The Purpose of Profits

Conservatism vs. the Populist Temptation

In a perfect world politicians would not be slaves to badly formed public pressure. It is nice to imagine a noble political soul resisting the tide of populist claptrap, seeking to educate rather than to amplify the idiocy. But that’s probably asking too much.

In a perfect world, people wouldn’t be idiots. They wouldn’t indulge in writhing moral outrage of almost sexual proportions base on nothing but pure, willful stupidity. But that’s probably asking too much.

In a perfect world people would seek to understand before opening their cake holes in mock fury. They would listen before they yell. But that’s probably asking too much

The recent hubbub surrounding the disaster-induced spikes in oil prices, and the outrage, the outrage!, when it was learned that oil company profits actually rose as a result, validates every cynical thought I have about the populist impulse, along with my appreciation for every Constitutional mechanism the Founders put in place to protect from our own silly passions. We are fools, plain and simple, if such a simple thing as price and profit fluctuation is beyond our ability to grasp, we’d best be careful not to give ourselves too much power.

The story is really rather simple: demand for petroleum products has been rising for years, accentuated by China’s economic growth. Production has been relatively stagnant as we have decided to forego new sources of oil and increased refining capacity. Hurricanes Katrina and Wilma knocked more capacity offline; and prices very, very predictably rose as a result.

How any other result than this could have occurred is a mystery. Prices go up when demand increases relative to supply. And something else goes up too - profits. Somehow everybody but a few cranky conservatives columnists saw this as a moral catastrophe. How could we let the oil companies make record profits while we the people struggled to fill our 2 ton SUVs?

It is obvious that our media institutions have played a major role in guiding our outrage very selectively. When was the last time you heard about the “obscene” salaries paid to college administrators? Or School Superintendents? When was the last time Congress held hearing to expose the obscene profits made by Oprah Winfrey? Or Madonna? Or Phil Mickelson? Or Michael Moore? Or, for that matter, the American Sugar Industry?

Whenever I see otherwise intelligent folks uniformly acting like idiots, it is a sign that a deeper dynamic is at work. I think the clue with oil profits is that those who are protesting are in a deep moral dudgeon. They think that this is a morality play! They think that profits are a moral issue! Oh what a silly mistake. Even such ostensible conservatives as Bill Frist appear to have misplaced their copies of The Wealth of Nations.

Free market prices and profits are completely amoral. In fact, a radical like myself could argue that it would be immoral for a CEO to forego profits that he could take. To do so would be to break his pact with the stockholders.

No, profits aren’t a moral issue, they are an informational issue. Prices and profits are the way that the market sends signals as to where resources are needed. Low profits say “Thanks, but we’ve got all we need over here”. But high profits send the opposite signal: “There’s money to be made over here, bring your resources and have a go.” This quite frankly, is the essence of the Invisible Hand. After Katrina, we needed more oil. The high process and profits sent a signal that, even in a high “barrier to entry” industry like petroleum, created the desired reaction. Prices peaked, and then came down. As Twin Cities radio host Joe Soucheray said “For those profits, they’d [The CEOs] have sucked the oil out of the ground with a straw.”

This is, literally, Econ 101. Adam Smith showed us that the Brewer does not give us beer out of the goodness of his heart. But out of his self-interest all end up benefiting. Had we forced “Big Oil” to forego those profits, we’d all be paying higher prices at the pump right now.

I had always thought that the failure to understand these basic distinctions was emblematic of the liberal worldview. This sort of Snidely Whiplash vs. Dudley Do-right mentality is hard wired from Rousseau to Marx to Barbara Boxer. To see theoretically conservative politicians fall for this claptrap is deeply disturbing.

I suspect it is not because they do not know better. I suspect it is cold, calculating political cynicism at work. It is the populist temptation in action. My faith in democracy is very strong. On net, the decision of the people are almost always better than those dreamed up by politicians. But for short periods of time the people's passions can be very dangerous. The scary thing is that it is the Senate which is supposed to cool those passions. Instead they are busy stoking them.

Something isn’t working as designed.

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