The Ethics of Profit in the Real World

A typical defense of capitalism is that profit is always nearly, or according to some unfortunate Koch-heads, perfectly, aligned with ethics, or is otherwise in some way naturally beneficent.  The idea behind this is that trade can only happen if both parties benefit; in other words, the defense starts with the conclusion that capitalism is benefit, and then designs a thought experiment to discover why this is:

“Now, the firm can only operate because customers, whether consumers or other firms, want to buy the goods or services that it provides. Hence, it fulfills some needs of customers.

Likewise, it can only operate if it can persuade others to provide real capital, financial capital, labour inputs, raw materials, etc. Normally, others will only do so for a certain renumeration [sic]. So, even before the firm has earned a profit, it has satisfied some needs of both customers and providers of input. These are, of course, positive consequences.

Consider the case where both customers and providers have entered their relations with the firm voluntarily, and are allowed to stop their purchase and provisions either immediately, or with a notice agreed upon with the firm, perhaps as the result of a negotiation. This is, of course, the normal case. Hence, in its operations, the firm can only operate as long as each provider will continue to provide. Obviously, both customers and providers will only continue to buy and supply, respectively, as long as other firms does not offer better conditions. The firm has to earn a positive normal profit in order to be able to honour its obligations. If it does not, it will have to stop operating when equity is spent.

[…]

We saw that the pursuit of profit has a large number of positive consequences. Therefore, it may be judged the ethical thing to do, given a rule-consequential ethics.” (Koch 274-275)

Consider the case where a firm and customer enter into a voluntary relationship, which is predicated upon an involuntary relationship with a third party.  Indeed, it would be hard to argue that there is any real example of the two-party version of this thought experiment, since all materials and knowledge that belong to private hands were put there in the first place by force: Conquest, enclosure, eminent domain, intellectual property, and so on.  One would struggle strenuously to find any example of land that was privatized willingly.

Consider the case where there is no firm and no customer, and someone is voluntarily producing something for themselves to fulfill their own needs, and then legal or social change makes this impossible, which results in the person paying for the same thing they were already getting.  If there is profit involved here, the person is not better off than they were before.

Consider the case where the passage of time, everyday stresses, engagement with work, the environment, public health, happiness, what happens to individuals, and the birth and death of people are of no consequence.  By disregarding all these factors, which surely have no impact whatsoever on quality of life, we can determine through objective and quantifiable economic means how people’s lives have improved.  All that is required is to look at the rate of profit:

“A negative pure profit shows that the activities of the firm have turned valuable productive resources into other goods and services that are less valuable. This is an indication that the firm in question has wasted society’s resources (where the resources of society mean all resources in the economy). So, there is nothing admirable about negative profit. A positive profit at least indicates that less valuable resources has been turned into more valuable resources.” (Koch 275)

The violence that is embedded in this mode of thinking is so incredible it’s hard to imagine.  Even from a purely abstract, economic standpoint, there are a multitude of reasons why a firm could be operating on a loss, one of them being they are a non-profit or charitable organization; the simplified calculus of “positive profit = increase in value” must ignore the realities of opportunity cost and externalities.  More importantly, there is a surprising ideology that lies underneath the bone-dry language.

First, the idea that negative profit means (as in unequivocally proves) something is qualitatively wrong with the firm betrays the class elitism of this ideology.  If you have money, you are responsible for that, because you did something positive for society; if you don’t have money, you are responsible for that, because you are a drain on society.  This is not surprising, since feeling wealthy makes people more conservative.  This is a way to rationalize the state of the world, rather than an actual description of causative factors.  The idea that negative profit means that value was lost also has dubious assumptions at its core.  Without redefining profit as something other than monetary gains minus monetary losses, any instance of a person doing something that costs them money means that value is lost.  Anything done for the joy of experience is irrational and a waste of society’s resources.  The fact that “society’s resources” is how things are put is especially interesting, because it’s a case where property is uniquely seen as belonging to society; in any other case of this ideology, property belongs solely the owner, and it is unethical to judge the consequences of what they do with their property, being that it belongs to them and they are free to do whatever they like (within the infinite recursion of caveats) with it.

“The price system is a mechanism that allows for economic coordination, in the widest sense of the word, in a society given to the conditions outlined in the previous section. The great advantage of the price system is that it is extremely efficient in allowing people to coordinate their behaviour. If the price of a certain good or service is increased, for whatever reason, self-interested actors will ceteris paribus seek to decrease their use of that good, or increase their production of it. The actors need never know why this happened in order to react properly on these price signals.” (Koch 277)

Do we really never need to know why this happened?  Consider the example of oil prices:A reduction in supply, especially in the context of a finite resource, means that there should be more of a motivation to look for a substitute for the resource.  An increase in demand, especially in the context of practical prices which are typically generated from production rates moreso than reserves, could also indicate that one *should not* look for a substitute, as standards and infrastructure for energy will tend to use the resource.  Let’s look on the other hand, an increase in supply or a decrease in demand.  Are these identical?  An increase in supply implies to the capitalist an increase in abundance.  However, prices are typically generated from production rates and not proven reserves, and proven reserves have tended not to decrease over the years.  There are many reasons for this, the primary two being improved technology and simply that companies do not survey for every little bit of a resource due to the cost of doing so.  However the proven reserves are simply the supply we know about, not the actual total supply, therefore an ebbing price does not necessarily indicate an absolute abundance.

