Wednesday, July 27, 2016

In a Free Society, the Profitable is the Good

It is relatively easy to understand and appreciate the benefits of direct cooperation. The value of familial gift-giving, mutual help between friends, and barter exchange is typically obvious enough even to the economically untrained mind. However, as social cooperation reaches ever more complex levels, its character becomes increasingly abstract, and, in intellectual terms, its proper appreciation becomes increasingly demanding.

One of the most important tools of such advanced cooperation is monetary profit. As explained by Ludwig von Mises, it fulfills a number of functions that make it an indispensable guide for creating social value in an environment characterized by highly diverse preferences, high transaction costs, and a high degree of interpersonal anonymity. It alerts producers to unsatisfied consumer demand. It provides a uniform scale of exchange value that allows for sound cost accounting. It motivates successful entrepreneurs to become ever more productive. In sum, it is the central nexus of the intricate evaluative process that makes complex social cooperation possible, or, to paraphrase Frederic Bastiat, makes the world fed. And it can serve as such only when all individuals are completely free to appraise various goods and services and reward others for their successful provision.

The above is difficult to grasp fully even as a set of purely economic statements. But what may further add to the difficulty is that those statements seem to militate against certain deeply ingrained moral prejudices. For one, accumulation of monetary profits easily attracts accusations of “acquisitiveness” and “greed”. While it is easy to think of such accusations as well-meaning moral admonitions, they actually betray a very naïve vision of morality, one that completely ignores the realities of extended social cooperation. Such cooperation enables but also requires high productivity, which requires sustained capital accumulation, which, in turn, requires prudence and thrift – that is, saving and investing one’s hard-earned profits rather than spending them in acts of reckless consumption or equally reckless “magnanimity”. Furthermore, extended social cooperation is typically characterized by a high degree of dynamism, which breeds both opportunity and the corresponding uncertainty. Holding on to a substantial part of one’s profits is what makes such uncertainty manageable by providing a crucial margin of safety to one’s long-term business plans. In other words, far from being an expression of acquisitiveness and greed, profit accumulation in a free market economy is a crucial indication of practical wisdom applied to complex productive processes.

Focusing on making profits is also often accused of promoting the instrumental treatment of others. This, again, betrays a morally naïve understanding of advanced social cooperation. Profit-driven entrepreneurs are no more likely to treat their collaborators and customers instrumentally than, say, members of families or groups of friends. The latter treat their dear ones and their company as “instruments” for the attainment of direct psychological satisfaction. The ultimate goal of the former is also some form of psychological satisfaction, be it familial or otherwise, but since they operate in a highly complex environment of economic uncertainty, recourse scarcity, and preference heterogeneity, they need to rely on quantitatively precise signals to guide their actions. And these signals, as described earlier, can be provided exclusively by monetary profits and losses. These economic tools, far from instrumentalizing the participants of market transactions, are but instruments themselves. In addition, the most profitable market enterprises are precisely those whose owners derive direct satisfaction from creating social value, and their profitability is the ultimate confirmation that they are successful in this regard. In other words, the only way in which they can successfully use their associates and clients as instruments is to treat them as ends in themselves. Thus, an economically informed and morally mature understanding of the phenomenon of entrepreneurial profit collapses the distinction between instrumental and intrinsic value.

Finally, the uniform scale of exchange value provided by the profit-and-loss system allows for objective comparisons of wealth generated by the business success of particular individuals and their enterprises. In this way, a complex monetary economy generates the amount of envy that is unlikely to exist in a barter or gift economy, and envy is an inexhaustible source of moralistic accusations. The obvious thing that must be said in this context is that envy is a vice that must not be appeased, and that the same environment that seems so conducive to its proliferation is perhaps also the only environment in which it can be successfully confronted and overcome by its victims. After all, the more you are afflicted by a disease, the more incentive you have to identify and eliminate its causes, even if you are likely to make many misidentifications along the way.

In conclusion, within the framework of a free society the profitable is the good and the good is the profitable. However, understanding and appreciating this fact requires letting go of a naïve vision of morality that is wholly inadequate in the context of extended social cooperation, which, in turn, can be properly appreciated only through sound economic education.

[Reposted from]

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