On the way to work the other morning, I came across a great line from economist Russ Roberts on this week’s episode of the Libertarian Christian Podcast:
“I would certainly agree [that the profit motive] by itself is not attractive. If your goal in life is to make as much money as possible, you might not always do the right thing, and I think that’s a bad rule of thumb for a good life. But the idea that if you can’t cover your costs, you don’t get to keep using resources–which is a different way to say what the profit requirement is…–that’s a way to make sure that resources don’t get badly used. It’s pretty amazing.”
It is pretty amazing, and it’s a point that, in my view, is criminally underappreciated.
Yes, the profit motive–at least, on its face–is self-centered and self-serving, and such a motive might lead to humans abusing one another for their own gain. But the profit motive doesn’t operate in a vacuum. In fact, when it operates in a framework of clearly established private property rights and reliably enforced contracts, and when profit-seekers also bear the costs of their losses, the profit motive is an influence that induces people to find ways of serving others that those others find valuable. In that important sense, the profit motive is highly other-regarding.
But let’s accept, for the moment, the notion that the profit motive is intrinsically selfish, and that we would like to abolish it altogether: the question remains as to how resources are to be allocated in its absence. Absent voluntary economic interaction by individuals motivated to earn profits and avoid losses, the only way to allocate resources is by conscious coordination (whether that’s a group of individuals deciding democratically or a government czar imbued with unilateral authority, there’s no moral or functional difference). Is such a system even possible?
The short answer is no. The long answer is noooooooo. And the real answer is that no such authority can possibly obtain and maintain all the knowledge necessary for efficient resource allocation, making such allocation utterly impossible. It’s not a question of political will, or prescriptive normativity, or cosmic justice, it’s merely a fact of reality. No measure of moralizing can change that.
If allocative efficiency by a central authority is impossible, how are we supposed to believe it can be accomplished by the “anarchy” of the market? The process–markets are processes, not entities–is pretty straightforward: the profit motive leads entrepreneurs to compete for scarce resources; that process of competition gives rise to a network of prices that reflect the relative abundancy and scarcity of goods; and the marginal response of consumers to those prices tends to weed out those who value resources least, leaving them available to those who value them most.
For example, if the price of rubber is high, it’s because the supply of rubber is scarce relative to its possible uses. Observing this, the perceptive entrepreneur can invest in rubber production, thereby increasing overall supply and profiting from higher-than-normal prices. The scantier the supply of rubber, the higher its price. The higher the price of rubber, the more profit-motivated entrepreneurs will rush to add to the total supply until rubber is relatively abundant and only accounting profits remain.
And we can assume that all of these entrepreneurs have little love for their fellowmen–in fact, we can even grant that they are entirely misanthropic–but it does nothing to change the fact that the inevitable outcome of their pursuit of profit is that rubber consumers now have access to more, and cheaper, rubber.
It’s a fact of reality that efficient allocation can only be obtained by the network of ongoing, voluntary interaction that constitutes the market. Is selfishness justifiable? No, selfishness is a vice, but in the market the end result of such a vice–the efficient allocation of resources–is not merely desirable, it’s crucial to sustained economic growth and rising standards of for rich and poor alike.
Fortunately, the profit motive need not be selfish to be an effective allocative mechanism. Indeed, not only do market activities tend to induce people to seek their own ends by serving others, there’s good evidence to suggest that individuals tend to be more fellow-feeling toward others as a result of profit-motivated market exchange. Additionally, contrary to what the concept of “profit motive” might seem to suggest, selfishness is more prevalent in non-market societies than in market societies, which suggests that the profit motive has a causal impact on improving human relationships.
In other words, not only is the profit motive much better than its given credit for, it actually has a countervailing influence on the human tendency toward selfishness. By contrast, removing the profit motive causes selfishness to increase rather than decrease. For those concerned with mitigating the influence of that vice on society, then, the only justifiable allocative mechanism is the profit motive in the context of strong property rights and contract enforcement.