Nobody likes to lose money, but profit generates polarized attitudes. As with most morally-charged phenomena — competition, wealth, poverty, property — getting past the often confused discussions requires some subtle distinctions.
Let’s approach profit by way of an example of its opposite — an accidental destruction of property. Suppose that I’m careless and drive my car onto your yard, tearing up some grass and killing some flowers. What should happen next?
Obviously, I should take responsibility for my actions and compensate you for your loss. So we get an estimate from a landscaper for $900 to restore your yard and add $100 for your frustration and loss of time. I then give you $1,000, your yard is fixed, and compensatory justice has been achieved.
Note that this example connects cause and effect with responsibility and justice.
My poor driving is the cause. The ruin of your yard is the effect. I am responsible for the cause and the effect. So the just thing for me to do is to restore your yard. To achieve justice, we measure the destruction of value and I compensate you that amount.
Profit is the positive flip side of the above example. When my actions (cause) lead to the creation of value (effect), I am responsible for the cause and the effect, and the just thing is for me to be compensated. That is to say, profit is a deeply just phenomenon.
Suppose that I grow vegetables in my yard and offer them for sale when I harvest them. You own a grocery store and offer me $2,000 for my crop. My time and other costs have been $1,000. So I have acquired a net $1,000—my compensation for producing something of value.
To make a profit is to receive the reward of value creation. To make restitution is to pay the price for value destruction. Both profit and restitution are species of justice.
The points that hold for material values — wallets, cars, vegetables — also hold for psychological values.
Suppose that your daughter studies hard and earns a perfect score on a math test. Her experience of pride is the deserved result, as is praise from her teachers and parents. The child’s studying (cause) led to the test performance (effect). The child is responsible for both cause and effect, and the pride and praise are her just rewards. By contrast, undercutting her accomplishment or only grudgingly saying something nice would be acts of injustice.
Or suppose that your teenage son throws a tantrum over a trifle. He will learn (hopefully) to experience shame, and he has earned some measure of disapproval or blame from others.
Just as taking another’s material property is an injustice, taking credit for another’s earned accomplishment is an injustice — e.g., when a subordinate does good work on a project but you claim it as your own when reporting to your boss. And just as shifting to another the financial costs of your own misdeeds is unjust, shifting the blame for your mistakes to another is unjust.
The point: Profit and justice are tightly linked. Creating value is the core morally-relevant fact; justice is recognizing the cause-and-effect responsibility of those who create value; and profit is one form of rewarding those who create value.
On the flip side: the destruction of value is also morally-relevant; and justice requires recognizing the responsibility of those who do so; and loss is one form of penalizing those who destroy value.
One fun implication: Profits can never be too large or “obscene,” because one can never create too much value. The billionaire who became so by getting $10 for each item she sold to 100 million people — added at least $10 worth of value to each of those customers. And if another 100 million people also want that item, the billionaire will become a multi-billionaire, and so on unendingly as long as she is making her customers’ lives better.
But a complication: Measuring the creation or destruction of value accurately can be enormously difficult. If I work independently as a vegetable farmer, then relatively easily I can count or weigh my harvest and calculate how much valuable food my efforts have yielded. But if I have co-workers, it becomes more difficult to measure the value-added of each worker’s contributions. How much of the value of the resulting crop was due to the two guys who did the planting? the three who did the weeding? the four who did the harvesting?
And in a modern division-of-labor economy, hundreds or thousands of workers may contribute to the making of a specialized product like an airplane or a movie. So mismeasurements become easier and, as a result, misallocating the profits also becomes easier. Some can get more or less than they deserve, and that is bad.
So good profit is when we accurately assess each person’s creation of value and reward them appropriately. Bad profit is when we try to reward value creators but misjudge—and the bad is the amount that is over- or under-rewarded.
And there is a sense in which “profit” can be obscene — when we consider some of those who acquire money without creating value. If I mug you and take your wallet with $100 in it, or if I steal your car and sell it to a chop shop for $5,000, or if I am a politician who demands $10,000 bribes from productive businesspeople — then in all cases I become richer and “profit”—but clearly my actions do not create value and I have no intention of creating value. My actions are unjust because they intentionally separate the creation of value from its reward.
