A lesson in profit

Addressing a joint session of Congress on health care, President Barack Obama reiterated his often-expressed aversion to the profit motive:

“[B]y avoiding some of the overhead that gets eaten up at private [health insurance] companies by profits and excessive costs and executive salaries, [the public insurance option] could provide a good deal for consumers, and would also keep pressure on private insurers to keep their policies affordable and treat their customers better . . .”

Is this true? Is profit wasteful, as Obama implies? Does it lead to higher prices and lower value to consumers? Can the government, unburdened by profit, do the same job as a private company, only cheaper and better?

To answer, let’s consider one business, one product, and one profit-seeking man who lived at a time when the market operated largely free of government subsidies, bailouts, regulations, taxation, and other “progressive” intrusions.

Henry Ford, at age 13, saw a steam-driven land vehicle, a “road locomotive,” which filled his imagination with the vision of a horseless carriage and fueled a passion to create one. As a young man, he worked day jobs, while trying to build a car in his free time. Realizing a viable car could not run on steam, he sought to develop a new kind of engine.

On Christmas Eve 1893, the 30-year-old inventor clamped his first gasoline engine to his wife Clara’s kitchen sink. With the home’s electricity providing ignition, the motor roared into action, sending the sink vibrating and exhaust flames flying while Clara prepared the holiday dinner.

In pursuit of his dream, Ford and Clara moved eight times in their first nine years of marriage. He quit a secure job at the Edison Illuminating Company, banking everything on his vision. He co-founded the Detroit Automobile Company—a venture that failed. Jobless, Ford moved his wife and child into his father’s home. But he kept working on his car. “It is always too soon to quit,” he said.

  • http://www.facebook.com/people/Jonathan-Clucas/50400019 Jonathan Clucas
  • wfoddis

    This post is further to what I mentioned about an economist’s (Steven Horwitz) view on why many people misunderstand the meaning of profit. Here’s an excerpt:

    “Since Adam Smith, economists have understood that the self-interest of producers (of which the profit motive is just one example) can lead to social benefits. As Smith famously put it, it is not the “benevolence” of the baker, butcher, and brewer that leads them to provide us with our dinner but their “self-love.” Smith’s insight, which was a core idea of the broader Scottish Enlightenment of which he was a part, puts the focus on the consequences of human action, not their motivation.

    What we care about is whether the goods get delivered, not the motives of those who provide them. Smith led economists to think about why it is that, or under what circumstances, self-interest leads to beneficial unintended consequences. It is perhaps human nature to assume that intentions equal results, or that self-interest means an absence of social benefit, as was often the case in the small, simple societies in which humanity evolved. However, in the more complex, anonymous world of what Hayek called “the Great Society,” the simple equation of intentions and results does not hold.”

    Link to full article:


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