I had a small epiphany today. It wasn’t anything I didn’t know but was just the fact that I realized it consciously for the first time. I was pondering a simple question, “is there such a thing as ‘too much profit’?”
Our society demonizes the rich and has managed to turn words like ‘greed’ and ‘exploitation’ into bad words. It is my belief that the reason behind this relates to a perception that there is such a thing as ‘too much’ in many people’s minds. A concept re-enforced through centuries of such demonization, especially from political sources (including religious groups behaving as a political control mechanism).
So how do you define how much profit is too much? If someone, for example, figures out a way to buy and/or produce an item for 1 penny and is able to sell it for 10 cents, is that too much? 1000%? What if he is able to sell it for a dollar? (10000%) What about even for 2 cents? (200%)
At this thought I was pondering what actually might allow someone to make such a profit – i.e. to sell something he bought for 1 cent for a dime? That is what we ‘used’ to call entrepreneurial ability. Their ability to research markets and know their industry, and therefore their accumulated knowledge of those markets and industries leads them to find, or find a way to produce, the item for that 1 cent. Similarly their knowledge of the market where they sell that good allows them to find the people willing to pay him for his ability.
Then came the epiphany.
In the real world, generally profits are not 200-10000%, they are usually more like 10-20%. The dictionaries define profit as:
net income: the excess of revenues over outlays in a given period of time.
In economics, economic profit is the difference between a company’s total revenue and its opportunity costs.
The epiphany that hit me requires you to play a little make believe for a moment to quickly understand. Imagine a world where government does not exist and therefore government costs (taxes, fees, tariffs, subsidies, etc.) do not exist. A world where the market deals strictly with the entrepreneurs and their respective consumers.
Any product sold*, consists of 100% ‘profit’!
* in a market without ‘government’ costs
You’re probably saying, “huh?” When considering a ‘service’ this is a lot easier to understand as there is no concrete ‘object’ for sale. Of course profit is 100% as you are paying the person for their time. (of course, you are also paying for the expertise and labor, but profit is essentially the reward for expertise and labor 100% of the time as well) But how does this apply to an ‘item’ produced? Follow the supply chain….
Say the item is made of wood and metal. Someone cuts down a tree to get the raw wood – do they pay the forest for the privilege? They may have to pay for the land, but someone some time had to claim ownership of the land to sell it in the first place. Did that original someone pay the land for that privilege? Similarly, does the guy mining the ore pay the rock to get the metal from it? No of course not.
Those original sources of raw materials are essentially in the ‘service’ industry of extracting from existing sources items that can be added into the supply chain to create goods and services. They are paid for their time and efforts (labor) and their ownership of the rights to cut timber or mine and their knowledge of how to do it (expertise).
Similarly on down the supply chain, the lumbermill buys the raw timber and profits through their labor and expertise to turn it into lumber. The smelter buys the raw ore and profits from their ability to refine it into metal stock. So the process goes on down the supply chain until the final entrepreneur buys the wood and metal and applies his expertise and labor to make the item in question.
Follow any ‘good’ down the supply chain and somewhere along the line the costs involved in making that good entail the ‘profit’ someone derived by trading their labors and expertise. 100% of the cost is therefore ‘profit’.
Which lends you to ponder, if profit is ‘bad’, what does that say about our time, our efforts, our knowledge and property and our desire to make a subsistence from applying them for our own greedy desires to survive and be successful?