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Profit IS Justified By Entrepreneurial Risk

July 4th, 2009

In his most recent post, Profit is not justified by entrepreneurial risk, Francois Tremblay appears to be baiting the big-tent Libertarians into defending the current economic system, which they quite wrongly describe as a “free market”. Or maybe I’m just in a particularly polemic mood (it wouldn’t be the first time). I’m not a “Libertarian”, but I’ll bite, if only to clear the air.

I have probably said it before, but in case I have not, let me make myself abundantly clear: the problem is not teh evil “profit”.

In a freed market, the return to labor is profit, when workers produce and sell products, what they receive in exchange for their production is sales revenue, not wages. Any net income (over and above their expended outlays) resulting from these sales is profit, not wages. In a truly free market, we’re all entrepreneurs. The degrees of risk we each accept in exchange for certain returns, of course, will vary widely by individual case.

since the workers take just as much risk as the owners.

The argument that “the workers” take as much risk as the entrepreneurs —in a free market— is patently false. The workers don’t take anywhere near as much risk as the entrepreneurs. The workers receive income for their production even if the ultimate product turns out to be a dud and generates 0 revenue. On the other hand, the entrepreneurs bear nearly all of the risk that others are unwilling to undertake. We know this is true, because if “society” was willing to bear these risks at a lower premium than the entrepreneur, they would’ve already done so, and we wouldn’t be talking about entrepreneurs.

Workers have to contend with losing their jobs and taking a major hit while looking for another one,

Meanwhile, entrepreneurs have to contend with losing everything, property, belongings, family-life, reputation, credit, etc. On the other hand, up until the entrepreneur closes shop, and the employees are pink-slipped, the employees benefitted (in a rather ironic reversal of the zero-sum-game) from the receipt of wage income in gross excess of their contributions’ actual value to society which may in some extremes be 0 or negative.

while the rich owners benefit from lenient bankruptcy laws.

This is a clear-cut example of “poisoning the well”. First, the assumption that the entrepreneur is rich ex ante (or some other primitive accumulation nonsense), the corollary to which of course is the use of “rich” in pejorative [1]. Whatever. Furthermore, the assumption that lenient bankruptcy laws exist to the benefit of the entrepreneur is not really a slam-dunk, and is a statement to which I could offer at least one serious objection [1].

Profit, which in a freed market may accrue to the controlling interests of any factor of production (i.e., land, labor or capital) is indeed justified by entrepreneurial risk. In a freed market, anyone who undertakes any productive endeavor is an entrepreneur. Some may choose to take the relative security of “wage” labor in lieu of pure entrepreneurialism (i.e., the net of my revenue less expenses is my “profit”), but I submit that under these conditions, these individuals are no less entrepreneurs. The only distinction is that they prefer the relative security and stability of a certain type of employment, to other arrangements.

The problem is a disparity between “profit” and “wages”, the result of a perversely unfree market.

1. Of course we know from observation that many entrepreneurs were not rich by anyone’s definition, when they began their undertakings. And we also know from observation, that many entrepreneurs (the vast majority, really) ultimately fail, and never become “rich” enough to vilify. Even if the entrepreneur is “rich” to begin with, this descriptive fact alone says nothing about the legitimacy of his earned, acquired, or found position of wealth with regards to any other.

2. Since the counter-party in any bankruptcy filing consists of either another “rich” entrepreneur, or a banking cartel, it would seem that however lenient are the bankruptcy laws, they result in a total wash. (Unless it could be demonstrated that the bankruptcy laws also are detrimental to the non-entrepreneurs. Plausible? Perhaps. But this argument was put forth, and so I’m not contesting it.)

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