I generally try to stay out of politics in this space, but the rhetoric and discussion in the past few weeks have really ticked me off. For the record, I don't support any candidate on either side at the moment. I am opposed to a couple of them – one actively – but have otherwise not been involved… the thing that concerns me now is the latest anti-profit kick from a couple of the current leaders in the US Presidential race.
I've come to expect this to expect this from Senator Clinton. For as long as I can remember, she's
ranted talked about the "windfall profits" of Big Oil/Pharmaceutical/Insurance/everyone else. More than anything, it seems to come from the assumption that everyone who has been successful has lied, cheated, and stolen to make it to where they are. Yes, a few have (Enron, MCI, etc), but I believe their names/companies come to mind because there are so few.
Honestly, Senator McCain surprised me a little with his "managed for patriotism, not profit". While this was an obvious shot at Mitt Romney, it smacks of the idea that profit or seeking profit in itself is a bad thing. It sounds like he considers that business experience and knowledge are a bad thing, something to be denigrated.
From an economic perspective, what is profit? According to Wikipedia, it's quite simple:
Profit generally is the making of gain in business activity for the benefit of the owners of the business.
The word comes from Latin meaning "to make progress", is defined in two different ways, one for economics and one for accounting.
Pure economic profit is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital. Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.
Either way, what is profit used for?
In the early days of a business, it is used to grow the business. Adding additional staff, growing inventory, pursuing new opportunities, taking calculated risks, and generally figuring out how to do things better. Later in the business, it can be used for a variety of things… all of the above still applies, but you get the additional possibility of investing in other firms and people or even the original investors – internal or external – wanting a return on their investment. Regardless, any profit is something that comes at a later stage, not at the beginning and doesn't pull the core value out of the organization.
Here's the interesting thing… if an industry, company, individual is making huge profits, it's only a short-term thing. Eventually competitors will move in. At an industry level, alternatives will appear. At a personal level, others will work to get the same skills. It usually won't happen immediately… in fact, it could take years to happen. Look at web development in the mid-late 90's. Look at oil prices now. In both cases, more competitors (or alternatives) come into the spaces and profits are pushed down.
Are there ways to "pull an Enron" and pull out dollars inappropriately via accounting tricks? Yes, definitely. In fact, some people have made a career of it, but that doesn't demonstrate that there's a flaw in the concept or even the system. It simply proves that you can't trust everyone, no matter what their title is. I would go so far as to say that the thugs who looted Enron are no different than the thugs who looted New Orleans… except for taste in clothing.
Unfortunately, those of us who are attempting to run businesses – especially small businesses or startups – suffer as a result of the misbehavior of these criminals and the people who attempt to "fix" the problem.