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Profit: The Concept and Its Moral Features

Published online by Cambridge University Press:  13 January 2009

James W. Child
James W. Child
Affiliation:
Philosophy, Bowling Green State University
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Extract

Profit is a concept that both causes and manifests deep conflict and division. It is not merely that people disagree over whether it is good or bad. The very meaning of the concept and its role in competing theories necessitates the deepest possible disagreement; people cannot agree on what profit is. Still, simply learning the starkly different sentiments expressed about profit gives us some feel for the depth of the conflict. Friends of capitalism have praised profit as central to the achievement of prosperity and to civilized modern life. Calvin Coolidge, that silent sentinel of American business, said, “Profit and civilization go hand in hand.” F. A. Hayek tells us that

in the evolution of the structure of human activities, profitability works as a signal that guides selection towards what makes man more fruitful; only what is more profitable will, as a rule, nourish more people, for it sacrifices less than it adds.

Type
Research Article
Information
Social Philosophy and Policy , Volume 15 , Issue 2 , Summer 1998 , pp. 243 - 282
Copyright
Copyright © Social Philosophy and Policy Foundation 1998

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References

1 See Gallie, W. B., “Essentially Contested Concepts,” Proceedings of the Aristotelian Society 1955–56, vol. 56, pp. 167–98.Google Scholar

2 In a speech in New York City, November 27, 1920.

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8 Ibid., entry under “profit,” p. 379 (emphasis added). To appreciate just how complex the notion of profit can be in accounting, see Paton, William, Corporate Profits (Homewood, IL: Irwin, 1965).Google Scholar The entire volume is pertinent, but chapter 2 is especially on point.

9 Newman, Benjamin and Mellman, Martin, Accounting Theory: A CPA Review (New York: John Wiley and Sons, 1967), p. 58 (emphasis added).Google Scholar

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12 In its most unvarnished form, this argument is found in Mandeville, Bernard, The Fable of the Bees, 2 vols. (Oxford: Oxford University Press, 1924)Google Scholar; see also F. B. Kaye's long and very helpful introduction.

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17 This micro-macro distinction is essentially the distinction John Rawls set out in “Two Concepts of Rules,” reprinted in Ethics, ed. Thomson, Judith and Dworkin, Gerald (New York: Harper and Row, 1968), pp. 104–35.Google Scholar

18 Of course, the more typical expression in game theory is that a game is zero-sum. But the idea that gains and losses sum to zero, and thus cancel each other out, can easily be extended to a single transaction. (Indeed, a transaction can be treated like a two-by-two game, where each player can elect to trade or not to trade, giving rise to four possibilities in a four-celled [two-by-two] matrix. However, since the zero-sum theory is wrong, the transaction will not come out to be zero-sum.) In any case, for now, I will use the term a little loosely and go no further into game theory.

19 Plato, , Euthydemus, 304Google Scholar, in The Dialogues of Plato, trans. Jowett, Benjamin (New York: Random House, 1937), p. 167.Google Scholar

20 Aristotle, , Nicomachean Ethics, ed. and trans. McKeon, Richard (New York: Random House, 1941), 1133a26, p. 1011.Google Scholar

21 Ibid., 1133a–1133c, pp. 1010–12. Below, I shall argue that Aristotle's view, even if based on demand and relational in nature, cannot be truly subjective. Still, in contemporary economics, we naturally think of demand as based upon subjective preference. For us, demand just is aggregated preference, and preference must be subjective.

22 The Politics of Aristotle, ed. and trans. Barker, Ernest (Oxford: Clarendon Press, 1946), Book I, ch. X, 1258a38–40, p. 28.Google Scholar

23 Aristotle, , Nicomachean Ethics, 1132b18–20, pp. 1009–10 (emphasis added).Google Scholar

24 See, for example, Spiegel, Henry William, The Growth of Economic Thought, 3d ed. (Durham, NC: Duke University Press, 1991), pp. 24–27Google Scholar; Roll, Eric, A History of Economic Thought, 4th ed. (London: Faber and Faber, 1973), pp. 31–35, esp. pp. 32–33Google Scholar; Langholm, Odd, Wealth and Money in the Aristotelian Tradition (Bergen: Universitetsforlaget, 1983), ch. 4, esp. pp. 50–53Google Scholar; and Lewis, Thomas J., “Acquisition and Anxiety: Aristotle's Case against the Market,” Canadian Journal of Economics, vol. 11 (1978), pp. 69–90.CrossRefGoogle Scholar It should be noted that Lewis believes his own contribution to the case for Aristotle's anti-commerce point of view lies in having shown that anxiety about livelihood and the destruction of friendship and citizenship counts against market transactions. Nonetheless, Lewis also concurs completely with the more canonical interpretation of Aristotle's critique based upon the unending pursuit of money in retail trade. See pp. 73–77.

