September 8, 2015

Corporations and Profits are not the Problem, the State is.

By In Articles, Economics

These days, one sometimes hears in nominally libertarian circles (and certainly in more liberal mainstream circles) that war, banking, and, well, most every other industry including food, health insurance, and internet technology, are corrupt so extensively that the leaders of these industries and corporations are “only concerned about their bottom line.”  That is, in greed they have transitioned away from serving the customer to focusing solely on padding their wallets and pleasing their shareholders.  Hence, inequality and the increasing distinction between rich and poor and the disappearance of the middle class.  This narrative confuses the economic issue, for two central aspects of the market economy are overlooked.

First, the above fails to consider the fact that man is no more greedy now than he was 1000, or even 2000, years ago. It is not as if mankind generally progressed along history with a certain low level greed and then, roughly in the 1990’s, we suddenly got super greedy and at various stages since then (such as 2000, 2008, and 2014) we have jumped to all new heights of human greediness. No, mankind has always been greedy. Blaming the troubles of the market economy on greed is a bit like blaming the crashing airplane on gravity. Sure, greed and gravity exist, but they consistent variables that are not useful in describing the problems of struggling markets and falling airplanes.

Second, the narrative fails to appreciate the exact nature of what it means to have a market economy.  The idea that corporations and “the rich” have stopped caring about the customer and instead cares about profits is faulty if we are talking about the free market.  For in order to make a profit, one must first satisfy the wants of his customer.  Aside from the problematic interventions of the State into the market economy, a business profit literally means that the consumers of the business’ product desired the good sold to them more than the money that they had in their wallet.  Thus, the customer was seeking his own desires as well and in the process, contributed to the corporation’s bottom line.  The corporation’s profit, therefore, was a reward for acting in a way that made the customer happy.

Also relevant, but under-appreciated, is the fact that profit doesn’t necessarily mean money.  Austrian-school economist Murray Rothbard noted this in his monumental economic treatise Man, Economy, and State, as he wrote:

Since man is always acting, he must always be engaged in trying to attain the greatest height on his value scale, whatever the type of choice under consideration. There must always be room for improvement in his value scale; otherwise all of man’s wants would be perfectly satisfied, and action would disappear. Since this cannot be the case, it means that there is always open to each actor the prospect of improving his lot, of attaining a value higher than he is giving up, i.e., of making a psychic profit.

Profit, then, is a result of trade that occurs in the minds of both parties.  The purchaser of a loaf of bread has traded his $3 for this bread and profited because he placed more value on the bread than he did his dollars; and the opposite was the case for the seller.  Both profited, and thus, there is no conflict between the happiness of the consumer and the profit of the corporation, under voluntary and free market conditions.

Such is the nature of the market transaction.

However, the role of profits become corrupted, not by a sudden and inexplicable rise in society’s greed levels, but by the means of state intervention into the market relationship between buyer and seller.  The State’s impact in producing profits for those who would not have otherwise earned them can be recognized in a number of different ways.  One way is more obvious of the two I will mention, and it is when the Government hires a company to provide a service for itself, and pays this company out of the money that was previously taxed, that is, taken from the consumers involuntarily.  It is important to note that this is not a moral statement; the economic nature of the tax is distinct from the payments voluntary agreed to by the consumer on the market.  Under the market conditions, as described above, the consumer is making a choice about the specific good that is being transferred to him and thus, his decision informs the selling business that the good, and the price, was satisfactory.  However, under State-provision of goods and services, there is no expression of consumer desires and thus whether or not the good was satisfactory is unknown.  Therefore, certain companies who are paid by the State can make a profit without satisfying the desires of the consumers in society.

Aldrich-plan-1912
A political cartoon that was published in 1912 as a reaction to the news of the coming Federal Reserve, called the “Aldrich plan” after Senator Aldrich, which sponsored the Act that was eventually signed in 1913 by Woodrow Wilson.

The second “way” that the State influences the profits of certain corporations in society over against the desires of the consumers is far more reprehensible; partially because most people don’t even recognize that it is happening.  In fact, it is this means toward wealth that is the most destructive in a given economy and has been the cause of Western economic demise in the 20th and 21st century.  I am talking here of the destruction of the market process via inflation; that is, artificial increases in the supply of money and credit by way of central banking.  The Federal Reserve is the central bank of the United States and has been since the Federal Reserve Act of 1913.  The result of the Federal Reserve’s inflationary policy is a massive occurrence of distorted market signals which causes capital flows to be directed to the wrong places in the economy.  For example, as the supply of money is increased, there is more credit that can be loaned out to businesses for their various projects.  The increase in the supply of loanable funds drives down the price of those funds; this price, the price of money, is known as the interest rate and is the most important price in the entire economy. To distort this is to distort everything.  Rather than letting the market, the buyers and sellers, determine the interest rate price level via their time preferences, the banks, because they are allowed to do so by the central bank which sets their lending policies, essentially expand their loans and push down the interest rates.  Businesses, seeing a profitable opportunity to invest in longer term projects than they were originally able to, take advantage of the situation and borrow at the low rates.

But the low rates did not stem from the market decision-makers, but rather from the decision of the Federal Reserve.  One of the fundamental principles of economics is that prices and the allocation of resources must always come from the supply and demand of buyers and sellers because only they, in pursuing their individual wants, can lead to the accuracy in capital flows and price levels.  The central planners do not have this extremely important knowledge.  The Central Bank then, which is protected by the legal pronouncements of the State, is the cause of capital flowing to places where it should not be.  Thus, again, we are in a situation where certain business are profiting even though they have not satisfied the desires of their consumers in the same way that would have taken place under free market conditions.

This is the cause of the destabilization of the markets, the apparent economic boom that will always end in a tragic and harmful bust.  There was a disrupting influence in the structure of production that led business to make unsustainable decisions, thereby wasting scarce capital on projects that could both never be completed and are also actually unprofitable.  Everything seems great until the boom peters out the the economic depression sets in.  This is a very basic overview of the Austrian Business Cycle Theory, which explains the existence of booms and busts; false prosperity, followed by recession.

After the boom and bust of the 1990’s, rather than letting the bust fully take place and letting the markets stabilize, the Federal Reserve, under the direction of Fed Chairman Alan Greenspan, decided to increase the money supply even more, thereby propping up another boom, which led to the financial and real estate crash of 2008.  And again, this time with Bernanke at the helm, the markets were not allowed to recover, but instead we got a tremendously dangerous bailout (TARP), which once again propped up the stock market.  And since that decision, the United State’s economy has been propped up by various rounds of “QE” (Quantitative Easing AKA more money printing) that has caused billions of dollars to go flooding into Wall Street and making the billionaires out of millionaires.  Yes, there are plenty of people profiting from the Great Wall Street Party of the 21st century, all the while Main Street sits on life support, drowning in debt and without the economic productivity that produces jobs on which they depend.  The Federal Reserve, backed by the strong arm of the State, has caused the greatest transfer of wealth the world has ever seen. And this is something it simply could not do without the help and protection of the Federal Government.

Corporations and profits aren’t the problem.  It is State power which is the source of our economic woes.  The Federal Reserve would be nothing without the State.

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com
  • Thanks for your hard-hitting and insightful work on this pressing issue.

    Keep up the good work, man, as I will still be a regular reader of this blog 🙂