 Hi, I'm James. And I'm Anthony. And this is Words and Numbers. This weekend we're talking about something near and dear to the hearts of all free marketeers – profit. Right. It's gotten – profit gets bad press from too many people. It does. It gets a really bad rap, right? And in a market system, profit is actually the signal that you're doing a good job. It is. I think a lot of misunderstanding about economics starts right here at this misunderstanding. If you get this wrong, everything else you think about economics is going to be wrong as well. Right. And this is one of those things that really has to be gotten right because it's pretty early in the chain. It is. And the way I tried to describe it is to take money out of the picture because I think money is what confuses people. Imagine a couple of people – or imagine one person who's in society, right? And this person does stuff. He maybe paints houses or fixes cars or what have you, but he contributes something to his neighbors. And in return, this guy asks for something. He wants some food, some clothing, some shelter, and the neighbors provide that. So imagine there's no money involved. It's just this. He does stuff for his neighbors. His neighbors do things for him. Now, suppose it's the case that the services this guy provides are – other people find them incredibly valuable. Maybe because they really need their houses painted or maybe because there's no one else around who can do that sort of thing. But for whatever reason, society really highly values the stuff this guy does. Conversely, suppose society does not value by much the resources he asks in return. Maybe society has lots of – there's lots of food, clothing, and shelter about and he wants some of this. That's no big deal. We would look at that person and say, this is someone we really want to live with. This is someone we want in society. He contributes more to others than he asks for in return. Most people can agree with that. But now here's the kicker. If you impose a monetary system on there where they're not exchanging goods for services, but they're exchanging goods and services for dollars, this guy is going to accumulate dollars. The dollars he accumulates, we call profit. It's actually a sign that he has provided more value for others than he's asked for in return. Yeah, no. Put most basically, it's proof that you make people happy in the grand scheme of things. That's what money is. As you accumulate money, as long as you're not stealing it or getting it from governmental sources, which we'll get to in a couple of minutes, as long as you're getting it through voluntary exchange, it's literal proof that you make your fellow human beings happy. That's right. You give them things that they want and need, you do it well, and that they choose to deal with you. Right. For whatever the reason. Yeah, choose is the right word. Provided the exchanges are voluntary, everything you said is correct. And all of a sudden now we see profit through new eyes and this is actually something that's good. Yeah, no, it's actually quite fantastic when it comes right down to it. Money itself is good. Let's make no mistake here, right? We're looking for, I mean, John Locke talked about this hundreds and hundreds of years ago, and he said money is what gets you around the problem of spoilage. Right. If you're an apple grower, I mean, you can grow all the apples in the world. Almost all of them will rot. Yes. Almost all of them will rot. But the many of a medium of exchange, you can store wealth over time, right? You don't have to watch your apples rot in a big box on the side of your house. You can sell them and just put the money in a drawer somewhere. Life's way better. So on the one hand, money makes life better. And on the other hand, profit makes life better. These are two perfectly wonderful tools. So where on earth did the problems come from? How is it that people who actually go out and earn and notice the verb I use, they earn a profit? How is it that they become demonized? These are people who we just decided a minute ago are making their fellow man happy. But then we see the money that they've got all piled up in the bank, and now we're not so happy anymore. I think we demonize them because of this potential misunderstanding. I think the misunderstanding of profit comes from the fact that we use this same word to actually describe two different things. One is the accumulation of dollars through voluntary transactions, but the other is the accumulation of dollars through involuntary action. So if I can lobby my local congressman to tax all people with bald heads and give the money to me, I get money out of your pocket. I'm better off, except that this wasn't a voluntary exchange. It was involuntary. And that money I'm collecting is actually a sign that I've harmed society rather than benefited it. Yeah. This would be the best example of a fundamentally unjust law. But I do feel the need to point out that you should look in the mirror at your receiving hairline right now. I'm going to be subject to the tax. That's right. You will soon be subject to the tax as well. And another thing that comes along here is we always think about Steve Jobs, right? He's the great example of a guy who made just a busload of money in the space of his life. Didn't he die with about $8 billion in the bank? $8 billion, right. And I like to use this guy as an example. I point to him and say, where did he get this money? We gave it to him. We gave it to him. We cheerfully gave it to him. People lined up around the block at his stores and said, just take it. Take my money because, and this is the part we always miss, because I really want that thing that you just made. And people got what they wanted. They got MacBooks. They got iPads. They got especially iPhones. And that's what we forget. We look at the $8 billion in his bank account. We think that bastard. Right. But then we never look at all of those products and say, look at all those happy people. But this was voluntary exchange at its finest. There's something interesting here, which is some people will look at jobs and say, well, he has an obligation to give back some of that