25 See Flew, Antony G. N., The Politics of Procrustes (Buffalo: Prometheus Press, 1981), pp. 148–54Google Scholar; Miller, Fred D. Jr., Nature, Justice, and Rights in Aristotle's “Politics” (Oxford: Clarendon Press, 1995), p. 321Google Scholar (in fairness to Miller, he suggests that this interpretation, while legitimate, “requires considerable speculative unpacking”); and Meikle, Scott, “Aristotle and Exchange Value,” in A Companion to Aristotle's “Politics”, ed. Keyt, David and Miller, Fred D. Jr., (Oxford: Blackwell, 1991), pp. 156–81.Google Scholar Meikle has other, more original, interpretations of some of Aristotle's views on trade, but h e makes it clear that, in addition, he adheres to the interpretation of Aristotle which sees trade as inherently zero-sum. See esp. pp. 163–64.

26 See Langholm, , Wealth and Money, p. 55Google Scholar, and especially Langholm, Odd, The Aristotelian Analysis of Usury (Bergen: Universitetsforlaget, 1981).Google Scholar Although the whole book is pertinent, chapter 4, entitled “The Teleology of Money,” pp. 54–69, is most directly on point.Google Scholar

27 Schumpeter, Joseph, History of Economic Analysis (Oxford: Oxford University Press, 1954), pp. 60–62.Google Scholar

28 Ibid., p. 61.

29 Ibid. “Positive economics” is that part of economics which is capable of empirical confirmation and which does not engage in value judgments or normative claims.

30 I believe this is true despite Sir Ernest Barker's claim that, for Aristotle, “value depends upon demand, felt utility” (emphasis added); see Barker, , The Political Thought of Plato and Aristotle (London: Methuen, 1906), p. 379, n. 2.Google Scholar This claim seems fatuous, a case of reading modern conceptions back onto Aristotle, much like Schumpeter's points. Given Aristotle's notion of use as proper use in accord with his notions of formal and final causes (see below), a “felt utility” is either an empty notion or an exiguous one. It is also anachronistic in the extreme. Indeed, although it wouJd fake us too far afield to pursue the matter further, I do not believe that Aristotelian (or Platonic, for that matter) philosophy of mind could give rise to a modern notion of subjective preference. For that, we need Descartes, Locke, Hume, et al.

31 See Aristotle's discussion of his four causes and what point each serves in Physics, Book II, chs. 7–9, and Metaphysics, Book VII, chs. 7–9, in McKeon, , The Basic Works of Aristotle.Google Scholar

32 See Aristotle, , Politics, Book I, ch. 11Google Scholar, and Nicomachean Ethics, Book V, ch. 5.

33 Matthew 19:21 and Matthew 6:24.

34 Quoted in The Great Thoughts, compiled by Seldes, George (New York: Ballantine Books, 1985), p. 210.Google Scholar

35 See, inter alia, Roll, , A History of Economic Thought, p. 46Google Scholar; Meek, Ronald L., Studies in the Labor Theory of Value (London: Lawrence and Wishart, 1973), pp. 12–14Google Scholar; and Tawney, R. H., Religion and the Rise of Capitalism (New York: Harcourt Brace, 1937), p. 37.Google Scholar

36 Alejandro A. Chafuen relates demand in Aquinas to “common estimation”; see his Christians for Freedom: Late-Scholastic Economics (San Francisco: Ignatius Press, 1986), p. 95 and ch. 7 passim.Google Scholar

37 See ibid.; Friedman, David O., “In Defense of Thomas Aquinas and the Just Price,” History of Political Economy, vol. 12, no. 2 (1980), pp. 234–42CrossRefGoogle Scholar; and Gordon, Barry, “St. Thomas Aquinas,” The New Palgrave: A Dictionary of Economics (New York: Macmillan Press, 1987), pp. 99–100.Google Scholar

