In January, 2009, President Obama told the banks that it was OK to make profits, but that “now” (the year 2009 I assume) is not the time. Of course, the banks had lost a lot of money and needed profits to “recapitalize” their balance sheets and enhance their soundness. Not earning money would have contributed to the weakness of the banking sector. It is not clear whether the President was talking only to the banks, or if his view extended to other firms, movie actors, highly paid athletes etc.

The concept of profits has never been in favor among those who think that making a profit is the exploitation of labor. Indeed, the Soviet Union never used the concept which is one big reason why they failed so miserably.

Profits tell us whether or not resources are being used efficiently and the Soviets didn’t have a clue. In the U.S., a failure to make profits is a signal that resources are being misused and mismanaged.

Many who have this view further allege that those making a lot of money are doing it at the expense of others, so every dollar a “rich” person makes could have been made by a “poor” person had the rich person not taken it. Other facets of this perspective suggest that it is not the value of output that should determine compensation, but just the number of hours worked and that all hours worked might even have the same value (we should all have equal incomes regardless of what we produce). Of course, millions of “poor” people get an income and don’t work at all.

William Dunkelberg
Economic Strategist,
Boenning & Scattergood

This is a view that is totally alien to the fundamentals of free markets and individual freedom where workers are free to find the employment that offers the highest wage (their highest value to a firm) and where employers cannot pay more than the value the worker creates for the firm. If the owner of the firm does well, he or she gets paid well (profits) and is rewarded by attracting more competition which is the discipline on profits made. The notion that the rich only make money at the expense of a valuable worker presumes that the worker is not free to find better pay elsewhere based on their contribution to the efforts of a firm which would find it “profitable” to hire them.

Here’s a thought experiment.

If it is true that the rich make their money by preventing others from making money, how about we get the rich to stop working for a year or two so that the “poor” can catch up?

If the rich stop making money, then the poor can have it and will make more. Think about it.

No doubt some compensation deals are inappropriate by any market performance measure and that boards of directors have often done a poor job of managing compensation, many co-opted by management (in my view, the Chairman of the Board, which represents shareholders, should never be the President/CEO). But the compensation of highly paid individuals doesn’t come by suppressing worker pay (more likely paid for by customers in the prices of goods and services) and is rarely a major expense item relative to business revenues.

There are more logical economic explanations for the growth in highly paid individuals and “class warfare” will not change these, history has proven that.