For other parts of this series on Christianity and Economics, click here.
For what does it profit a man to gain the whole world and forfeit his soul?
Mark 8:36
The answer to Jesus’s question is obviously nothing. Even if a man were to gain the whole world, if he loses his soul in the process, he has made a terrible trade. In the end there is no profit at all. There is only tremendous loss.
What is “Profit”?
It’s not uncommon to hear “profit” treated like a bad thing. Just think about all the movies where the villain is some evil businessman that chooses “profits over people.” But profit is not a bad thing. The word “profit” simply means “benefit.”
Profit can certainly be measured in money if the “benefit” sought is money. If I buy something for $3, and I turn around and sell it for $5, I’ve earned a profit of $2. But in a more general sense, such as the sense in which Jesus used the word, profit simply refers to the reward for making good decisions. Giving away money to a charity can be “profitable” if advances a cause that I’m passionate about.
When discussing economics, however, “profit” often takes on the more precise meaning of monetary profit. When all goods can be traded for money, those goods develop market prices defined in amount of money. For this reason profit and loss can be discussed in terms of money. As long as revenue is greater than expenses, there is a profit. If expenses are greater than revenue, there is a loss.
But we must remember that as soon as we limit “profit” to a monetary value, we are no longer making a statement about an entrepreneur’s overall happiness, spiritual well-being, or subjective satisfaction. We are only talking about profit as it is appraised by other members of society, who ultimately determine monetary value through their demand for certain products in relation to their supply.
It’s easy to see how profit benefits an entrepreneur. But what often goes unrecognized is how profit benefits others. In order to explain how this is so we must first consider the problem of resource allocation.
The Complex Problem of Resource Allocation
God created the world with numerous resources, each of which could be used in any number of ways. For example, iron could be used to make all sorts of things – cars, refrigerators, medical devices, construction buildings, houses, power plants, tools, weapons, spoons, etc. The possibilities are endless. The same could be said for all natural resources.
With endless possibilities, mankind is faced with the complex task of deciding what resources, in what quantities, should be used in what ways. What needs are most important? How can we properly use the earth’s resources to help as many people as possible? Even if we are properly motivated impartial love for everyone, how can we know for certain that we are using the earth’s resources most effectively? How much iron should be used for refrigerators? For medical devices? For houses? For machines?
Even if we correctly prioritize the right needs, we still have a problem. Perhaps we think housing is most important. Since resources are limited, at what point does our investment in housing begin to take away from the important need for medical devices? Or for tractors, which are used to harvest the food everyone needs? Even if our intentions are pure, it would be impossible to know for sure if we are using resources in the best possible way.
To illustrate the complexity of this problem, imagine a world where this problem is perfectly solved, where we know the optimal use of every resource. To simplify the illustration, imagine there are no changes to anyone’s subjective wants, changes in technology development, changes in the total population, or changes in resource availability. If this were the case, every person would do the same tasks every day. Producers would produce the same products, in the same quantity, every day. The prices of all consumer goods and factors of production would remain constant, as neither supply nor demand ever changed.
Consequently, there would be no uncertainty about the future. There would be no need for someone to risk combining resources in a new way. There would be no reason for a business owner to invest more in one line of production, or less in another, or for anyone to take any risks or seek greater profit. Everything would already be used towards its optimal end.
It’s not difficult to see why this can only be an imaginary scenario. James cautions us against assuming that things will continue in the future as they do today.
Come now, you who say, “Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit” – yet you do not know what tomorrow will bring.
James 4:13-14
People’s subjective values change all the time. Technology changes. Population levels change. Resource availability changes. There’s always change going on. Tomorrow will not be like today. The future is uncertain.
For this reason, all entrepreneurs have the task of taking risks. No mater how successful an investment may have been in the past, or may appear today, the future will be different. An entrepreneur has no guarantee of future profitability, because prices are always changing to meet changes in supply and demand.
How Profit and Loss Solves The Problem of Resource Allocation
Since the future is uncertain, entrepreneurs must engage in the task of forecasting future prices for the factors of production and finished products. They must forecast future profitability.