38 See a very persuasive argument to this effect in Hollander, Samuel, “On the Interpretation of Just Price,” Kyklos, vol. 18, no. 4 (1965), pp. 615–34.CrossRefGoogle Scholar

39 Aquinas, , Summa Theologica, II-II, question 77Google Scholar, in St. Thomas Aquinas on Politics and Ethics, ed. Sigmund, Paul (New York: Norton, 1988), pp. 73–74.Google Scholar

40 Hollander, , “On the Interpretation of Just Price” (supra note 38).Google Scholar

41 Smith, , The Wealth of Nations (supra note 13), p. 30.Google Scholar

42 Ibid., p. 47 (emphasis added).

43 Ibid., p. 30 (emphasis added). Thorough discussions of Smith's labor theory of value may be found in Hollander, Samuel, The Economics of Adam Smith (Toronto: University of Toronto, 1973), ch. 4Google Scholar; and Meek, , Studies in the Labor Theory of Value, ch. 2.Google Scholar Hollander, in a judicious discussion, gives fair weight to those places where Smith seems to use demand, utility, and other concepts related to contemporary neoclassical economics, yet concludes that Smith is, at heart, a partisan of some sort of labor theory of value.

44 Smith, , The Wealth of Nations, p. 33.Google Scholar See also a similarly categorical statement on p. 36.

45 The Dictionary of Modern Economics, 2d ed. (Cambridge, MA: MIT Press, 1983)Google Scholar defines “Pareto optimality” as that state “when the economy's resources and output are allocated in such a way that no reallocation makes anyone better off without making at least one person worse off” (p. 332). It defines a “Pareto improvement” as “[a] reallocation of resources which makes at least one person better off without making anyone else worse off” (ibid.). Obviously, an ethical exchange makes both parties better off (or, in the limit, leaves one of them unchanged in his utility) and makes no third parties worse off, so such an exchange is Pareto-improving. Exchange is a kind of “reallocation of resources” referred to in the definition. On Paretian conditions generally, see Schotter, Andrew, Free Market Economics (New York: St. Martin's, 1985), chs. 1 and 2 and p. 134.CrossRefGoogle Scholar

46 There is one very limited exception to this blanket assertion. But first let me remind the reader what I mean by “gains from trade.” I mean this as a term of art for those gains realized by individuals who exchange as recognized by formal economics, either through the notion of consumer and producer surplus or through the Edgeworth Box (an economic model for analyzing exchange which presupposes a world of two traders, where they possess reciprocal preferences and there exists a bilateral monopoly). For a typical treatment, see Hirshleifer, Jack, Price Theory and Applications, 3d ed. (Englewood Cliffs, NJ: Prentice Hall, 1984), pp. 210–26Google Scholar (consumer surplus) and pp. 400–410 (the Edgeworth Box). All this sounds very fancy, but it really only means that if I have an apple and I love oranges far more than apples, and you have an orange and have a confirmed preference for apples, we will both gain from the exchange simply because of our reciprocal preferences. That is gains from trade or what I earlier set out as pure surplus or transaction surplus.

However, I do not mean for the expression “gains from trade” to refer to the more general improvement of position due to market transactions in all conceivable circumstances. For example, Smith does realize that when the city trades with the country, both benefit (The Wealth of Nations, p. 356Google Scholar)—although he attributes the gain to division of labor, not to the mere act of exchange in the context of reciprocal preferences. Moreover, he clearly recognizes that free international trade benefits all countries involved, for without this assumption, his war against mercantilist regulation and tariffs on trade makes no sense. Again, however, everything he says indicates that he bases this mutual improvement (as in the case of trade between city and country) on division of labor, or even on a vague glimpse of comparative advantage, but not on an aggregation of individual “gains from trade” that come from transactions alone.

One must, of course, carefully differentiate (1) “gains from trade” which arise exclusively because of reciprocal preferences of individual transactors, and which result in an improvement in each individual's situation, from (2) more general improvement in the position of two collective parties (countries or regions) engaged in aggregations of transactions, resulting from specialization and division of labor. The necessity of making this distinction with great care was made clear to me in a very helpful conversation with Robert Sugden.

47 Smith, , The Wealth of Nations, pp. 4–5.Google Scholar Smith's famous example of the p in factory makes the point well. If one man makes one whole pin at a time, he may only make a few in a day, as there are a variety of operations he must go through. Even if you add workers, where each makes a whole pin, gains in production are merely additive. If, however, you break down the task and have one man draw the wire, one man cut it, one man sharpen it, another make the head, another attach it, etc., you will get multiplicative increases in production. In Smith's pin factory, the division of labor provides 240 times the productive power of the same number of individual pin-makers each making one whole pin at a time.

