Two Quotations on Profits

15 September 2009 at 3:26 am 4 comments

| Peter Klein |

Henry Hazlitt, from Economics in One Lesson:

In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities — and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.

One function of profits, in brief, is to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat, no matter how brilliant, can solve this problem arbitrarily. Free prices and free profits will maximize production and relieve shortages quicker than any other system. Arbitrarily fixed prices and arbitrarily limited profits can only prolong shortages and reduce production and employment.

The function of profits, finally, is to put constant and unremitting pressure on the head of every competitive business to introduce further economies and efficiencies, no matter to what stage these may already have been brought.

Barack Obama, from last week’s address on healthcare:

I’ve insisted that like any private insurance company, the public insurance option would have to be self-sufficient and rely on the premiums it collects.  But by avoiding some of the overhead that gets eaten up at private companies by profits and excessive administrative costs and executive salaries, it could provide a good deal for consumers, and would also keep pressure on private insurers to keep their policies affordable and treat their customers better. . . .

So, (a) profits and executive salaries are part of (avoidable) overhead, and (b) government agencies have lower administrative costs than private firms. Who knew? (Thanks to Gary for the quote.)

Entry filed under: - Klein -, Classical Liberalism, Management Theory, Myths and Realities, Public Policy / Political Economy. Tags: .

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4 Comments Add your own

  • 1. Steve Horwitz  |  15 September 2009 at 7:20 am

    If I might add a line from W. H. Hutt: “Profits are proof of social service.” And if I might point readers to an essay of my own: “Profit: Not Just a Motive.” http://fee.org/pdf/the-freeman/0803FreemanHorwitz.pdf

  • 2. Jason  |  15 September 2009 at 7:55 pm

    Would you treat Obama’s statement as a logical impossibility? Or would you entertain the possibility that there’s something going on in healthcare that Hazlitt style one-paragraph explanations don’t capture?

    Would you say that the US health system is the best that it can possibly be in terms of ‘economies and efficiency’, because people are chasing profits relentlessly?

  • 3. bee  |  15 September 2009 at 9:31 pm

    I would say that Obama’s statement is a pure errant nonsense stated for political gain. It is predicated upon logical impossibilities that only fair tales could compute.

    Health care is a market driven by many forces that seek to limit reasoned choice and competition. Addressing these will not make the market perfect, but it will go a long way to ameliorate problems we currently face.

  • 4. Barack Obama vs. Henry Hazlitt « Free Market Mojo  |  9 October 2009 at 11:32 am

    […] Organizations and Markets Possibly related posts: (automatically generated)Electric slide: Power costs […]

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