A Lesson in Profit by Gen LaGreca and Marsha Familaro Enright

[Marsha Enright]

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

“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.

Ten years passed from the roar of the little engine on Clara’s sink to the launch of the Ford Motor Company. It took five more years to produce his big success, the Model T, and additional years to master its mass production.

Why did Ford persist through years of hardship and uncertainty? How much would his love for the work have sustained him without the hope of eventual profit? Imagine if he had lived in a system where politicians could, at the stroke of a pen, seize his profits or decide how much he could keep. Would he have risked so much or worked so ferociously to bring a world-changing invention to market?

Would an Amtrak employee devote a decade of free time inventing a new train, only to rise a notch on a civil-servant’s pay scale? Dream big, work hard, create something earth shaking, but be paid small is the antithesis of the American dream.

The pursuit of profit not only motivated Ford, but also his bold investors who had the foresight to realize the horse was doomed.

In 1903, a school teacher invested $100—half her life savings—in the Ford Motor Company. Sixteen years later, she sold her stock for a total gain of $355,000. Why would she and others place their money on a highly experimental venture, were it not for the hope of tremendous gain should the enterprise succeed? What kind of person would deny her the reward for recognizing Ford’s vision and risking her own money?

The pursuit of profit also impacted every aspect of Ford’s business operations.

Ford didn’t need a politician’s scolding to lower prices—only the desire to make huge profits by reaching mass markets. Because early cars were expensive, people viewed them as mere playthings of the rich. But Ford sought to “build a motor car for the multitude.” This led him to develop his moving assembly line, significantly reducing manufacturing costs and, consequently, prices. The original $825 price of the Model T finally bottomed at $260. That price-lowering strategy brought him the millions of customers that made him rich.

Similarly, Ford’s pursuit of profit didn’t result in bare-subsistence wages for employees, but in phenomenal pay increases. He shocked the world by introducing the $5 workday, more than doubling the era’s prevailing wage. Why? To attract the best workers, whose talents increased product quality and company efficiency. High pay also decreased employee turnover and training costs, again increasing Ford’s profits.

Ford typifies the successful capitalist, whose profit-driven innovations lower prices, while raising wages and living standards for all.

Even today’s Ford Motor Company, a much-fettered child of our mixed economy, demonstrates the superiority of private- over government-run companies. Ford refused TARP bailout money, choosing to operate without government strings. The result? Ford’s profits are up 43 percent, while bailed-out GM and Chrysler lag behind.

In Henry Ford—a thin man who was the fattest of fat cats—we see an embodied refutation of President Obama’s worldview. Ford developed a new form of transportation vastly cheaper, faster, more convenient, and superior to the old mode. He continually lowered prices so that everyone, rich and poor, would have access to his product. He created thousands of jobs. He raised employee wages. He did all this good without government grants, bailouts, stimuli, subsidies, or coercion, but simply as a result of the honest pursuit of personal gain.

This achievement was possible only because a private individual had the freedom to pursue his own self-interest, in cooperation with others who supported his vision and shared in the rewards, unencumbered by government.

By eliminating profit, Obama implies that everything else about an enterprise would remain the same, only the product would be cheaper and better. Actually, by removing profit, nothing at all would remain the same.

Contrary to Obama’s notions, profit is not an overhead cost, but a vital gain sought over and above costs in order to reward a company’s risk-takers. According to economist Ludwig von Mises, “Profit is the pay-off of successful action.” And “The elimination of profit . . . would create poverty for all.”

Eliminate the hope of profit, and you extinguish that spark which ignites the human engine and powers it to explore uncharted roads: the creative mind. Profit is the proud product of the creative mind, and the creative mind is an attribute of the individual. Obama’s attack on profit is an attack on human creativity and innovation, which is an attack on the individual.

Obama’s antipathy for the self-interested individual is explicit. “In America, we have this strong bias toward individual action,” he said in an interview in the Chicago Reader. “But individual actions, individual dreams, are not sufficient. We must unite in collective action, build collective institutions and organizations.”

It was Henry Ford’s individual actions and individual dreams that brought motorized, personal transportation within reach of everyone in the world.

