Friday, March 09, 2007

‘Human Needs before Profits!’

The alleged superiority of socialism (or communism or interventionism or anything-but-capitalism-ism) is that it somehow addresses the more noble goal of meeting human needs than the base, greedy capitalist goal of reaping profits; hence the political slogan, ‘Human Needs Before Profits!’. Implicit in this slogan, which one can imagine an emotional crowd chanting at a demonstration, is the idea that capitalists are greedy pigs whose prosperity comes at the expense of the poor and that society should be organized (forced to behave) in such a way that true human needs (as defined by the slogan chanters) should have priority over the earnings of business owners.

This sentiment is the embodiment of multiple errors of reasoning, and I can demonstrate this by a very simple proposition.

I ask (defy) you, reader, to:

  • design a business plan guaranteed to generate profits while ensuring that no human needs be met. Or, if human needs are met, they are met only after profits have been earned and collected.

You may not kill, rob, rape, persecute or conspire; you must respect the lives and property of all other people at least to the extent of doing no harm, commiting no offense. But you must not provide any service that anyone needs, nor produce any product that is useful, nor add anything to a customer or beneficiary’s well-being or happiness. Or if you do, you must make sure you have pocketed your profit first. You must turn a profit consistently over the long term (say, eight out of ten years), without commiting any crimes, and without subsidies, protective tarrifs, or other government-bestowed privileges.

How would you do it?

Maybe you’d try the classic industrial capitalist model: build a factory, hire workers, produce and sell products. You’re in trouble from end to end! First, you must accumulate the capital to build the factory. Let’s pass over the implications of that and go to the next: hire the workers. Unless you are going to enslave people against their will (which is not permitted), you have to offer them wages and working conditions that are better than their alternatives, i.e., working on a farm or in a competitor’s factory. You have to meet their needs at some level long before you can even dream of profit. In other words, under capitalism, human needs --- the needs of the hired workers --- already do naturally come before anything, and profit naturally comes dead last. Revenue generally can only be collected after the product has been delivered to the customer, which is after the product was manufactured, which was after the workers were hired (and paid, and paid, and paid many times over), which was after the factory was built, which in itself required the hiring and paying of workers and the purchase of building materials and equipment. Profits come dead last if they come at all. If the entrepreneur fails to meet the most urgent needs of his/her customers at a cost that is less than the prices customers are willing to pay, then the profits don’t come at all.

It doesn’t matter what business discipline or industry you chose. If you are operating within the laws of the free market, which require you to respect the lives and property of all other people and to only engage in voluntary cooperation, then there is no way to earn profit without meeting human needs, and no way to reap the profit before meeting just about all stakeholders’ needs but your own --- employees, managers, creditors, customers --- first. If you go into a service business rather than industrial manufacturing, you’ll have to serve the needs of customers in some way (hence the term ‘service’). Whether you are an accountant, lawyer, physician, fashion consultant, beautician, personal trainer, software developer or masseuse, before you reap any profits, you’re going to serve some customers.

But what about speculators? Now there are some parasitic leeches, you say! Surely their profits come from no redemable humanitarian activity!

Actually, speculators are no less virtuous than any other actors in the free market. They indeed do play a vital role in meeting human needs, through their research and assumption of risks, which they transmit to their ‘customers’ through the price system of the market via their investments and trades.

An original equity investor provides funds to a company to enable it to get started or to expand operations: build a factory, hire workers, pay wages and salaries (meet human needs). Since the stock confer upon the stockholder an ownership claim to a portion of the assets of the company and hence the profits (and losses) thereof, it has a value of its own which can be sold and bought in the stock market. The price is determined by the average estimations of any number of investors as to how well the company is doing and its future prospects. The speculator’s role is to put a reality check on all other speculators and investors and to correct errors before their magnitude becomes great. If investors bid a stock price up (or down) beyond reality, eventually fundamental business processes of profit and loss will inevitably bring it back down (or up). These price swings can be very painful, particularly for the investors who buy when the stock is overpriced and find the price sinking far below their original outlay. The speculator helps to smooth out these swings, mitigating the damage. If he is right, his short-sell puts the brakes on the excessive appreciation of the stock price; likewise, his buying the stock when it is undervalued influences the price in the right direction.

Speculators in the commodities markets provide a year-round, risk-mitigated market for agricultural products[1]. The farmer is not at the mercy of what the price of corn happens to be on the day he harvests his crop. Because of the commodity markets and the speculators who research market conditions around the world and express their forecasts by their own commitments, risking their own money, the farmer can be much more secure than he otherwise would be as to what price he will be able to sell for, and can make the decision any time of the year via futures contracts.

The speculator only wins (earns profits) if he is right. If he short-sells and under-priced stock, he loses. So you can’t beat the human-needs-before-profits law by becoming a speculator (sorry!). Only in a market distorted by government intervention (high tarrifs, taxes, corruption, regulations that have nothing to do with preventing murder, theft, fraud or conspiracy) can a speculator earn profits at the expense of the general population.

Profits are the reward --- after the fact --- of meeting human needs.

So the slogan is true after all, even if those chanting it are clueless.

Copyright©2007 by Howard Hyde. All rights reserved.

[1] see also: The Social Function of Call and Put Options, by Robert P. Murphy at