Among proponents of leftist political ideologies, the “people vs. profits” dichotomy is commonplace. Indeed, recently the Washington Post reported that President Obama will continue attacking Mitt Romney’s tenure at Bain Capital, painting him as a “corporate menace that protects profits at the expense of people and jobs.”
While astute political observers are probably accustomed to such talk coming from the political Left, it is nevertheless a mistaken way to think about the economy. Profits simply cannot be separated from “people and jobs.” Indeed, the highest profits come to those who best provide for the public, usually creating more jobs and satisfying more people. This is economics 101.
When an individual earns a profit, it is because he is providing something to others that they are willing to buy for more than it cost that individual to make. There is no other way to make an honest profit in a free economy. The profit-maker simply must take into account the demand of potential consumers.
Of course, not every entrepreneur can satisfy the preferences of everyone with an interest in his work. There will always be winners and losers. The inevitable fact of resource-scarcity means tough, economizing decisions have to be made.
For example, in the case of private equity firms (of which Bain Capital is one), making a profit may indeed require some layoffs and organizational restructuring. In order to maximize returns, it may be in an investor’s interest to reduce inputs like labor. But such layoffs would only be undertaken if investors believed such an action would increase the total value of their investment—the efficiency with which it serves consumer demand.
Admittedly, entrepreneurs who do not take “the little guy” into account when making employment decisions can seem heartless—especially to one ignorant of economics. But such behavior does not constitute a “profits before people” attitude. It simply means that the entrepreneur has economized and considers the interest of some to be more important than the interest of others. Indeed, one cannot expect entrepreneurs to serve the interests of every interested party.
It should be obvious now why separating people from profits yields misleading conclusions about the economy. Perhaps Mitt Romney did put the interest of his investors before those of certain employees. But it was only in the interest of increasing the efficiency of his firm—reducing the amount of inputs relative to outputs, and making the world that much better for us all. It had nothing to do with “people vs. profits.”
Consider if things were otherwise—if executives all refrained from pursuing mass layoffs in order to better serve their employees. Such a policy would undoubtedly mean consistently lower profits. This would entail more inputs required to achieve the same level of output, meaning higher resource consumption and higher consumer prices. Fewer workers would be available for employment in new industries, and private equity firms would have less capital with which to invest in startups and other firms, thereby restricting the number of jobs they create in the long run.
Such a reality would be disastrous.
Profits, therefore, are the most accurate means of gauging how well an entrepreneur is serving public demand. Yes, there are unfortunate aspects about profit-making that arise because of resource-scarcity. But even when profit-making leads to layoffs, it is best for society as a whole.
As always, Ludwig von Mises said it best:
“Profits are the driving force of the market economy. The greater the profits, the better the needs of the consumers are supplied … He who serves the public best makes the highest profits.”