” are not neglected. (Defining “stakeholders” is a bit more difficult, as the list of people meeting that qualification seems to be ever expanding.) Thus, by seeking to do something other than just be profitable, businesses become “responsible corporate citizens.”

For all the self-congratulations members of the Business Roundtable are heaping upon themselves for this supposed newly discovered role for private enterprise, a few things are in order. First, business executives in 2021 are more than a century late in the “We want to be respectable” sweepstakes. The progressives more than a century ago sought to make “big business” respectable and shake the “robber baron” image that had been a staple in the press since the late 1800s.

Whether or not such descriptions were warranted is quite another matter. Burton W. Folsom dealt with that era effectively in his The Myth of the Robber Barons: A New Look at the Rise of Big Business in America and pointed out that there was a difference between the market entrepreneurs and the political entrepreneurs. Unfortunately, today’s climate of business “respectability” doesn’t make that distinction, assuming, instead, that all business success is the result of a firm exercising “power,” a term progressives don’t try to accurately, confusing the power of the state with the so-called market power that business firms have. The former can have you killed without recourse; the latter is subject to the whims and decisions of consumers. Mises writes in Bureaucracy:

The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.

Mises’s words are important because they point away from the standard progressive belief that businesses can extract wealth from the community through normal business practices without possessing the legal privileges reserved for state actors. The simple acts of producing goods and selling them, according to progressives, can be interpreted as a forced extraction and, thus, coercive and violent. (Black activist Jesse Jackson, for example, often has referred to normal business practices as “economic violence.”)

Conversely, progressives refer to state action as democracy in action, implying that such action toward regulation of business firms is done to protect people from private sector predations. That “our democracy” is run by people with guns who are not afraid to use them on innocent people somehow does not register with them. The state is a manifestation of The Will of the People; private enterprise fosters violence upon us.

If one concludes that businesses in a market system (as opposed to what Randall Holcombe calls political capitalism) operate in a setting in which they cannot coerce buyers and suppliers, but must depend upon voluntary contracts and trust, then the popular descriptions of their activity using terms related to violence simply don’t fit. Nonetheless, our leading institutions, from education to media to religion to government, portray markets as coercive and exploitative, earning profits at the expense of the well-being of others.

While Karl Marx claimed that profits were unjust expropriations of wealth from labor, most of the modern criticism of private enterprise is less systematic and, frankly, less sophisticated than any analysis that Marx might have undertaken. Despite the lack of rigorous thought that characterizes much of today’s anticapitalism (and especially the anticapitalism held by American elites), one still needs to provide some answers that deal with their objections, even though we know that the usual suspects have no intention of honestly dealing with other systems of thinking.

So, what is the typical objection to profits? Some critics claim that profits create higher prices, which the Jimmy Carter administration believed when it laid out its wage-price-profit guidelines in the late 1970s. In fact, any firm that had profit margins of greater than 6 percent could be declared ineligible to receive federal government contracts. I dealt with that objection in 2004, writing:

Indeed, to “fight” against the inflation that plagued his presidential term, Carter’s “inflation czar” Alfred Kahn of Cornell University announced a “voluntary” wage/price/profit plan. Firms that wished to do business with the government first had to demonstrate their “anti-inflation” credentials by raising prices and wages by six percent or less annually and by earning six percent or less in profits. In other words, according to Kahn, “high” business profits significantly contributed to inflation.

The first thing to remember is that profits do not come about because businesses charge exorbitantly high prices but rather because entrepreneurs have successfully found ways to lower potential costs. Murray N. Rothbard writes in Man, Economy, and State:

What gave rise to this realized profit, this ex post profit fulfilling the producer’s ex ante expectations? The fact that the factors of production in this process were underpriced and undercapitalized—underpriced in so far as their unit services were bought, undercapitalized in so far as the factors were bought as wholes.

Peter Klein in The Capitalist and the Entrepreneur points out that uncertainty is necessary for profitability in a market system:

Profit … is a reward for anticipating the uncertain future more accurately than others (e.g., purchasing factors of production at market prices below the eventual selling price of the product), and exists only in a world of “true” uncertainty. In such a world, given that production takes time, entrepreneurs will earn either profits or losses based on the differences between factor prices paid and product prices received.

The anticapitalist critics would pounce here, claiming that the greedy capitalist had “underpaid” factor owners (especially labor) to gain profits. (Most likely, the critics would claim that the business owners also charged “unjust” prices, but they are going to make that claim no matter what the circumstances, with the assumption of “injustice” also being the conclusion, the classic “begging the question” informal fallacy.) There is a major weakness in that argument, however, and while the critics never will move past their own anticapitalist assumptions (since all progressives know that capitalism causes poverty), they assume that the entrepreneurs know that labor is “underpriced” ex ante. Yet, as Klein and Rothbard point out, because entrepreneurs operate within the arena of uncertainty, they only can surmise that at least some factors are underpriced, since they only can know for sure ex post.

Furthermore, since entrepreneurs also experience losses, factors owners are overpaid in those situations, and that includes labor. (One doubts that the progressive critics of capitalism will demand that workers give back their windfall should the entrepreneurial venture lose money.)

Note again that the critics of capitalism hold that it is naturally exploitative and that unless government steps in to force employers to pay “just” wages, employers will force employees to work for substandard wages. Declares the Christian socialist publication Sojourners:

In the capitalist economy in which we live, the labor market and wages are matters of profound inequality, exploitation, and injustice. For example, according to the Economic Policy Institute, a nonpartisan organization committed to policies that benefit low-and middle-income workers, the current federal minimum wage is just $7.25 per hour and hasn’t been raised in over 10 years. Even raising the minimum wage modestly to $15 per hour would give more than 32 million Americans a raise. Black, Latinx, and Indigenous workers would be the biggest beneficiaries of raising the minimum wage.

If the above statement were correct, then most people would be employed at $7.25 an hour (unless state or local minimum wages were higher) and supply and demand for labor would have no effect upon what people are paid. In other words, they believe that wages are not connected to economic reality and are nothing more than mere numbers.

(One doubts that anyone at Sojourners would have their minds changed when confronted with the real and racist history of the minimum wage—that it was implemented precisely to make the abovementioned minority workers less employable. It is utterly ironic that the people at Sojourners believe that even though progressives in the first half of the twentieth century hated racial minorities and wanted them eliminated from American society, they somehow unwittingly imposed and demanded economic policies that benefitted the very people they hated.)

If one believes what clearly is obvious—that prices in unhampered markets send accurate signals to market participants—then profits are not gained by harming others. Markets by their very nature involve voluntary action by consenting parties, which by definition is nonexploitative. Profits in a free market system exist, because entrepreneurs have made correct predictions about future consumer choices and acted on their beliefs. This is not profits over people, but rather profits benefitting people.

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