The Morality of Profit

By Timothy D. Terrell
July 29, 2004

An article I read recently on a consumer advocacy website complained about allegedly huge profits being garnered by pharmaceutical companies. “Prescription drug profiteering racket exposed by Dept. of Commerce” was the headline. The Department of Commerce “study” the author cited bore the earmarks of a hoax, and in fact a check of the Department of Commerce website revealed no mention of any such action. The website editor apparently believed that pharmaceutical companies were actually earning profits of around a half-million percent. But let us set the editor’s gullibility aside and go straight to the main ethical issue in question: Are profits immoral? And, if they aren’t immoral per se, is there a level at which they become immoral?

For centuries, if not millennia, people have been suspicious of profit, thinking that profit to one person must mean a loss to someone else. Exchange, people have thought, must be “zero-sum,” that is, if someone gains, someone or some group of people must have lost an amount equal to those profits. Profit, then, would simply be evidence that theft has occurred. Those who promoted this view failed to see that both sides could benefit from an exchange because both sides place different, and equally valid, values on the object traded.

In a market exchange, if I voluntarily hand over dollars in exchange for, say, prescription drugs, it is evidence that I expect to be better off with the drugs than with the dollars. If the drug manufacturer voluntarily hands over the drugs in exchange for the dollars, it is evidence that they expect to be better off with the dollars than with the drugs. Both expectations can be fulfilled. Furthermore, how much better off I become relative to how much better off the manufacturer becomes is a matter of complete ethical indifference. If I am willing to pay $5,000 for the prescription and the manufacturer is willing to accept anything over $1, then there is a wide range of prices that would make us both better off. I’d be willing to pay anything less than $5,000, and the manufacturer would be willing to accept anything over $1. If the price is actually $4,951, do the manufacturer’s $4,950 (495,000 percent) profits constitute unethical “profiteering”? Or, to turn this around, if I would be willing to pay $5,000 for a drug (say, one that restores my ability to work or significantly extends my life), but I only have to pay $50, I get a “profit” of $4,950. Am I “profiteering”? Why do consumer advocates want to condemn high profits in one case but not the other?

For Christians, who base ethics on the Bible, it would be difficult to find grounds for ruling out large profits by businesses but not large profits by customers. And I have yet to see a coherent case for determining that profit over such-and-such a level would be unethical. It would seem that in the absence of a Biblical statement on the issue, we would be adding to the word of God to argue that any level of profit is unethical.

Beyond this basic argument for the ethics of free pricing and profits, we can see that profit is necessary, even required as evidence of good stewardship. Profit is evidence that the action taken by the entrepreneur created more benefits than costs. It is a here-and-now reward for doing something that is beneficial to other people.

There are those who will argue that one should never “make a profit from someone else’s suffering.” Certainly the presence of hardship or suffering provides an opportunity to exercise charity, and it would be wrong to always pass up such opportunities for ministering to another person in need. However, to disallow profit from meeting intense human needs is to eliminate the most significant motivating force that prompts relief of those needs. Most hunger is relieved not by people donating charitably to a community pantry, diaconal fund, or international aid organization, but by profit-seeking entrepreneurs in the normal course of business. The vast majority of the time, the profit motive gets food to where it is needed. Charity deals with the exceptions to the rule.

And, if we are to be honest, we all occupy ourselves with relieving suffering in some way. A pharmaceutical company profits from relieving the illness that would result without their drugs. A construction business profits from relieving the hardship that would exist without shelter. I, as a college professor, make a profit from relieving the ignorance of my students. My wife, who works part-time as a nurse, makes a profit from relieving illness and injury. (Employees, of course, are unaccustomed to thinking of their wage as being partly “profit,” but in fact any wage that is larger than their next-best use of their time and abilities contains profit.)

In a world with a wide variety of human needs and limited resources with which to meet them and limited knowledge about which needs are most severe, we should actually be thankful for the existence of profit. Profits serve as an important signal, with higher profits saying, in effect, “More resources are needed over here,” and lower profits or losses saying, “Filling this need is less urgent right now.” Because humans are not omniscient, these signals are vital to good stewardship.

In deciding among competing needs, other sources of information are highly unreliable. If you had a million dollars at your disposal with the requirement that you devote it to the relief of the most urgent human need, how would you decide? Of course the initial response for many Christians would be to direct the funds toward the ministry of the gospel. Yet even the most zealous evangelist would have to concede that other uses of those resources are also desirable. Even Christ Himself spent money on food, clothing, and other things. We do not want to fall into the gnostic error here by classifying the material world as below our esteem. Food, clothing, shelter, medical care, education, and other things are well worth our consideration. So then, how should this million dollars be allocated among these needs? The repetitiveness, volume, or tone of requests for funding of these various needs is a poor substitute for the test applied by the market. That is, for which of these needs are people willing to sacrifice the most “other goods” to satisfy the need? That essential clue is provided by profit.

Even charitable efforts are directed by profit, to some extent. Charitable assistance being what it is, it is not sold and has no profit associated with it directly. However, the price system and profits inform the donor about which goods and services are in the shortest supply and thus which goods and services would do the most good if donated.

Paradoxically, “nonprofit organizations” rely on profits, of a kind. Let’s suppose a group of people organized as a nonprofit are in the business of selling a magazine, running a website, and publishing books. Suppose their revenues from magazine and book sales, plus donations, exceed their costs of providing the magazines, books, and website. This is actually a profit, but the difference lies in how it is handled. It does not go to a business owner or shareholders. There is no one who can claim what is leftover after expenses have been paid. The leftover — the profit — must remain under the management of those who guide the company, but this money still serves as a signal to those managers. Those services that provide the largest excess of revenues over costs will tend to be favored by the managers, as the excess shows that the consumers value that particular output of the nonprofit. If the revenues that result from the magazine, books, and donations do not cover the costs of providing the nonprofit’s services, the amount of assets under the nonprofit’s control will decline, and the organization will eventually fold.

Those who say they prefer a world without profit are asking for a world of chaos, a world without coordination, a world in which Christian stewardship is severely hindered. There is certainly nothing ethically superior about low profits or nonprofits, and, as I see it, those who would like to make “profiteering” a sin have no Biblical basis for doing so.

Topics: Biblical Law, Business, Culture , Economics, Medicine / Healthcare, Socialism, Statism

Timothy D. Terrell

Timothy Terrell is associate professor of economics at Wofford College in Spartanburg, South Carolina. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute.

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