There are three misconceptions about profits that arise in most conversations I have with people about businesses seeking profit:
1. Businesses seeking profit codifies greed and encourages corruption.
2. Profit-maximization exploits the poor and benefits the rich.
3. Some firms, in seeking profit, become too big and have too much power.
To dismantle these myths I rely on the next principle in our series on the biblical foundations of economic principles:
Principle #7: Profits direct businesses toward activities that increase wealth.
God blessed them and said to them, “Be fruitful and increase in number; fill the earth and subdue it. Rule over the fish in the sea and the birds in the sky and over every living creature that moves on the ground.”
The Cultural Mandate tells us that humanity was created to be stewards of creation through our work. It calls us to develop and protect the natural world. Profit is a tool enabling us to live out this mandate.
Understanding the relationship between profits and the Cultural Mandate involves unpacking the mechanics of profit. We must first understand the function of profit and limitations in a fallen world.
To start, recall the scarcity principle. The resources at our disposable are not sufficient to meet our demands. Resources, including our raw materials, time, and talents, have multiple and competing ends.
How do entrepreneurs decide where to focus these resources? Profits and losses act as signaling devices that help entrepreneurs better understand where and when to make investments. Both profits and losses serve this function, as the authors of Common Sense Economics explain:
Profits and losses direct business investment toward projects that promote economic progress and away from those that squander scarce resources. This is a vitally important function. Economies that fail to perform this function well will almost surely experience stagnation, or even worse.
Profits result when entrepreneurs combine their skills with certain resources and transform those resources into goods and services that people value. Additionally, profits direct new entrepreneurs into successful markets. Over time, these businesses compete to give us what we need at lower prices.
Losses, while equally painful, serve an equally important signaling function. If a business owner cannot create a product for a price that exceeds production costs, losses accrue. These losses signal to the owner that he or she failed to wisely use scarce resources. These are often honest mistakes, but important ones to learn so that he or she can redirect resources to more highly-valued uses.
In this way, profits encourage prudence in that they encourage entrepreneurs to be wise stewards. Profits serve as a tool to help us steward creation as we develop it.
Another key point is that to earn a profit, you have to create something of value. Profits only accrue when we serve others. Garreth Bloor, of Acton University, writes,
Profit allows us to be moral in serving needs, for it is the most precise measure by which we can accurately identify those needs of our neighbors whom we do not know and will never meet.
Keeping these ideas about profit in mind, let’s respond to the three misconceptions I mentioned at the beginning:
1. Seeking profits doesn’t imply greed or corruption. We actually want companies to strive for profits. Profits are an indication companies are serving the needs of others using the least amount of scarce resources. Profit-maximization through market competition, supported by well-defined property rights and the rule of law, tempers greed and corruption.
2. When an entrepreneur successfully earns profits, they actually help the poor. They do this by offering goods and services that are otherwise unavailable. The competition for profit drives prices down, making goods and services more easily available to the poor.
3. Firms should be as big as the market will allow. If Honda only made ten cars per year, they would have to charge more expensive prices to cover their costs. Higher prices raise the cost of transportation for poor people, limiting their access to jobs.
Of course, there is a need for virtue in society to minimize the demand for profitable industries that are nonetheless inherently sinful (like pornography). I’ll explore this notion next week.
For now, remember that power, greed, and corruption in markets are and should be important concerns for Christians. But the pursuit of profits doesn’t necessarily promote any of these. People can pursue profit because they are pursuing the opportunity to create something of value for others.
How should Christians think about profit? Is profit-maximization an important concern? Should it be? Leave your comments here.
- Part 1: The Biblical Foundations of Economic Principles
- Part 2: Should Christians Care About Incentives? An Economic Perspective
- Part 3: Should Christians Care About Incentives? A Biblical Perspective
- Part 4: Why Is There No Free Lunch?
- Part 5: Should Christians Play Golf? Making Decisions at the Margin
- Part 6: Should Christians Seek Wealth Creation?
- Part 7: Counting the Cost, Even When It Hurts
- Part 8: Why Christians Should Care About Transaction Costs
- Part 9: How Do We Set Just Prices?
- Part 10: How Does Pursuing Profit Fulfill the Cultural Mandate?
- Part 11: How Should Christians Think About Income?
- Part 12: How Creating Value Fulfills the Cultural Mandate
- Part 13: Four Essential Elements of Economic Progress
- Part 14: What Is the Invisible Hand Guiding Us to Flourishing?
- Part 15: The Call of Stewardship: Seeing the Unseen
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