‘David Cameron says profit isn’t a dirty word, well I say profit is a filthy word,’ the comedian passionately declared. ‘I think the very concept of profit should be very much reduced because wherever there is profit there is also deficit. This system currently doesn’t address these ideas.’
Ah, no. Entirely misunderstanding what is going on here.
Profit is simply the proof that value is being created. Leave aside for a moment who is getting that profit and consider what it actually is. We have the costs of our doing something: whatever those costs might be in labour, wages (no, not the same thing), raw materials, other inputs and for purists, the opportunity costs of doing something else with all of these things. We also have the income from having done this thing, whatever it is. All profit is is the acknowledgement that the income is higher than hte costs of having done it. Thus value has been created.
And we like people creating value: it’s really rather the point of having an economy at all, creating value. For if no value was being created then there wouldn’t be any value for us human beings to consume.
Indeed, we can go further. The opposite of profits is losses: they being an acknowledgement that value is being destroyed. What is being produced from our process is less valuable than the things we are using to do the production. There is therefore less wealth to share around: people are all poorer therefore.
Losses are the destruction of economic wealth, profits the creation of that wealth.
Now I’m not going to disagree with the Adam Smith Institute, and I’m certainly not going to agree with Russell Brand – because RB is clearly someone who thinks that if anyone makes a profit, it can only be at someone else’s expense.
What I am going to say instead is that the ASI explanation is about as clear as mud. Because it doesn’t explain what is meant by “value”. What is meant by “value”? How is “value” created? How is it measured? What are the units by which it is measured? Lengths are measured in units of feet or metres: what is value measured in?
I spend a lot of my time building physical models of things like asteroids or rock clouds, and I have to be very clear the whole time about the units I’m using. So the first thing I want to know about any numerical quantity (and if something can be “less valuable”, it implies a numerical measure) is what its units are. Until I know that, it doesn’t mean anything.
I’d like to imagine a simple tool, like a flint axe, and think about what its value might be, and how that value might be measured. Let’s suppose that a Stone Age man living in a cave in a forest needs to keep a fire burning to keep warm, cook food, and keep wolves at bay. And let’s suppose that it takes him 4 hours a day to collect windfallen twigs and branches to carry back to feed a fire at the mouth of a cave. And because he has to wait for windfalls, he has to walk further and further into the forest to find them, and it can take 6 hours or longer to collect enough and carry it back.
And then someone shows him how to make flint axes from the flints strewn around his cave, by splitting them with a deer antler hammer to produce a sharp edge. And let’s say that it takes him two days to make a flint axe. And let’s say that now that he’s got a flint axe he can do something he couldn’t do before, which is to chop branches off trees, instead of waiting for them to fall off of their own accord. And let’s also say that he now no longer has to walk long distances, but can cut branches from trees near his cave. And let’s say that the result is that instead of it taking him 6 hours a day to collect all the wood he needs, he now only needs 2 hours using his flint axe.
His flint axe is thus saving him 4 hours of work a day. And since it took him 48 hours of work to make the flint axe, it only takes 12 (48 divided by 4) days for him to break even on his little enterprise. After 12 days, he will have done just as much work with his axe as he would have done without it. So, if his axe lasts for more than 12 days without getting blunt or shattering, he’ll find that he has an easier life using a flint axe than he would if he didn’t have one.
His flint axe is a labour-saving tool. And its value is found in the amount of labour it saves over its lifetime. And so its value is measured in hours. Or, if you want to be more exact, hours times his physical workrate: kilowatt hours.
Useful tools like flint axes – or knives or scissors or saws or hammers or bicycles or cars or airplanes or ships or computers – are all labour-saving devices, and their value is measured in kilowatt hours. And the more tools like this that humans possess, the less work they need to do, and the more leisure time or free time they have.
Now, someone will probably object that not all the things that we value highly are useful tools of this sort. We also like things like beer and cigarettes and art and music and literature and movies and chess. And these things aren’t labour-saving tools. So they can’t be measured in units of kilowatt hours.
But actually, they can be. Because all the things that we enjoy for their own sake, like beer and cigarettes, need leisure time in which to enjoy them. And since useful tools make free time for us, then luxuries and amusements and pastimes use up that free time. So the value of these various amusements lies in the amount of time or energy we devote to them in our free time (if we have any). No free time means no beer, no cigarettes, no art, no music, no literature, no movies, no games of chess.
So the value of a chess set, for example, is all the hours that can be devoted to playing chess, minus the cost of making the chess set. And since chess sets are usually pretty cheap to make (I’ve made a few myself), and seldom wear out, a chess set may be as valuable in disposing of free time as a flint axe is in making free time.
Anyway, without going any further, we now have some physical units – time or energy – with which to measure value. And we can start to think straight. And we can go on to say that the value – in hours or kilowatt hours – of something like a flint axe is also the profit that is made out of it. And we can explore what happens when somebody makes flint axes and sells them to other people at some price or other. And we can show that it’s possible for someone to make a profit making and selling flint axes, and for the buyers of those axes to make a profit too. So when you sell goods at a profit, you’re not stealing from anyone (unless your prices are too high, or your axes are badly made). If we didn’t make profits, we wouldn’t have leisure or any of the things we enjoy doing in our leisure time, and life would consist of unending toil, and – more likely – death.
This all Idle Theory, and in several essays I discuss value and profit and prices in the terms just set out. I think it’s a much simpler and more rational way of thinking about this sort of stuff.
But that’s just me.