48 Ibid., pp. 9–10.

49 See, inter alia, ibid., pp. 11–12 and 17–18.

50 Marx, Karl, “Free Human Production,” in Writings of the Young Marx on Philosophy and Society, ed. Easton, Loyd and Guddat, Kurt (Garden City, NY: Doubleday, 1967), pp. 278–79.Google Scholar

51 Buchanan, Allen, Marx and Justice (Totowa, NJ: Rowman and Allanheld, 1982), p. 39Google Scholar; for Buchanan's full account of exploitation, see generally ch. 3.

52 Arnold, N. Scott, Marx's Radical Critique of Capitalist Society (Oxford: Oxford University Press, 1990), chs. 4 and 5 passim.Google Scholar To clarify, Arnold is not a Marxist; rather, he is a strong critic of Marx. Nonetheless, Arnold's analytic rubric for exploitation is highly original and one of the most helpful in the literature.

53 Ibid., pp. 91 and 97.

54 Ibid., p. 90; cf. Buchanan, , Marx and Justice, p. 38.Google Scholar

55 Arnold, , Marx's Radical Critique, pp. 90–91.Google Scholar

56 Elster, Jon, Making Sense of Marx (Cambridge: Cambridge University Press, 1983), p. 167.Google Scholar For Elster's coverage of exploitation more generally, see especially ch. 4.

57 Ibid., p. 181. See also Roemer, John, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982), pp. 39–40 and ch. 3 generally.CrossRefGoogle Scholar

58 This explication of the narrow notion of Marxian exploitation draws on Marx, Karl, Capital (New York: Charles Kerr and Co., 1906), esp. vol. 1, Part III, ch. 7.Google Scholar Secondary sources include: Buchanan, , Marx and JusticeGoogle Scholar; Arnold, , Marx's Radical CritiqueGoogle Scholar; Elster, , Making Sense of MarxGoogle Scholar; Roemer, , A General Theory of Exploitation and ClassGoogle Scholar; entry, Susan Himmelweit's “Exploitation” in A Dictionary of Marxist Thought, ed. Bottomore, Tom (Cambridge, MA: Harvard University Press, 1983), pp. 157–58Google Scholar; and Roberts, Paul Craig and Stephenson, Matthew, Marx's Theory of Exchange, Alienation, and Crisis (New York: Praeger, 1983).Google Scholar

59 Things get more complicated than this for a variety of reasons. Labor differs in quality, intensity, and required training, so a notion of “abstract labor” must be formulated. That leads to further complications. For our purposes, however, the foregoing simple sketch will do.

60 See Marx, Karl, Capital (New York: International Publishers, 1967), vol. 3, pp. 594–97 and 609.Google Scholar

61 This particular example comes from Russell, Bertrand, The Problems of Philosophy (Buffalo: Prometheus Books, 1988), pp. 97–98Google Scholar; for his discussion of relations generally, see chs. 9–13 passim.

62 Heilbroner, Robert, The Worldly Philosophers (New York: Simon and Schuster, 1980), p. 24 (emphasis added).Google Scholar

63 Ibid., p. 22 (emphasis added).

64 Ibid., p. 34.

65 Some volumes that take this approach are actually pro-capitalist. See, for example, Brockway, George, Economics (New York: Harper and Row, 1985), ch. 2.Google Scholar Most, however, take Heilbroner's highly critical position. See, for example, Cavanaugh, Gerald, American Business Values, 3d ed. (Englewood Cliffs, NJ: Prentice Hall, 1990), chs. 1, 2, and 3Google Scholar; and Schwartz, Barry, The Battle for Human Nature (New York: Norton, 1986), chs. 3, 6, 9, and 10.Google Scholar

66 Heilbroner, Robert, The Nature and Logic of Capitalism (New York: Norton, 1985), pp. 65–66.Google Scholar

67 Locke, John, Second TreatiseGoogle Scholar, in Locke, , Two Treatises of Government [1690], ed. Laslett, Peter (Cambridge: Cambridge University Press, 1960), ch. 5.Google Scholar The Lockean proviso is formulated several times and in several different ways in the Second Treatise. The two clearest, most explicit, and most famous formulations are in section 27, where “enough and as good” is used, and in section 33.

