Profits and Profit Makers: What Does the Public Think About Them?

Mr. Fertig is an economic columnist. This ar­ticle is condensed from his paper before the meeting of the Mont Pelerin Society in Mu­nich, Germany, September, 1970, being one of several presentations concerning the image of the entrepreneur in various countries.

It is axiomatic that a nation which hopes to substantially im­prove its standard of living and maximize economic growth must provide maximum freedom for the entrepreneur. For it is the entrepreneur who makes decisions about the use of capital and directs his ideas and energies toward meeting the most urgent demands of the consumer. Upon his ef­ficiency depend the creation of profits and the accumulation of capital so essential to increasing the goods and services available for the citizens of any country.

If the American public clearly understood this concept, the restrictions and impediments placed on the operations of the entrepre­neur in the United States would never have been initiated. In this paper I shall try to describe the public image of the entrepreneur, suggest some reasons why the American public has a distorted view of the entrepreneurial func­tion, and discuss some of the ef­fects of this distortion upon the economy of the United States.

According to entrepreneurial theory as developed by Mises and Knight, there would be no profits and no capital accumulation in a static society.’ A changing society is necessary in order to provide opportunity for the entrepreneur’s judgment and talents. Wherever the future is uncertain, the abilities of the entrepreneur come into play. Uncertainty is the basis of the risks he takes. It is his perceptions, judgment and estimates about the future which permit him possibly to make a profit and accumulate capital.

According to the above theory, practically everyone is an entrepreneur who employs the factors of production toward fulfilling the needs of the citizens. Some do so efficiently and gain a profit, and some inefficiently and incur a loss. This applies equally to large cor­porate organizations, small com­panies, and individuals in their business activity.

Plainly, encouragement of the free market and the absence of strangling restrictions provide the most fertile ground for entre­preneurial skills. This is the basis of a nation’s progress. It makes possible increased capital forma­tion, the most efficient use of capital, and the greatest possible increase in the living conditions of all citizens.

Function vs. Image of the Entrepreneur

But unfortunately the function of the entrepreneur, as defined by leading neoclassical economists, is hardly the image of the entrepre­neur in the mind of the man in the street. Perhaps we can clarify this subject by restating the basic question as follows: What do most American citizens think about profits and those who are engaged in making profits? The answer to that question would give us the key to the image of the entrepre­neur.

Under our representative form of government, what citizens think about profits and private enter­prise has a way of becoming law about this subject.

There are a number of pieces of evidence which bear on the image of the entrepreneur and can lead us to some valid conclusions. The evidence runs along the following lines:

1.          Sporadic opinion polls on profits and the entrepreneur.

2.          Laws affecting the entrepre­neur which are passed in Con­gress, including revision of the tax structure.

3.            The nature of concepts and ideas which prevail in institutions of higher learning in the U. S. The student of today becomes teacher, editor, community leader, and legislator of tomorrow. What he is taught in college becomes of vital importance to the function of the entrepreneur.

4.            Books, articles, and speeches by leading intellectual figures which have a decided effect on the thinking of the typical citizen and on the restraints he is willing to enforce upon enterprise and profit.

5.            Entrepreneurial decisions by the man in the street—as opposed to general ideas which he may express—and which can give us a clue as to how he feels about some aspects of profits and free enterprise.

Opinion Polls on the Entrepreneur

Practically all surveys of public opinion reveal that the American public accepts the idea of profits as a necessary part of our business system.² But they also reveal that more than half the public is al­ways of the opinion that profits are "too high" and that the public is misinformed on the relative magnitude of wages, profits, and the like. There is a general im­pression that the workers do not fairly share the wealth which they help to create. For instance, polls show that a great majority of the public believes that the larger share of productivity increases al­ways goes to stockholders in the form of profits. These opinions are especially strong among many pro­fessional people—school teachers, ministers, and others.³ While these surveys do not constitute conclu­sive evidence, their findings reveal a blurred image of the entrepre­neur in the public mind, to say the least.

Favoring the Small Entrepreneur—Penalizing the Big Company

It is important to note one central fact about the image of the entrepreneur which invariably emerges from the evidence at hand. While the typical citizen considers himself to be rather favorable in a general way to private enterprise and profits, he does not think of small companies in the same category as big business. The man in the street knows little or nothing of the function of the entrepreneur as defined by neoclassical economists. He regards the corner grocery store, the hamburger stand, and the recently formed small manu­facturer in quite a different light from U.S. Steel, General Motors, DuPont, and the like. Further­more, he tends to think of an en­trepreneur as someone who under­takes a new venture, not as an individual or group who must make important judgments every day in the conduct of some vast company like DuPont or General Motors.

