What does it mean for a firm to have a positive profit? People think of it as some sort of evidence of exploitation for a firm to take $10.00 worth of parts and pay a person $10.00 to assemble them, into a device that a consumer will buy for $40.00 (and boast about his purchase). But of course there is no injustice in this, as long as the person who gathered those parts and sold them for $10.00 voluntarily chose to make that trade, the employee who assembled voluntarily chose to apply for and not quit that job, and the consumer willingly handed over the $40.00 in exchange for the device he wanted more than the money. AND if no alternatives were destroyed, then not a single one of the people in this transaction is worse off than he otherwise would have been.
i anticipate the objection: “Why can’t the consumer get the device for $20.00? Or why can’t the laborer be paid $30.00? Isn’t the rest of the firm just an exploiter, collecting a rent while offering no contribution?” This is an objection, but it is an objection in favor of the Free Market, and against the kind of market which prevails now. Yes indeed, if the only things necessary to produce the final product were the raw parts and the labor, then absolutely the consumer, the laborer, and the parts supplier should split among themselves the $20.00 collected by the rest of the firm in this scenario, and we can plainly see that this is the outcome the parts supplier, laborer, and consumer will desire, and be able to effect, given freedom to do so. If i worked for an employer in a Free Market, and found that my productive activities relied on no tools, machines, or other contributions from the firm itself, what would you expect me to do as soon as i realized this fact? How would my employer, or anyone else, prevent me from putting up a sign that said “Finished products, $35.00!” over my garage door, thus claiming all the sales and nearly all the profits that previously went to the employer? How would i prevent anyone else skilled in the trade from further undercutting me, until a price closer to $20.00 was reached and the benefits accrued to the consumer? How precarious is the situation of an employer who is dispensable! In a Free Market, this firm obviously is totally exposed to being cut out as a middle man, by the free negotiations of the consumers with the individuals actually doing the producing. What, pray tell, prevents this kind of breakdown in the fortunes of the very fortunate CEO’s and managers? What keeps the firm in the illustration in existence? There are exactly two possible reasons: Either the firm is making some sort of contribution unrecognized by the critic (either through machinery, publicity, distribution, coordination, etc.) or, and this is the true problem, the firm is protected against the Free Market.
i hold that no firm can survive in a Free Market without making some sort of contribution, for the reason i described above; namely that consumers and productive individuals will benefit enormously from cutting out the useless middlemen, and if they are permitted to negotiate freely they will do just that. But of course the above process is not to be observed every day in the world, and the sort of firm we blame for sucking up huge resources into the vast salaries of its executives continues to exist. i would say that there is a fair amount of unrecognized productive activity in a firm, and it is common to blame business for wasting resources where it is merely spending resources to feed us, resources that are necessary for elements of the process of production that outsiders don’t understand. But i say equally strongly that literally billions of dollars go to enrich members of the private sector who have contributed nothing to the physical well-being and comfort of the consumers. The exploiters exist, even among the private sector.
Now obviously if the way you produce the $40.00 final product is using $10.00 in parts, $10.00 in labor, and the operation of a $20,000,000.00 machine, we’re in a quite different situation from one in which all it takes is the parts and labor. In that case the necessity of the machine, in making it possible to produce the product at all, is a contribution, and the investment necessary to have the machine in the first place and the existence of the whole production system needs and deserves compensation. Marx would argue that even this is exploitation; i’m not tackling that right now. i’m identifying a class of exploitation wherein paychecks, dividends, and other compensation go to the kind of useless middleman who would simply be destroyed by the appearance of the garage-based operations described above. Now obviously the reason they were cut out of the picture in that paragraph, and replaced by smaller producers not supporting bloated, costly firms, is because the employees were free to stop being employees and become direct producers, and because others were free to move in and compete if they were capable of competing production, and because consumers were free to choose to patronize any of these producers they wanted. And it should be equally obvious, if we do spot a truly contemptible employer of this type, that he is not subject to this disciplining effect because these freedoms are destroyed. We already knew they were destroyed. When we got to the part about putting a sign up over my garage and offering products for a lower price than my former employer, those familiar with the world will have objected, “But the cops will just make you take it down!”. Very true. The only mystery is why anyone, whether for or against regulation of commerce, would refer to a situation in which this interdiction is taken for granted, as “Capitalism”.
If a firm is to pay its executives or favorites or investors twenty times the value of their contribution, or a thousand times, or pay them for making no contribution, simply directing the firm’s income for their own benefit…i hope they are doing it in a trade i know. i hope they’re not fashion designers or seafarers, but are exercising that incredible arrogance within reach of my competition, because it won’t take me six months to have all their sales flowing my way, if they’re foolish enough to adopt such a wasteful inefficiency as paying proud men big salaries to do nothing. The exploitative employer who takes $10.00 in parts and $10.00 in labor and adds nothing before selling the product for $40.00…he is the prey of the entrepreneur. His millions are the scent that draws men out from wage work and into competing ventures. His own wealth destroys him by luring others to compete with him while avoiding the same extravagance. Unless, of course, the cops come and make me take down the sign over my garage. Then i suppose the exploiters will rule the world.