money. Well, notice, because this is a voluntary transaction, if jobs has an obligation to give back some of the money, then we have an obligation to give back some of our iPhones because that was the other half of the transaction. Right. Well, I'm guessing you're gonna find a fair number of people with iPhone ones that would cheerfully give them back. Right, right, yeah. But most people who have these products that they use every day are not the least bit interested in giving them back. That's why they bought them in the first place. That's right, that's right. So, you know, here's the thing. We've got this great example now of a guy who made stuff to use the technical term that people really wanted and they came out and drove, dumped money in his bank account and every bit is importantly, he put phones in their pockets. Right. Okay, but now we've got this other kind of profit, all right, that it does us well to talk about. We've got this thoroughly voluntary kind that we just covered, but there's an involuntary kind as well and here's where the problems emerge. Yeah, the kind of the poster child of this is agribusiness, right? So, if you go back years, the government decided that we should have ethanol in our gasoline because it makes us less dependent on foreign oil, it's better for the environment, all this stuff and as the decades go by we find out actually none of that's true, right? It costs more energy to produce ethanol than what the ethanol is worth, right? So, it's actually at a net minus when you include ethanol in the gasoline and yet. And yet there's still ethanol in my gasoline. There's still ethanol by law, at least whatever it is 10% or something of the gas has to be ethanol. Why is that so? We look at each other knowingly right now because we know why that's so, right? Because agribusiness, big corporate farms that grow corn, which is the key ingredient in ethanol, these businesses lobby the government to keep the ethanol requirements in place. Why? Because it's profitable for them. But this is the other kind of profit. This is the involuntary kind where the law says you must put ethanol in the gas tank which makes gas more expensive for us and that money ultimately filters through to the corporate farms. So they're using government to rob us. Right, but that robbery yields a profit for them. And this is the kind of involuntary profit, right? The involuntary exchange that leads to profit that we think about when we think about all the problems that come with this sort of system. And if you look at it carefully the problems don't come from voluntary exchange. They come when government gets involved with special interest and big money gets implicated. And before you know it, everybody has a vested interest in maintaining a system that's asinine on its face. Right, and how do I know this? We are not dependent on foreign oil. Right. And haven't been for quite some time. How many people in the United States actually know that? And the answer is very, very few because that's a rallying crime now. We've been on foreign oil, therefore we must do the following. The United States, the United States makes more than enough energy to do some suffixion. So I don't know the numbers on that, on how much we produce. I do know the numbers on how much we consume. And roughly speaking, 40% to 50% of the oil we consume in the United States comes from one country. And that country is the United States. Actually, we're out producing most of what we consider to be major rail producers in the world right now. And that's fine, right? I'm perfectly happy with this. What I'm not happy with is a bunch of senators, representatives, presidents getting together and saying, let's support the corn industry. Let's support the corn industry. And then creating an artificial demand for something through government mandate, which drives the price up. Because we pay more for all of our corn products now. Oh, that's right. But when the demand for corn rises, the price of corn rises too. And isn't that a bit of a problem? So this is what we've got. And we've got any number of things that fit this very set of circumstances. And this is where profit causes a problem. Because it's not honestly achieved. Yeah, it's not honestly achieved. And it raises the question, why would the corn industry go through all of this? And the answer is because regulations like this, the ethanol requirement, hide what's going on. Imagine if someone on the floor of Congress proposed a law tomorrow that said, let's just take money from regular Americans and give it to these corporations over here. There'd be a huge outcry, right? So they don't say that. What they do is they couch the whole thing in this regulatory language. And we're going to require ethanol. But at the end of the day, they've done the exact same thing, as if they passed a law saying, James Harrigan and Anthony Davies must each write a check every year for $100 to agribusiness. Right, and this is something that, say, Apple, just because it's the example we've been using, but any number of companies fit the bill, just doesn't do. Probably because there was never the opportunity to do it. Yeah, well, I wouldn't let Apple off the hook entirely. I'm certain if we dig around, we can find them benefiting from some regulation or another that isn't necessary. But you're correct. By and large, the profit that Apple earns is due to voluntary exchange. That's the good profit. And I think that's really what we want you to take away today, right? That profit isn't the problem. The form of exchange is the problem. And voluntary exchange isn't the problem in voluntary exchanges. When government uses its authority to reach into your pocket, take your money and give it to someone else. As always, if people are interested in reading more on this, click the I at the top of your screen. That's about all we've got time for this week anyway. So feel free to check us out at all the links below and click on the little Subscribe button if you'd like. We'll be back next Wednesday at about noon with another Words and Numbers episode. Until then, check out all the great content at fee.org and at fee online. Until next week. See you next week, James.