In a June 4 New York City campaign speech, President Barack Obama noted that Mitt Romney “has a theory of the economy that basically says, if I’m maximizing returns for my investors, for wealthy individuals like myself, then everybody’s going to be better off.”
We could debate whether this statement accurately reflects Mitt Romney’s views on capitalism, but for the sake of this article let’s assume it does. What's wrong with maximizing profits? Is it really that bad to believe that people motivated by self-interest, even selfish and greedy self-interest, can collectively arrive at an efficient and equitable outcome?
This phenomenon of efficient markets is one of the greatest wonders of our modern world. Markets are not perfect, but the size and complexity of modern markets and their interconnectedness is nothing short of amazing.
To see this, imagine the alternative to markets. I live in a suburban neighborhood in Utah's state Utah County. Despite the number of vegetable gardens and fruit trees, our neighborhood is not self-sufficient in food. As a community, we purchase a great deal of food from other parts of the state and country. Now imagine we were setting our community up from scratch and needed to ensure adequate food for all. We could obtain food by relying on a central plan where a chosen coordinator, perhaps called a food czar, purchased and then distributed food. Let us further stipulate that the food czar will be a fine, upstanding and moral person who cares primarily for the welfare of the community.
Would you prefer living under this regime? Or would you prefer to have your food supplied by groups of greedy business owners whose primary motive is maximizing its own profit?
I'm not provided restaurant meals out of pure affection or even a sense of public virtue. The restaurant owner fully expects me to pay for my dinners. This voluntary trade benefits all of us. I get a meal that I value at least as much as the money I spend, otherwise I would not have agreed to pay. The workers get wages that they value at least as much as the leisure time they are giving up to work. The owner gets profits that are at least as high as the next best use of the restaurant and cooking equipment.
As long as the restaurant owner knows I am free to purchase meals from a competitor, and I know that the owner is free to sell his meals to other customers, we end up with the best possible outcome. The owner could be genuine philanthropist or highly antisocial; his motives are unimportant because of the discipline imposed on his actions by the market. If he fails to provide quality at a good price, he will have no customers.
When you stop to think about it, the fact that selfish individuals collectively trying to make themselves as well-off as possible end up distributing large amounts of high-quality food at prices we are willing to pay is nothing short of astounding. And food is only one market in the economy.1 comment on this story
As noted, markets are not always perfect. Sometimes we experience “market failure”; the free market fails to deliver the best possible outcome. A monopoly is one example. Monopolists deliberately restrict supply in order to drive prices up and increase their profits. So perhaps Obama is concerned that selfish behavior, in an attempt to maximize return for investors, will lead to monopoly. It is certainly the case that most business owners would not mind a bit more monopoly power.
But absent government protection, it is very difficult to maintain a monopoly, especially if it is not very costly for new businesses to enter the marketplace. The general public perception is that the Democratic party is anti-business and pro-labor, while Republicans are pro-business and anti-labor. Thus Democrats support labor monopolies in the form of labor unions and Republicans support goods monopolies via support for big business.
What we need for good public policy, however, is a pro-market stance that is neither pro-business nor pro-labor. We need policy that allows firms to compete with each other and naturally rewards those that can supply quality at low prices with high profits. Similarly we need to allow workers to compete with each other in the labor market and thus reward those who provide quality labor at competitive wages. Business owners and individual workers may have varying amounts of avarice, but a free market imposes limits on how much that greed can run amok.
Ker Phillips is an associate professor of economics at BYU.