For example, one farmer may forecast that there will be a beef shortage, beef prices will increase, and raising cattle will be profitable. As a result, he may raise more cows, build bigger barns, and dedicate more land towards cattle farming. On the other hand, a competing farmer may forecast that cattle prices will fall, and his time will be better spent growing fresh produce, such as corn, beans, and garden vegetables. Whichever farmer’s forecast proves to be more correct will enjoy a greater profit.
Suppose the first farmer is correct. Due to a beef shortage, prices were high, and he was able to enjoy a good profit. The following year, the other farmer may look to the first farmer’s success as a signal that he should raise cattle as well. Because of the first farmer’s profits, the beef shortage will move quickly towards a solution as more and more farmers move into cattle farming. This will continue until cattle production reaches a level where cattle farming is no longer as profitable as the next best use of the land. As entrepreneurs seek to invest where there will be the greatest return on their investment, production shifts to meet consumer demand.
Just as important as profit is loss. By suffering a loss, the unsuccessful entrepreneur may be forced to make changes. Suppose the cattle farmer was wrong. Instead of a shortage, there was a surplus of cattle. As a result, he was not able to bring in enough revenue to cover the cost of his investment. If the farmer continues suffer loss, he will eventually have to make a change. Perhaps he will shift away from cattle farming to something more in line with consumer demand. Or perhaps he will sell the farm to another entrepreneur who will use the land more efficiently and more profitably. For instance, if there is a housing shortage, there may be a great demand to develop the land as a new neighborhood.
Profit and loss is a wonderful thing, because it communicates to entrepreneurs the most effective uses of resources allowing them to produce what people want and need. Regardless of whether the farmer is profitable, or suffers a loss, by following profit and loss signals, resources will continually be reallocated to meet consumer demand.
This process plays itself out every day, in every industry, in various ways. All over the world, entrepreneurs continually adapt to changes in people’s preferences, changes in technology, and changes in resource availability. When consumers are free to choose which products, they spend their money on, they are able to influence where entrepreneurs invest, what products are produced, and in what quantities.
Who Benefits from Profit?
Obviously, the entrepreneur who correctly forecasts future economic conditions will enjoy the reward of greater profits. But now we can see how others benefit from profit as well.
Consumers enjoy the benefit of enjoying new and better products. Because of profit, these products will become increasingly available and affordable until the market is saturated to the point where increased production is no longer profitable. As entrepreneurs seek to maximize production of profitable products, they will need to invest in the labors of others. So not only to consumers benefit, but workers are able to earn a greater living as well. Profit and loss are signals which everyone to a greater standard of living.
A successful entrepreneur is able to earn a profit, not by cheating people, but by meeting the desires of his customers. He does this by anticipating what products they are most willing to spend money on. As they seek to earn a profit, they continually examine whether the resources at their disposal are being used in the most efficient way to meet the needs of the greatest number of people.
Obstacles to Meeting The Needs of Others
This process only works when consumers are free to choose what products they spend money on, and entrepreneurs are free to make whatever changes are necessary to earn a greater profit.
When profits are villainized, so that a portion of profits are taken through taxation, this is bad for everyone. It is bad for entrepreneurs, who receive a decreased return for their investments. As profits decrease, entrepreneurs will decrease investment in production. This hurts workers, who receive less investment for their labors. It is bad for consumers, who get less of the product that they desire.
When people call for the government to bail out industries that aren’t profitable, they prevent those resources from being recombined in more beneficial ways. When politicians protect certain jobs they like, they fail to recognize the more profitable, yet unseen jobs they destroy (see Part 2). Instead of responding to losses by making necessary changes, they will continue to waste scarce resources for products that people don’t want enough to buy.
We have the responsibility to use the limited resources as efficiently as possible to meet the needs of others. Making sure entrepreneurs are free to seek a profit, while also bearing the risk of an uncertain future, is the best way to make sure that the earth’s resources are being used in the best possible way.
The Christian Exile 