January 28, 2014

Don’t Vilify the Prices and Profits

By In Blogs, C.Jay Engel

Among the most important aspects of an economy is the presence of prices and profits.  Without them, entrepreneurs and businessmen would be blind and in the dark about the goods or services that they are providing.  In fact, without prices and profits, there would hardly be any goods and services at all because it takes prices and profits higher up in the structure of production for the resources to even reach the lower levels.  If the refiners of the resources gathered by the miners cannot sell their refined capital goods to the manufactures for a price, how could they possibly know whether their activity is beneficial at all?  If there is no price, there is no verification that the manufacturers are doing the right thing in buying nor the refiners in selling.  Prices are the signals by which capitalists and entrepreneurs and business owners in general are made aware of whether or not they are being productive.  If they are not, they will surely suffer a loss.  If they are, they will make a profit.  In a free and voluntary market, profit is a result of consumers verifying that the prices are set at precisely the right level.

One site that I have recently been following is Jeremy Hammond’s.  He writes on a variety of different topics, among them simple principles of economics.  He is often in a Twitter debate.  And I often have my feet up while I munch popcorn.

He writes recently about his back-and-forth with some proponents of  a single-payer health care system:

For example, notice how they are supporting a petition advocating the need to “End the For-Profit Health Care Marketplace”, but watch their replies when I press them on the ridiculousness of this idea of eliminating any profit motive.

Ridiculous indeed.  For example, Hammond presses: “How are doctors to earn a living if they can’t profit from their labor like everyone else?”  The answer given? None. There was no answer.  There was no answer because there is no answer.  “Earning a living” requires the presence of profit.  This is not only true for the owner of a business, but, despite the magnificent manipulations in the labor markets, it is also true of any wage laborer.  If the productivity of the wage laborer leads to more revenue than the laborer receives per hour (or day, or whatever), then this profit allows the laborer to keep his job and continue his efforts.  If the productivity of the laborer falls compared to the worker’s wage, this makes it more difficult to justify the worker.  If productivity stays the same while the wage increases, profit decreases and unemployment ensues.  Hence, minimum wage laws effectually narrow the revenue/costs gap and begin to weed out workers that are less productive.  With minimum wage laws up so high, it is no wonder that the United States (and the rest of the world) are suffering from unemployment (not to mention central banking manipulations and business cycles).

Now, more generally, eliminating profit in a given industry has a similar effect.  A bill that seeks a single payer system so as to end profits in health care will require all kinds of regulations and fees on the care providers so that the single payer system does not go bankrupt immediately from care providers charging the system whatever they want.  In order to keep the single payer system afloat, they must indeed clamp down on how much a care provider can charge.  In other words, eliminating the profit is an immediate necessity that results from the single payer system.  But once the profit is taken out of the equation, suddenly the gap between revenue and costs is eliminated.  The productivity of the doctor is no longer enough to justify such high costs of doing business.  There is no reward for serving clients because there is no prices that have been agreed on by two willing parties.  Economically, we get to a place where demand (patients) exceeds the supply (of doctors).  Quality of care plummets (less competition), waiting times and lists are introduced to society, economic calculation becomes impossible, bureaucratic rules multiply, and they entire industry crashes.

And all because the original tweet in the conversation that Hammond had, said this: “We need universal health care for all!”  The emotional demand for free goods does not rule out the fact that prices are vital for the growth of an economy.  We all like free. But it is because we all like free, that in a world of scarce resources, prices must be introduced to direct resources to their most important ends.

Without profits, there would be no accurate prices; and without accurate prices, we are blind: resources are squandered, there is less to go around, and the poor become poorer.  Only a free market can achieve the best health care system for the greatest number of people.  And what does a free market require except for government to get out of the way and surrender its power?  Hammond is right: Less Government, not more, is the solution to our health care woes.

 

 

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