Of course, he may be willing to concede that some phases of large business activity require entre­preneurial skills, such as promot­ing new inventions by General Electric, new techniques of pro­ducing steel, newly discovered drugs, and so forth. But in the main he conceives of the entre­preneur as a small or medium-size business which is engaged in some new creative effort. This concept of entrepreneurship is reflected in the kind of legislation by Congress which he approves.

Such legislation, for instance, authorized setting up a Small Bus­iness Administration (SBA) "to aid the little fellow." The perilous state of small business is often due to the backbreaking load of taxes, work restrictions enforced by labor unions, minimum wage laws which prevent the hiring of needed help, and so forth. Having burdened small business with these restrictions, the government then pursues the usual course of cre­ating new interventions in an at­tempt to redress the evils which it created by former intervention. We must contrast this govern­ment solicitude for the small and medium-size business with the numerous attacks and harass­ments on big corporations.

Taxes and the Entrepreneur

We gain further insight into the typical citizen’s view of the entrepreneur by analyzing tax legislation which he and his rep­resentatives in Congress favor. These tax schedules generally tend to restrict entrepreneurial effort and capital accumulation. This is indeed a curious fact at the pres­ent time because there is urgent necessity for greater entrepre­neurial effort and more capital in order to meet the needs of in­dustry, states, and municipalities. Whether the problem is antipollu­tion, housing, educational facili­ties, or transportation, the need is for capital and more capital.

In the face of this need it is strange indeed that a responsible legislature would pass the Tax Reform Act of 1969. The complex­ity of this bill is in itself detri­mental to the conduct of business. But most important of all, its main provisions plainly restrict capital accumulation and enter­prise. In substance the Act pro­vides for long-run reductions of over $9 billion a year for individu­als (mostly lower and middle in­come), two-thirds of which will be financed by increase on business and capital accumulation. Provi­sions of the Act which restrict capital accumulation include less depreciation on most new build­ings, heavier taxes on producers of natural resources, and smaller loss reserves for financial institutions.

The Act raises the amount of personal income exempt from tax­ation, thus in effect lowering the tax rates for the low and middle income groups. On the other hand, it increases the tax rate for indi­viduals with annual incomes of $100,000 or more. At the same time the Act repeals the tax credit for investment by corporations which had acted as an incentive for modernizing and expanding production facilities.

One other provision of the new tax law affecting entrepreneurship requires mention. On the personal income tax form there is a provi­sion for "earned income" in one column, and "other income" in another column. The maximum tax on "earned" income will be only 50 per cent, for "other" in­come 70 per cent. This is one short step from adopting the idea of earned and unearned income—which is obviously a Marxian in­heritance. Aside from this basic theoretical implication, the pro­vision on the tax form which sep­arates earned income from that derived from interest, dividends, royalties, and the like, is a clear indication of the tendency to un­derrate entrepreneurial freedom and the necessity of capital ac­cumulation.

The above provisions (and many more) are undoubtedly a reflec­tion of the attitude of Congress and the people that capital ac­cumulation is not all-important and that large-scale entrepreneurs must be assessed at a higher rate than others.

The Intellectuals’ Attack on Large-Scale Entrepreneurs

The public confusion about the nature of the entrepreneur is en­couraged by socialistically oriented intellectuals. The general direction of their attack is to castigate the large corporations, to undermine confidence in established compa­nies, and in fact to question the very basis of the free enterprise system. The free market, encouragement of the entrepreneur, and the importance of profits in pri­vate enterprise, are generally de­rided. Ideas advanced by these writers and teachers are the basis for editorials, special articles in magazines, and political cam­paigns. They become part of the intellectual framework of college students and most of those en­gaged in formulating social, po­litical, and economic ideas.

Clear evidence of this may be seen in the predominance of text­books which are anticapitalist at worst, and equalitarian and inter­ventionist at best. A generation of college students have been brought up on the following texts: Eco­nomic Analysis and Public Policy by Bowman and Bach; The Ele­ments of Economics by Lorie Tarshis; Income and Employment by Theodore Morgan, and most important of all, Economics: An Introductory Analysis by Paul Samuelson. The last-mentioned text has sold several million copies. It is no exaggeration to say that the vast majority of students who assimilated the ideas in these texts completed their education with a very low tolerance for free-market economics and freedom for the entrepreneur. A great number of students were influenced to be­come absolutely hostile to the free-enterprise system. Undoubtedly a whole generation of opinion-mak­ers were conditioned by these texts.

A nation like the United States which has been nurtured over the years on attacks against the en­trepreneur, varying from the scholarly works of Thorstein Ve­blen to popular books and articles typified by such works as The Robber Barons by Matthew Jo­sephson, The Rich and the Super-Rich and The Sixty Families by Ferdinand Lundberg—such a na­tion is naturally influenced against the entrepreneur.