Helpful here is the distinction sometimes made between accounting “profit” and economic profit. If we look only at accounting ledgers of the mugger, car thief, or corrupt politician, then each has acquired more money from his actions, so he has “profited.” But if we also look at accounting ledgers of their victims, the victims have lost. In those cases, no value creation has occurred, only a win-lose redistribution.
Economic profit is different. If we look at the ledgers of both the vegetable grower and the grocery store owner, for example, both show an increase. Value has been added to both parties’ situations. A win-win transaction has occurred.
It’s the difference between makers and takers. Makers create value, while takers merely redistribute existing value created by others.
Both makers and takers are responsible for their actions. So the just consequence is that makers receive the profits and the honors that are their proper reward for adding value to the world — and that the takers be penalized, both materially and psychologically, for the damage they do.
Photo by Melpomenem/Getty Images
Stephen Hicks is the author of Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault and of Nietzsche and the Nazis. He blogs at StephenHicks.org. For future columns on The Good Life, feel welcome to send your philosophical questions and moral dilemmas to him at .
Note: If you follow the retail links in this post and make purchases on the site(s), Defy Media may receive a share of the proceeds from your sale through the retailer’s affiliate program.
Keep up with the best of The Good Life below. Click through the gallery to read more from Stephen Hicks.
ProfitNobody likes to lose money, but profit generates polarized attitudes.
Photo by Melpomenem/Getty Images
Money and booksWhich is more evil - loving money or books?
Photo by Getty Images
Campus PoliticsUniversities are political places, but there’s good politics and bad.
Photo by Getty Images
ImmigrationStephen Hicks discusses the limits to open immigration.
Photo by Jordan Pix/Getty Images
TerrorismStephen Hicks explores how to tame religious terrorists.
Photo by Thierry Chesnot/Getty Images
SchoolingIs education really too expensive?
Photo: monkeybusinessimages / Getty Images
SexbotsLet's discuss the ethics of having sex with robots.
Photo by Jiri Miklo/Getty Images
Comparing North and Latin AmericaStephen Hicks explores why there are such dramatic differences in economic performance between the two Americas?
Photo: Anson_iStock / Getty Images
Free College Tuition Is a Moral IssueMany successful people did not graduate from college and many unsuccessful people have impressive degrees. So who should go to college? And who should pay for it?
Photo: Rawpixel Ltd / Getty Images
HitlerStephen Hicks explores answers to the question, "How smart and well-read was Adolf Hitler?"
MicroaggressionRead Part I and Part II in this series on understanding triggers and microaggression as strategy.
GreeceStephen Hicks weighs in on Greeek debts and doing what's moral.
Free SpeechTimes are changing. Is Free Speech Dead in Universities?
IntelligenceStephen Hicks talks about intelligence, freedom, and who knows what's best for you. Also don't miss his piece entitled, "Are You Smart Enough to Live in a Free Society?
EconomicsHow close is current Keynesian practice to original Keynesian theory? Can we blame Keynes for our current situation?
PhilosophyPhilosophy has a reputation for attracting deep thinkers whose quest for wisdom can serve as a model for all of us. And since politics is a major component of the life well lived, what wisdom can philosophy bring to bear on politics? Are philosophers stupid about politics?
PovertyLet us share with you the most impressive number of our generation: 600 million. That is how many people have been lifted out of extreme poverty in the last 25 years. Read more about the the problem of poverty.
SexControversy has been running high recently over how best to lower the rape rate on campuses. Read Stephen Hicks' piece on Campus Sex and the Anti-Sexiness of the New Authoritarians.
MoneyStephen Hicks weighs in on the economy, deregulation, capitalism and much more.
- Where are All Those Free-Market Economists Who Caused the Financial Crisis?
- Conservatives Against Free-Market Capitalism
- Blamestorming: “Deregulation Caused the Financial Crisis”