America is rooted in the “pursuit of happiness”—which means the right of each of us to create, to produce, to rise, to succeed, and to profit from the fruits of our labor. Contrast this worldview with that of a president who disparages the individual and seeks to limit or expropriate his profits on behalf of a faceless “collective.” Obama’s war on profit is a war against the individualist heart and soul of America.

Profits are a badge of honor earned by someone who offers others something they value enough to buy. The first buyer of the first car of the Ford Motor Company was a doctor. He was tired of hitching up his horse and buggy for nighttime emergencies. Ford’s product enhanced his life, as it later enhanced the lives of millions. Profit is the medal Ford received from his customers for a job well done.

If our nation is to cultivate productive geniuses like Henry Ford, it must proclaim that the quest for profit is moral and noble.

POSTSCRIPT: Transportation Secretary Ray LaHood recently announced “the end of favoring motorized transportation at the expense of non-motorized.” This means that the federal government, with its vast powers to fund highway projects, “liveability” initiatives, and other aid programs, as well as to tax gasoline, now intends, in LaHood’s stunningly brazen words, “to coerce people out of their cars,” in favor of walking or cycling. A century ago, Henry Ford, through capitalism and the profit motive, brought motorized transportation to the world. Now, an alarmingly anti-capitalist government is reversing that historic achievement and pulling us back to the pre-industrial age.

Gen LaGreca is author of “Noble Vision,” an award-winning novel about the struggle for liberty in health care today. Marsha Familaro Enright is president of the Reason, Individualism, Freedom Institute, the Foundation for the College of the United States. Incidents from the book “Young Henry Ford,” by Sidney Olson appear in this article.

Copyright © 2010 by Marsha Familaro Enright and Gen LaGreca. Permission to reprint is granted with attribution to the authors and inclusion of their byline.

Permanent Link: http://fountainheadinstitute.com/a-lesson-in-profit/

Originally published at: http://dailycaller.com/2010/03/31/a-lesson-in-profit/

[Michael Stuart Kelly]

Marsha,

I'm very sorry for the delay in approving this. I haven't had time to overhaul the forum (especially the Portal page) in the manner that I want, so this happens at times. I am doing some heavy lifting in another project and I don't have the time I really need to monitor this section correctly.

I think I am going to open the restriction on the Articles section for the time being since this is happening too often.

Michael

[BaalChatzaf]

One of the reasons Henry Ford paid his workers so much is that they could afford to buy the cars they participated in making. Ford used to say: One dollar, one day, one Ford.

Ba'al Chatzaf

[tjohnson]

But surely there is a difference in profit from making consumer goods and profit from people's illness?

[sbeaulieu]

But surely there is a difference in profit from making consumer goods and profit from people's illness?

Two truths from your statement will always loom; consumer needs (food, clothing, etc.) and people getting sick. The article on Ford's achievements and societal benefits can be applied in medicine as well. Granted, there are corporations that take advantage of sick people...extremely disheartening.

However, it does not negate the positive aspects of free market medicine. A lot of the money goes into research and development, both in medicine and surgical procedures. I seriously doubt the government could duplicate the advancements by pioneering doctors and engineers if they regulated them.

Ideologically, there may be a difference, but a dollar is a dollar.

~ Shane

[tjohnson]

But surely there is a difference in profit from making consumer goods and profit from people's illness?

Two truths from your statement will always loom; consumer needs (food, clothing, etc.) and people getting sick. The article on Ford's achievements and societal benefits can be applied in medicine as well. Granted, there are corporations that take advantage of sick people...extremely disheartening.

However, it does not negate the positive aspects of free market medicine. A lot of the money goes into research and development, both in medicine and surgical procedures. I seriously doubt the government could duplicate the advancements by pioneering doctors and engineers if they regulated them.

Ideologically, there may be a difference, but a dollar is a dollar.

~ Shane

Yes but health insurance is the issue Obama was speaking about, not technological advancements in medicine. Do the health insurance companies invest in R&D to help make people healthier? Or do they try and make profit by charging high premiums and paying as few claims as they can?

