Notes on Profit

February 10, 2011

Some people think that profit must be a kind of trick or illusion. Value, the argument goes, is like energy; it can’t be created or destroyed, only moved around. Thus, if people seem to be getting richer as time goes by, this implies that some resource is being depleted in order for that to happen.

Energy is not a good metaphor for value, because valuation is subjective. Value depends only on how we feel about the things we have, and how those feelings affect our behavior. If I have a can of tuna even though I don’t like tuna, and you have a book on economics even though you hate economics, and we make a trade, the combined value of the things we own will increase, simply because the items that neither of us liked very much have been given to people who value them more.

Defining value subjectively seems to create a sort of reductio ad absurdum that turns out not to be one at all upon further consideration. Skeptical, you might say, “So if value is subjective, then that means that if suddenly a bunch of people decided they like blue hats, the total value of blue hats would increase. But that’s silly. The hats are the hats, they have already been created. Their value can’t increase after the fact.” Sure it can. Why not? When you measure value subjectively, value reflects what people want. When people want something more, value reflects that. If you want to define value in such a way that when everyone decides they love blue hats and rushes out to buy them, the value of the hats doesn’t increase, then your notion of value doesn’t mean much to me. And by assumption, it doesn’t mean much to the actual human beings making choices in your story.

I write these thoughts in response to the common belief, cited by economist Deirdre McCloskey, that wealthy businessmen eventually ought to “give back” to the community by engaging in philanthropy. If you know what profit is all about, you can see that that’s a strange thing to say. Wealthy businessmen already did give to the community when they bought low from someone who didn’t place much value on what he was selling, and sold high to someone who did. That was their first good deed, increasing people’s satisfaction with the existing pile of goods in society. Now you’re asking that they go even further, and refuse to accept any compensation in return for their good deeds? Yeesh, you’re pretty demanding. What have you done lately?

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