First, before I get started, we are now a mere 9 days away from the end of the world. Now on to more pertinant things.
A frequent cry from anti capitalists, leftists, and even many in the emergent church movement refers to how terrible it is that all corporations exist to make a profit. On the surface, this does sound like a bad thing. If all companies do is try to make a profit, they will charge exorbatant prices and pay workers little or nothing for the work that they do. Because of this, the government needs to step in and tell the businesses what to pay their workers or they need to tax profits that some person arbitrarily determines are “immoral”.
Time out for a second. I just saw a TV commercial that told me if I don’t do anything about global warming, a little girl will get hit by a speeding train. Ok, time in.
Sure, the claims of those anticapitalists sound valid, but when one looks at the science of how prices and wages are determined, it becomes increasingly obvious that profit maximization works for the good of all.
First, wages and prices are set by something that economists call “supply and demand”. In regards to wages, what an employee is paid is determined by several factors. The person who is the most qualified, does the best job, and will work for the lowest wage, will get the job. Depending on the number of skilled or unskilled workers in an area, wages go up or down. If you own a business, and you are in charge of hiring a receptionist and there is high unemployment in the area and low economic growth, you will have many high skilled laborers looking for work. Because the demand for your receptionist position is high (because many people are out of work) you will pay the least amount of money that a person with the correct skills will take. On the contrary, if there are few unemployed and you need a receptionist for your booming business, you will offer a higher wage in order to lure in the best employee.
The same occurs with the prices of goods. If there is low demand for a good or service, I will charge whatever price occurs where the supply and demand curves meet. Where they meet is the place at which your profit is maximized, but it is also the place where you have neither a surplus of goods or a shortage. In cases where disaster strikes, supply and demand actually brings the goods that are needed into areas where they are needed the most because of higher profits. Where as a tree trimmer isn’t in high demand in Kentucky for the most part, when a hurricane hits the gulf coast, the demand for services is high, which raises prices until the profit incentive brings enough tree trimmers in so that competition can happen and prices once again go down. Profits actually help resources be distributed in the most efficient manner. The places where goods are desired most is where the goods will go because profits bring in more goods.
Just the same, where profit is maximized is not an exorbatant price. If I have a truckload of watermelons, and I try to sell them for 40 bucks a melon, I will sell few if any watermelons. We’ll say, for example, that I have 100 melons. If I sell 2 melons at 40 bucks, then I have 80 dollars and a bunch of wasted watermelons. If I lower my price to 5 dollars a water melon, I can sell all one hundred melons, but at 6 dollars a melon I can only sell 80. If I try and sell water melons for 1 dollar each, I will sell all of them, but many people who want watermelons don’t get any because I have run out.
Basically, if you read any basic economics textbooks, you’ll get this information. I think its important that people understand basic economic concepts because misinformation leads to flawed governmental economic policies which actually end up hurting the poor. And few if any people wish more hardship on those in need among us.