[sbeaulieu]

Yes but health insurance is the issue Obama was speaking about, not technological advancements in medicine. Do the health insurance companies invest in R&D to help make people healthier? Or do they try and make profit by charging high premiums and paying as few claims as they can?

Most likely the latter. But I wouldn't hold that assumption for 100% of healthcare providers. And it's likely Obama is hinging his pitch on those out to make a profit at the detriment of their customers.

As for R&D, I'd have to do a little research. Most of the R&D I'm familiar with (through TriCare) is geared towards preventive medicine...which most people neglect. A large portion of patients that come into ERs, for example, could be mitigated by preventive medicine, clearing out the ERs for acute patients and those with the real need for care. This is one aspect that drives costs up.

~ Shane

[tjohnson]

A large portion of patients that come into ERs, for example, could be mitigated by preventive medicine, clearing out the ERs for acute patients and those with the real need for care. This is one aspect that drives costs up.

~ Shane

I agree 100% Discalimer; I have no use for doctors. If I had cancer or heart disease i would treat myself and I'm not kidding. I have learned more about health in the last 3 years than my doctor knows about it. So the whole healthcare issue to me is academic. Insurance is supposed to protect individuals from catastrophes, it's not supposed to be for trivial things and that's exactly what is happening - in both private and public systems and the mixture of them. I applaud insurance companies that would get involved in preventative medicine and that's something that could be done by governments or private companies equally well.

[Philip Coates]

Subject: Keep it Real, Stupid

This is either the second or third of a series of op eds which Marsha Enright and Genevieve LaGreca have been writing and getting published in the last month or so.

What is refreshing about them is good balance between abstractions and concrete details, between philosophical claims and "story-telling". So often are the writings of Objectivists top-heavy with abstractions without sufficient illustration, explanation, support, or narrative, that Oists have come to find this sort of 'eggheadism' natural. And to thoughtlessly emulate it themselves, talking in a fuzzy manner or over the heads of baffled listeners or prospective editors or readers.

It isn't "natural". Nor is it successful. Or persuasive. The overeagerness to 'sell' too many abstract ideas in one 600 or 800 or 1200 word piece is a common error in many op eds from ARI and TAS.

Resulting in not having much impact on those not already basically in agreement.

For every ten words of abstract principle that are new to the reader, you probably need about a hundred words of 'concretization'.

Learn from these essays. Notice how they differ from most of the Oist writing you've seen - other than that by Rand. [if you are interested in an in-depth exploration of concretization (forms, uses, applications), you can buy the CD of my two session course on it from TAS.]

Edited April 15, 2010 by Philip Coates

[sseraph]

I usually try to get a particular point across when someone puts down "profit" or "profit motive". A profit occurs when the values produced are greater than the values consumed in the production. That is not only perfectly moral it is utterly essential to the continued well being and thriving of each and every one of us. If we are consuming or destroying more values that the action results in then we are well advised to choose differently.

Most people mix up "profit" with mere accumulation of useless bits of funny colored paper by any means whatsoever. That money should be a symbol of real value but it has long been perverted from even approximating so noble a purpose.

[BaalChatzaf]

But surely there is a difference in profit from making consumer goods and profit from people's illness?

Auto manufacturers make their profit from the inability of consumers to move sixty miles an hour under their own muscle power for sustained lengths of time. Isn't it awful how the exploit our inability to move fast by our own power?

Ba'al Chatzaf

[Guyau]

I usually try to get a particular point across when someone puts down "profit" or "profit motive". A profit occurs when the values produced are greater than the values consumed in the production. That is not only perfectly moral it is utterly essential to the continued well being and thriving of each and every one of us. If we are consuming or destroying more values that the action results in then we are well advised to choose differently.

Most people mix up "profit" with mere accumulation of useless bits of funny colored paper by any means whatsoever. That money should be a symbol of real value but it has long been perverted from even approximating so noble a purpose.

Welcome to Objectivist Living, Samantha Atkins (Seren Seraph)! I enjoyed your post in Epistemology also.

-Stephen