The subject of greed and profit has always been a very politically polarizing topic, with the left seeing profit as inherently evil and the right, while not perfect, seeing profit as a more acceptable showcase of success. From the Austrian perspective, profit is the side effect of providing a good or service that has more marginal benefits than marginal costs. It is also referred to as interest in some papers, being the interest on funds invested in the company.
The subject of profits and greed has been something of a front page topic in the fallout of the housing bubble and the associated bailouts and zero-interest funds being lent to banks unable to escape with their balance sheets in tact. Upon closer inspection, it becomes obvious why people are upset about the money that banks are making and especially the bonuses that bank executives are taking home. Ironically, as with most economic problems, people have a tendency to cry out to the government to fix a problem without realizing what is driving their misplaced anger against “profit”.
To get to the bottom if the situation, I will refer back to my introduction, a definition of “profit”. If you look at the government banking equation of bailouts + write-downs = profits, you can clearly see why people are upset: the banks aren’t making real profit, only ending the financial quarters with excess dollars and not giving anyone a service that yields marginal benefit.
It sparks the interest when an economist can talk to “common people” who have never heard about marginal benefit, yet still understand instinctively how profit is to be acquired. They fall short in their understanding how profit can be acquired without providing net marginal benefits and they wrongly stereotype excess profits as greed, often calling for government taxing and intervention to bring profit to a more acceptable level.
Psychologically, I can believe that a company has the ability to make too much money relative to the marginal benefits they provide to consumers. Economically though, I cannot believe that companies can make excessive profits, as profits are by definition the product of providing a good or service that provides a marginal gain to consumers. Both of these thoughts can be rationalized when one entity is added to the equation, government intervention into markets.
In every case, without fail, where there is an outcry of “excessive profits”, one can look no further than the acts of government intervention that cause “profits without cause” or those which were had without providing a beneficial service that seemed to warrant a specific quantity of profits. Drug companies “shameful” profits: a byproduct of extensive regulation by the FDA, Record bank profits: the direct effects of giving them billions of zero-interest dollars, and the list can continue into the auto industry and the fact that a great opportunity to change the way we think about cars was squashed by the government “saving” and industry which has failed miserably for decades.
The fact of the matter is, it is impossible under a pure market driven economy to make profits without being a net benefit for the community. In that case, the more profits, the better off society as a whole will be. When you fail to provide anything of value to society, people quit buying and profits dwindle. Barring government intervention, failure to change as profits decline will end up in bankruptcy and a new opportunity arises for other, more agile companies to step in and provide what that company couldn’t. The market works, but people are sometimes unable to see the forest for the trees.