Why Is Creating Value Good, Profits Bad?
"Profit" is a dirty word. Profit-seeking businessmen are stock villains in Hollywood movies. "Occupy Wall Street" protestors demand, "People not profits" (whatever that means). Companies reporting healthy profits are automatically assumed to be exploiting customers and can only atone for this by "giving back" to their communities. "Making a profit" has an unsavory, morally suspect taint.
Yet simultaneously, Americans have a far more positive view of the concept of "creating value." The mainstream press lauds visionary businessmen who "create value," such as the late Steve Jobs of Apple. The business literature routinely emphasizes the importance of "creating value." So many organizations wish to be seen as "creating value" that it has become a business cliche, like "best practices" and "thinking outside the box."
But in a free society, "creating value" and "making a profit" are just two sides of the same coin. Under genuine laissez-faire capitalism, all trades are voluntary. If I buy a new laptop computer from you for $500 in a free market, it means I value the computer more than the $500 and you value the $500 more than the computer. Both of us thus benefit from this exchange.
I've purchased many Apple products over the years, and in each case Steve Jobs gave me something of greater value than the money I gave him in exchange. If one multiplies that by the millions of other happy Apple customers, it means he created far more value than the value of his personal wealth. His profits were thus a measure of the immense number of other people he made better off.
But it's not only manufacturers of physical goods who create value. Service providers also create value. For example, eBay has created a robust global marketplace that allows people to engage in mutually beneficial trades with partners they might not have found otherwise. The commissions eBay collects for this service reflects the value they have created.
Similarly, insurance companies enable individuals to voluntarily share the risks of unlikely but expensive adverse events, such as a serious accident or illness. Customers pay premiums in exchange for promised payments if a covered accident or illness befalls them. An insurer must carefully analyze the likelihoods and costs of possible adverse events, then set premiums at a level that is worthwhile to customers while allowing the insurer to remain economically viable in the long run. Offering this valuable service takes rational thought and hard work. The successful insurer's reward is his profit.
Mitt Romney's former company Bain Capital also created value by a combination of venture capital and private equity services. As the Wall Street Journal recently noted, Bain took underperforming or undervalued companies and tried to turn them around through improved management. Of course, "Sometimes this mean[t] closing parts of the company and laying off employees, but the overriding goal [was] to create value, not destroy it." The result was profit for Bain's investment partners.
In contrast to profits earned by companies engaging in voluntary trade, apparent "profits" made by cronyism and political favoritism are an entirely different matter. This includes government bailouts of failing businesses or subsidies to otherwise nonviable enterprises (such as the "green energy" Solyndra company). The money they receive isn't the result of voluntary trades, but government compulsion. Taxpayers must pay for goods or services they would not otherwise voluntarily purchase. We properly look askance at those who become rich not by offering value but through bailouts and political "pull."
But honest businessmen who have earned their profits through voluntary trade shouldn't apologize for this fact. Rather they should take pride in their accomplishment, just as they take justified pride in the value they have created.
As a concrete reminder of "creating value," attorney-blogger Doug Mataconis recently observed: "5 years ago I was using a cell phone that didn't have a touch screen, didn't have apps, and didn't access the internet. Thanks, Steve Jobs."
Profits make such innovation possible and profits are the just reward for successful innovators. If we wish to continue enjoying the benefits of capitalistic innovation, we should regard "making a profit" as praiseworthy as "creating value," and give those who earn honest profits the respect and gratitude they deserve.