Elgin Hushbeck – Question 6 – Reply 1 (Profit)

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Question 6

Elgin’s Answer

Joel’s Answer

Joel Watts – Question 6 – Reply 1 (Profit)

Content:

1.) You quote Scripture regarding pay. Are profit and the pay the same thing?

 Well, there are clearly some differences; otherwise we would not have separate words. But at their core they are basically the same in that they are the compensation for services rendered.

Where they differ is in how they are paid. Wages are paid for a particular unit of time. But, if we look at a store owner selling a can of soup, it would be very difficult to if not impossible to determine the hours worked to get a can of soup on the self so it could be purchased.  As such the store owner is paid for his or her work by the difference between the cost of the can of soup and the amount paid for the can of soup.

This difference also results in another key difference that is often overlooked.  Most people see profit only in terms of gain. But there is no guarantee that anyone will purchase the can of soup.   If someone works for a wage, they are virtually guaranteed to receive payment for services rendered; as such there is little, if any, risk.  With profit, there is rarely any guaranteed and normally there is significant risk.

I have worked both ways. When I worked for a wage I have always been paid for the work I did. When I worked for profit there have been many times where I have not.  If my costs ended up higher than I had expected, then my compensation was reduced.  In fact, there were many times when I wrote checks for my employees’ wages, and did not have enough money to even pay all my bills, much less myself.

So at their core, they are both compensation, but they vary in how they are paid and the risk involved.

2.) Do you see only one “profit?” In other words, you speak about profit motive, yet we have seen in recent economic epochs the increasing split level of meaning applied to profit. Do you believe in different profits or is there only one profit, with just different avenues to get there?

Similar to the previous question they are all compensation, but there are two things that distinguish among the various types of profit. One is in what the compensation is in exchange for, is it in exchange for a good or a service?   There is at times some confusion about this because at times the service being provided is not clear, and at times not understood by many people.

The other is in the number of people being compensated, is it the single owner of a small store, or thousands of stockholders of a corporations?

3.) You write: “You pay a store in exchange for goods and services received.” I would contest that while this is philosophically the case, this is not always true. There are profit centers in business where profit is earned at a greater rate than with other products. Your statement seems to indicate you believe in a fair exchange. Economic practices no longer pretend this is true. Would you regulate fair exchanges? What if the exchange wasn’t fair?

At a minimum I would want to add a lot of qualifiers to these statements, but I would accept the general concept of a fair exchange as a goal, the main problem being how one defines “fair.”  But if we ignore that issue for now, I do think there is a need for some regulation.  To me the issue is not the existence of regulation, but the purpose or goal of regulation.

Regulation that aims at encouraging choice and competition is good. Because of the nature of regulation, regulation aimed at encouraging choice and competition is limited in nature, as too much regulation creates barriers to entry that stifle competition.  On the other hand, regulation that seeks to impose some concept of fairness is doomed to not only to fail, but will ultimately make things worse.

Here is a case in point.  A few years back Florida was hit by a hurricane and there were charges of price gouging by gas stations.  In response, the Florida Attorney general made a very public point of saying that the states anti-gouging law would be strictly enforced.  As chance had it, a few weeks later, another part of Florida was hit by another hurricane.  Sure enough this time there was virtually no gouging – because there was no gas.

It is easy to understand, and in fact is simply the law of supply and demand in action. When stations were “gouging” with the first hurricane they were effectively rationing it and people purchased just what they need. After the second hurricane, they simply filled up “just in case” and stations quickly ran out.  In addition, with the first hurricane station owners were encouraged to take extra efforts, perhaps purchasing a generator and getting an electrician to wire it up knowing they could recoup their costs.  If they did that in the second case, they could easily be charge with “gouging” and end up in court and even fined. So why take the risk?

As for what to do if the exchange is not fair, the first question is who determines what is and is not fair? For me the best solution is to ensure consumers have choice. This will encourage business owners to provide the best value to customers.  Again a case in point:  There is a lot of competition among restaurants, and prices vary widely.  Some places charge more for a lunch than others. But who is to say that one place is unfair and the other is fair?  If I have a problem with one restaurant, I can very easily go someplace else.

The bottom line is that given all the factors that are involved in a transaction, so many of which are subjective, it is simply impossible for the government to regulate this in any effective manner and history is pretty clear that the more they try, the worst they make things.    Thus government should instead focus on making sure there is choice and competition for consumers and then let consumers decide for themselves which of the many suppliers provide them with the best value.

 

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