Now we come to the most important distinction, the most contextually interesting for oil, as well as the one that shows the critical weaknesses of the price system: Falling demand can indicate far more than could ever be conveyed through a falling price.  In the real world, oil’s price relative to its real costs benefits from severe price externalities, especially in the US where oil is a subsidized product.  The refining of oil into gasoline or kerosene, or the chemical process of converting it to oligomers for production of plastic, provides certainly the majority of the feedstock for modern conveniences.  If oil prices have gone down, does this mean that we should increase our use of it?  Certainly the Kochs wouldn’t agree that burning more oil might be bad for the environment, but the simple fact is that prices would never capture this relationship, because nobody owns the environment, and even if it were owned, it is not necessarily true that its owner would be a good enough steward to bring and win litigation against anyone who causes harm to it (and cause a resulting change in prices).  Oil, and all products derived from it, also create pollution on a scale that has turned into a multi-species existential threat.  This pollution, of course, is not internalized in the price;  The massive external costs have long been known but ignored by policy-makers who should be internalizing these costs by introducing laws that would correct them: “The majority of people paying just over $1 for a gallon of gasoline at the pump has no idea that through increased taxes, excessive insurance premiums, and inflated prices in other retail sectors that that same gallon of fuel is actually costing them between $5.60 and $15.14” (The Progress Report 2003).  In either extreme, the cost of fuel is many times higher than the price of the fuel.  Plastics must be treated similarly, since the cost of disposing of a material that is (for all practical purposes) non-biodegradable is not figured into the price.

However, eliminating subsidies or providing them likewise to renewables would not fix the problem; The agnostic character of a price signal means that rather than falling demand signalling to economic actors that there is something wrong with oil and cessation of its use is most desirable, oil prices, and therefore oil use, will simply follow a sinusoidal tapering off that will prolong its use far beyond the limits our waste sinks can handle.  In fact, the falling demand, corresponding to a falling price, will require ever-higher subsidies for renewables, and will actually cause more pollution at a higher rate than if there had been no new subsidies:

“If governments only use RE subsidies to reduce emissions without carbon pricing, RE will become cheaper than fossil resources. Resource owners will respond by reducing the scarcity rent component of the fossil resource price, which will allow them to continue extracting at positive, albeit lower, profits. To achieve the emission target, the regulator has to raise subsidies further until RE prices fall below the extraction costs of fossil resources. The result of this race to the bottom of energy prices is an explosion in energy use.” (Edenhofer S14)

In fact, profit at its most conceptual level provides the fuel for the engine of an ever-growing scale of energy use.  Profit is to act as both an incentive for growth for the firm whose revenues include profit, as well as a provision of the capital to do so; In essence, profit is a guarantee that a firm’s energy scale will increase.  However, oil is not the only energy source that causes pollution–all energy sources create some sort of illth, whether carbon dioxide, toxic gases, land use changes, physical danger to fauna, the entire list is more cumbersome than is necessary here.

Most importantly, since all economically valuable activity requires energy, all economic activity must be treated as being based on this corrupt calculus of energy prices.  Thus, considering the real-world state of the economy, the case for profit maximization being consequentially or otherwise ethical must be considered weak: Real-world economic activity is based on inputs whose harm is quantified at a mere fraction of its benefit.  The most staunch advocates of the price system hold that too much government intervention and not enough private property is the reason these price externalities cause harm.  However, the idea that more discretization and exclusivity would solve problems caused by dissipative wastes which have no conception of private property or its boundaries is not very compelling.

The idea that litigation over the damages caused by pollution to private property owners will cause polluters to internalize all the costs of their pollution is even less so.  Garrett Hardin’s influential essay in which he describes the “Tragedy of the Commons”, is still used as part of the gospels of the virtuosity of wealth despite being so poorly supported and utterly wrong that it had to be retracted.  Though commonly assumed to be an inevitability, nowhere is it acknowledged that the Tragedy requires certain environmental conditions: A private property regime, to which the resource in the commons must be transferred, and a profit motive, which must be present to incentivize actors to take valuable resources from the commons and use them for private benefit.  Without the profit motive, there is a cost to privatizing the common resource, and thus no “economic incentive” to do so.  Without private property, there is no way for any one person to benefit from over-exploiting the commons, and thus no “economic incentive” to do so.  Here, again, we have a case where profit produces more illth than wealth (except, of course, for the seller, to whom the tragedy is actually a comedy).

Capitalism and the profit motive have always been silly with ethics violations.  From its introduction through political force, driving the subsistence-farming underclass into “voluntary” urban wage labor, to its various imperial exponents making colonies out of the countries unfortunate enough to have valuable resources and no defense against industrial military strength, to its escalation and streamlining of the slave trade and obfuscation of the very use of slaves (chattel or otherwise) through commodity relations, to today, where a global bureaucracy maintains the elite position of its handful of beneficiaries over and above the basic infrastructure that keeps the planet and its people alive.  There has never been an ethical version of capitalism, and capitalism is as far away from ethics as a system comes.

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