68 Throughout, I have used these three expressions as if they were synonymous. Of course, they are not. Utility in the canonical formulation is a mapping of a preference ordering into the real numbers—that is, a function in the technical, mathematical sense, where both the range and the domain are subject to a variety of limitations. Preference satisfaction is the psychological basis for utility maximization. However, welfare is the term that differs most from the others, for it (typically and at least prima facie) suggests “objective” elements of undesired needs and unrecognized constituents of well-being. That is, I may need a medicine for my welfare but not know it, or I may know it, but not prefer it or desire it. For our purposes, however, the three terms can be used interchangeably.

69 See, for example, Braudel, Fernand, The Wheels of Commerce (New York: Harper and Row, 1979)Google Scholar; Rosenberg, Nathan and Birdzell, L. E., How the West Grew Rich (New York: Basic Books, 1988)Google Scholar; and Jones, E. L., The European Miracle (Cambridge: Cambridge University Press, 1981).Google Scholar

70 The same point could be made in a couple of ways using the concepts of contemporary economics. One approach is that of consumer and producer surplus. A different perspective that, nonetheless, makes the same point is the example of the two traders in the Edgeworth Box. See note 46 supra.

71 See Robert Nozick's elegant last paragraph in Anarchy, State, and Utopia (New York: Basic Books, 1974), pp. 333–34Google Scholar, for an implicit, but powerful, appeal to Kantianism in this form of rights-based libertarianism. Even more clear is the undeniable moral, as opposed to egoistic, foundation of the position.

72 Although the mathematics of contemporary economics does accept the case where the improvement in Thursday's situation approaches zero in the limit, I reject it on practical and psychological grounds. Just as, in the zero-sum view, exchange at a “just price” was intentional action without motive, so exchanging where your gain “approaches zero in the limit” makes no sense as regards motivation or practical reasoning, for you are also approaching indifference in the limit.

73 Roemer, John, Free to Lose (Cambridge, MA: Harvard University Press, 1988), p. 59.Google Scholar

74 It fails to be a market transaction because there is no market (there are not multiple traders of bananas and breadfruit). Rather, this is a case of “bilateral monopoly,” with each trader having one kind of item and reciprocal preferences. However, this does not offer the threatening associations that usually go with “monopoly.” There is not, indeed there cannot be, coercion, for example. Each trader, but for lacking special knowledge and skills, has access to the other's source of products, and each trader can live quite well (as they did in the pre-trade world) without the other's product.

Return to the market point again for a moment. Usually we think of a market as requiring money, if for no other reason than to generate enough exchange to be a market. For our purposes, it can remain a moot point whether a market requires money, for we do not really need a fully developed market.

75 See my essay “Can Libertarianism Sustain a Fraud Standard?” Ethics, vol. 104, no. 4 (07 1994).Google Scholar

76 Hobbes is, of course, the locus classicus for this approach. By far the most important effort in contemporary theory is Gauthier's, DavidMorals by Agreement (Oxford: Oxford University Press, 1986)Google Scholar, although most would agree that Gauthier does not quite succeed in a complete reduction of morals to self-interest.

77 See, for example, Schumpeter, Joseph, The Theory of Economic Development (New Brunswick, NJ: Transaction Books, 1983), ch. 4.Google Scholar

78 Among several works, perhaps the one most on point is Kirzner, Israel, Perception, Opportunity, and Profit (Chicago: University of Chicago Press, 1979)Google Scholar, esp. Part 3; but see also his Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973).Google Scholar

79 A “negotiated sale” involves only one (or one lot) of something versus the vast quantity required for a true market with nearly perfect competition. It does not involve repetitive purchases and sales to many parties. There is no market price set by supply and demand and no assurance that the market will “clear.” Indeed, in this case, that could only mean that the item will be sold; but there is no assurance of that. Lastly, the actual transaction price is arrived at through bargaining.

Treatments of negotiation, where the points set out here are discussed in detail, may be found in Lewicki, Roy J. and Litterer, Joseph A., Negotiation (Homewood, IL: Irwin, 1985), ch. 4Google Scholar; and in an outstanding book by Raiffa, Howard, The Art and Science of Negotiation (Cambridge, MA: Harvard University Press, 1983), passim, but esp. pp. 35–65.Google Scholar