TCS Daily


Putting People Before Profits

By Pete Geddes - December 16, 2002 12:00 AM

Recently my family and I awoke to four inches of sewage in our basement. While we have many close fiends, we didn't call them for help. No doubt some would have interrupted their plans and come over. But we didn't want to impose this big, unpleasant job on them. Further, they have neither the equipment nor the expertise of professionals. The motto of the entrepreneurs who cover this niche, Buffalo Restoration, says it well: "We make it feel like home again." In our case they surely did. Here's the story and its message.

Thirty minutes after we called, a cheerful, competent crew arrived. In a matter of minutes they had tackled our problem. Soon the owner arrived. He and his crew spent most of the day cleaning our basement as my wife and I cleaned and salvaged our belongings.

Many believe that capitalism and the pursuit of profits is somewhat unseemly if not immoral. Naive critics claim that capitalism presupposes selfishness and greed. I demur. Capitalism presupposes only that people act in their own self-interest. Usually this self-interest benefits others, e.g., the man from AAA who comes out on a sub-zero night to start your car. Even those who disdain capitalism concede that it delivers services and products like no other system. Capitalism may work, they say, but does it produce a moral society?

Profit is the positive spread between costs and revenue. The potential for profit induces individuals to take business risks. They gain when others find benefit in their work. Entrepreneurs may be motivated by self-interest, concerns about family, ego, or the love of the game. However, it's the value of their services, not underlying motivations, that measure their social contributions.

Like fish in water, we take this social environment for granted. Yet it is this process that provides us with fresh fruit in winter, extra turkey in supermarkets at Thanksgiving, and yes, even cleanup crews on holidays.

What about alternative institutions to organize society? The MIT economist Lester Thurow writes: "Attempts have been made to organize productive societies without the profit motive. Communism is the best recent example. But in the modern world these attempts have failed spectacularly.... Capitalism requires profits and profits require ownership. Ownership generates responsibility."

One key problem is that the information needed to create products and coordinate human activity is widely scattered. Central planners are not omniscient. They obtain only a tiny fraction of this knowledge. They are thereby precluded from recognizing people's wants and fostering innovative ways to meet them. Here's a simple example of the pervasive problem of acquiring the knowledge necessary to make good decisions.

A driver waiting for the late passenger to catch the bus cannot possibly know whether the good he does for her outweighs the harm he does to other passengers by delaying their trip. True, he delays each only a little. But it may be enough to miss a connection for a flight to visit a critically ill family member. The late passenger may be on a mission of mercy. She also might be on the way to meet her drug dealer or rob a store.

The important point is the driver can't know. And because he can't, he has a moral obligation to follow the rules. By waiting he is more arrogant than virtuous.

Here are two great advantages of the free market: it reduces the potential for human conflict while minimizing the amount of knowledge required to act responsibly. The peaceful competition of the marketplace is a profoundly cooperative process, which increases net social benefits. And the material success that free societies enjoy allows us to pursue all sorts of "non-market" matters (e.g., spirituality, leisure, and volunteerism).

My insurance claims adjustor is located in Washington. He called while I was writing this column and gave me his number in case there was anything else I needed. He acted as though he was genuinely concerned about my family's welfare. He is quite unlikely to ever meet us, yet he acted as though he cared about the desires of complete strangers. That's the way the world should work.

Pete Geddes is Program Director of the Foundation for Research on Economics and the Environment (FREE) in Bozeman, Montana.
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