The Role of Profits in Free-Market Capitalism, and Why High Profits are Good for a Company’s Workers

Underpants Gnomes Meme - Phase 1: Physical Labor Phase 2: ? Phase 3: ProfitWhether people like it or not, it is a fact that the production of valuable things requires more than physical labor. (I’m looking at you, Karl Marx, with your Labor Theory of Value and “profit as exploitation.”) This is especially true when it comes to industrial-scale mass production. To successfully deliver products at a reasonable price and quality, a company must be organized in certain ways that are effective; there must be communication and coordination between the various departments; there must be management to make sure things keep running smoothly together and that timetables are kept; there must be wealth invested for buildings, machinery and raw materials in the right amounts; any machinery and facilities must be continually maintained; there must be management of sales and distribution of the product; etc.

A collection of factory workers without power tools, without specific roles and without management direction will produce very little and very inefficiently. In any line of business, there is a tremendous amount of strategy, business planning, technical planning, management, and industry knowledge that goes into making a company productive and successful.

As I discussed in my essay, “How Business Executives and Investors Create Wealth and Earn Large Incomes,” a company’s chief executive officer (CEO) carries tremendous responsibility: he is crucial in making large-scale decisions for the company, implementing and coordinating major changes, planning long-term for the future market and technology the company will face, formulating and holding onto a large-scale vision of where the company should go, etc.

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Wealth is Not Money — Monetary Wages vs. Real Wages


Not wealth.

There are many confusions that many people hold about economics today. One fairly common one that I’d like to address is the confusion of wealth with money.

Wealth consists of the actual goods and services that are available to a person. Food, medicine, clothing, houses, televisions, computers, jewelry, the services of a doctor–all of this is wealth.

Money, on the other hand, is the medium of exchange used to indirectly barter wealth. Unlike wealth, having money does you no good by yourself on an island. If the money supply in an economy is doubled, this does not increase the amount of wealth in that economy. What increases wealth in an economy is the production of material goods and the offering of valuable services.

The confusion between money and wealth tends to arise because, on an individual level with a given money supply, the way one gets access to more wealth is to get more money. But the way money translates into wealth is not a simple “more nominal money equals more wealth,” but “having a greater percentage of the money in the economy entitles one to a greater percentage of the wealth in that economy that one doesn’t already own.” Money is a claim to the wealth produced by others, (who are willing to sell) relative to the total money supply and the total wealth.

Money--Wealth Ratio

When people create wealth by producing valuable goods from raw materials or using skills to offer services, then trade these for money, they give value to the money in circulation. If they are able to produce wealth (of a type that’s needed/desired) faster than it’s consumed, they increase the value of the money in circulation. Since there are more goods and services chasing the same amount of money (assuming no more money is printed/created) the prices of the goods and services decrease. Continue reading