America is the most successful country in the history of mankind, largely due to its capitalist, free-market system. So it never ceases to amaze me that some people spend their entire lives in America and never understand the role that the profit motive plays in that success. Two stories this week (as well as one on-going story) illustrate this perfectly.
The first is an article in the Wall Street Journal discussing “benefit corporations.” Benefit corporations (currently available in only six states) utilize a corporate charter that allows their board to consider other objectives, such as social concerns or the environment, over profit. Providing jobs to a low-income area, or creating green, alternative energy might be pursued, rather than the almighty buck. This all sounds warm and fuzzy, but what does it mean in practice?
A corporation (or sole proprietorship, for that matter) exists solely for one purpose: to produce a profit. Any jobs that corporation produces, or charities it funds, or public good it pursues are incidental to producing a profit, and in fact can’t even exist unless the corporation is profitable. Investors in a corporation have one measuring stick: what kind of profit does it make? Corporate management understands this, they know they will be judged on this metric; they also know if the corporation doesn’t make a profit it will cease to exist as will their jobs.
A Benefit Corporation measures success by different goals. They still plan to make a profit, but spend part of it on being nicer to their employees or customers, or on “saving the world”. The first problem is that “saving the world” tends to be a little hard to quantify. Whether the money is being spent effectively becomes pretty much an article of faith. The second is that when profits take second place to other priorities, they tend to disappear, along with the corporation. The third is that when decisions are made “for the social good”, it is difficult to know if that social good also incidentally benefits the CEO or his friends.
Although it is not a “benefit corporation”, the experience with Solyndra gives a great example of what to expect. Over half a billion dollars in taxpayer money was invested in Solyndra, but the government officials making the investment weren’t interested in making a profit; the real goals were “green jobs”, alternative energy production and a good photo op for the President. The “green jobs” came and went, and the product was never able to cost-effectively produce energy, but the photo shoot worked out great. And while all those taxpayer dollars were swirling down the toilet when Solyndra went bankrupt, the private investors with friends in the government somehow got put ahead of the taxpayers in getting paid back. All this was deemed for “the public good”.
The next story is that six Democrats in the House, led by Rep. Dennis Kucinich of Ohio, have filed the “Gas Price Spike Act”, a bill aiming to control gas prices by applying a windfall tax on oil and natural gas companies. A “Reasonable Profits Board” would decide what profit is reasonable, and levy a 100% tax on profits beyond that. The revenues would go to tax credits for high mileage vehicles and mass transit subsidies. Aside from the fact that the bill is quite certainly unconstitutional and, fortunately, quite certain to die in the House, it again illustrates their utter ignorance of the way our free market works. Gas prices cannot be reduced by taxing the profits of those producing gasoline; corporations will simply pass on the extra taxes by increasing the cost of gasoline, or this government board will render the business unprofitable, corporations will be driven from the market and the reduced supply will drive up the cost of gasoline. This bill is well-named, for it will surely cause a gas price spike.
Despite all the demonization from the left, the fact remains that profits are a good and necessary thing. Profits, not social welfare programs, are what made America the amazing land of prosperity and opportunity it is today.
[photo credit: g.s.springer]