The Misconception about Making Profit

-This article was originally published by Prience Shrestha in The Himalayan Times on March 19, 2017.

Compared to communism or dictatorship, the idea of free market seems to go hand-in-hand the best with democracy. However, it also appears that even the popular belief held by the voice of democracy (i.e. the majority) frequently works against the idea of fundamental market principle towards the detriment of economic well-being. On such regards, Brian Caplan, Senior Economist at George Mason University acknowledges the popularly held sentiment against fundamental market principles, and talks about four key popular anti-sentiments towards free market in a democratic society. Market practices of making abnormal profits and collecting more wealth are among the fundamental market principles that he regards as being disdained in our democratic society from a naive emotional base point.

Renowned Austrian economist Schumpeter even derives the negative sentiment held against the idea of making profit through market practices to be deeply rooted pattern of unwise human thinking that is not culturally specific and only prejudice. The myopic sentiment of this distorted perception totally skips the observation of value and utility generated in the society in pursuit of self-interest and profit-making.

Anti-market sentiment in democratic society of Nepal

Maintaining negative outlook over the practices of making abnormal profits and garnering wealth through engagement in a particular market facilitated by no other than ourselves is also commonly seen in our very own democratic Nepalese society. Such profit-makers or entrepreneurs are even tagged as being public wealth lechers or scoundrel of the society. Recently, Laxmi Intercontinental Pvt Ltd, dealer of Hyundai Motors in Nepal has become the victim of such insult as the abnormal profits close to 50% per vehicle sold by the dealership is gaining public attention and possibly legal prosecution in near future. Moreover, automobile enthusiasts in Nepal are already expressing harsh criticism on the dealership in making considerable profit above industry average. Now rationally, why would a dealer choose to stick to the average industry margin for a vehicle for which there is consumer demand regardless?

Economist Caplan identifies such bias against profiting among the majority to have been guided by their misunderstanding regarding the mechanism of profit-making itself. While most of the general people believe profit as the function of corporate greed and intentions, the reality behind profit is often the interaction of demand and supply dynamics of a product in the market. Henceforth, rather than blaming a profit-maker for making excessive profits out of consumer, one should ask, why are the consumers allowing that.

Influence of irrational popular preference on state law and moral base

Such anti-sentiment towards the fundamental market practices in a democratic society not only creates unnecessary social stigma towards market practitioners, but it also often translates into market rules and regulations that adds legal hindrance to engaging in market practices. Since politicians are obliged to prioritize popular choices to secure their political career till foreseeable future, such choices are prone to shape the law or at least moral perspective of the government despite the absence of adequate rationality in them. Particularly, it could also be the reason why our democracy still preserves the decades-old profit regulation that legally limits the profit-making ability of an entrepreneur to a haphazardly stipulated level of 20%.

Until now, implication of this regulations and the perspective of the state surrounding it has caused absurd market raids and prosecution against retailers and service providers in relation to making excessive profits. The classic example for it is the prosecution of a manger of a renowned high-end coffee chain outlet little more than a year ago in Kathmandu on accusation of overly profiting in bottled water. The prosecution enforced by the local police was solely based on so-called moral grounds silently backed up by the strong irrational popular sentiment against profit making.

Misconception and reality of Profit

Unfortunately, it happens to be that democracy is actually seeing profit as a gift or transfer to a small group of greedy capitalist against majority of people who actually are the representative of a society. Instead, the fundamental idea of market is such that profit is actually the result of voluntary exchange between the profit-maker/entrepreneur and the buyers. An accused profit-maker would not be able to make profits in the first place if the people did not choose to pay for the good or service being exchanged. And the people would not pay for it if they did not think that it was making them better-off.

Profiting, being one of the fundamental market activities also plays a vital role in giving incentives to reduce business cost, allocate limited resources efficiently, and force creativity and product innovation for the well-being of the economy and the society at large. In fact, it is also the well-known feature of the “invisible hand” coined by the popular Scottish economist Adam Smith who discovered that selfish interest of businessmen also unintentionally yields benefits for all.

Independence from popular preference

In a democratic society where majority links greed and profiting with everything that is bad and unfair, it is necessary to uphold a system that allows will of the individual or the market (i.e., laissez-faire) over the one that consists of laws and regulation based on irrational popular sentiment held against fundamental market principle. The decisions related consuming goods or services, practising entrepreneurship and making profit should be left to the will of the individuals that engage in voluntary transactions.