Within the past few years there has appeared a book unsympa­thetic and even hostile to the market economy which has had an important influence on teachers, editors, and other molders of pub­lic opinion. This is John Gal­braith’s The Industrial State. Here he strikes directly at big business and the idea of consumer sover­eignty.

Schumpeter’s Contribution

No discussion of the Intellectual and the Entrepreneur can be con­sidered complete without referring to the brilliant analysis of Joseph A. Schumpeter in his book Capi­talism, Socialism and Democracy, published nearly a generation ago. The influence of the intellectual who, Schumpeter says, "wields the power of the spoken and written word," is central to his thesis. We now clearly see the truth of his statement that "the role of the intellectual group consists primar­ily in stimulating, energizing, verbalizing and organizing this [anticapitalist] material." Fur­thermore, "they staff political bu­reaus, write party pamphlets and speeches, act as secretaries and advisers, make the individual pol­itician’s newspaper reputation," and so forth. The point is, accord­ing to Schumpeter, that "unlike any other type of society, capi­talism inevitably and by virtue of the very logic of its civilization, creates, educates, and subsidizes a vested interest in social unrest. This social unrest is stirred by the sociology of the intellectuals."

It must be noted that not all textbooks and all teaching in American colleges is interven­tionist or collectivist. In recent years, it is heartening to note, many free-market advocates have established small enclaves in vari­ous institutions of learning, and in some cases have written text­books for college courses. While these ideas are undoubtedly be­coming more widespread, there is little doubt that the preponderance of teaching and writing by in­tellectuals of the United States leans heavily toward intervention and restrictions of the entre­preneur.

It is interesting and perhaps hopeful to note that intervention­ists and left-wing intellectuals do not have, and never have had, mass support in the United States for a broad-scale political attack upon free enterprise. The intellectual left can nibble away at the profit system, but it does not seem able to form a political base for a frontal attack. Furthermore, the incentive system is so powerful that it has been able to absorb the harassments and attacks made upon it while still maintaining its strength to build a large capital base and to provide the most pro­ductive industrial society in the world.

The Man in the Street as Entrepreneur

It must not be assumed that the average citizen is antagonistic to all entrepreneurial effort and free enterprise. In fact, in a general way he approves it, and by his actions indicates that he would like to become an important en­trepreneur himself. Evidence of this is at hand in the investment activities of the typical citizen—how he handles the cash savings which he has accumulated.

Today there are at least 25 mil­lion individual owners of equities in the United States. This is ap­proximately 12 per cent of the entire population and about 25 per cent of the adult population. But to this substantial number must be added the millions who invest through mutual funds. The volume of mutual fund investment has grown to over $48 billion—having recorded an accumulation of more than $7 billion in the year 1969. Of course there are duplications among individual investors and mutual fund investors, but taken all in all, the growth of investment by the typical citizen has been phenomenal in the past five or ten years.

Inflation—and the Image of the Entrepreneur

Although the man in the street would assert that he is quite fa­vorable to the general idea of free enterprise and encouragement to profit making, his tolerance for adverse economic conditions is quite low. Whenever conditions be­come difficult and he feels frus­trated with shrinking income and rising costs, his tendency is to opt for government intervention in the economic process. This invariably occurs during a period of sub­stantial monetary inflation, such as we have had in the past few years. Economists, of course, are familiar with the time lag that takes place between changes in monetary policy and changes in the rate of inflationary price in­creases. But the average citizen does not understand this, and he becomes restless under the pound­ing he takes during an inflation. Then he demands government in­tervention at any cost. Under such conditions successful operations of the entrepreneur are impeded.

But it must not be imagined that only consumers run to Wash­ington during periods of infla­tion. Heads of leading corpora­tions also engage in an unseemly rush to Washington to apply pres­sure for price and wage controls. Inflation is dangerous for many reasons, especially because it tends to create pressure for government intervention and wage-price con­trol. To encourage a favorable climate for the entrepreneurial effort it is essential to control inflation.

Labor Unions and the Entrepreneur

A discussion of the entrepre­neur in the United States should not be concluded without some mention of the effects of labor unions on entrepreneurial activi­ties. Beyond question the rigidity of unions’ rules and practices, the restrictions upon entrepreneurial decisions, are an important deter­rent. Human nature being what it is, some people are able to operate efficiently despite all the obstruc­tions in their way. It certainly cannot be asserted that unioniza­tion and monopoly practices by unions have operated to prevent capital accumulation in the United States. The record since 1936, when powerful unions were given monopoly privileges under the law, tends to confirm the fact that entrepreneurs have been able to demonstrate their dynamism and to create a fabulously productive society despite all obstacles.

But conversely, there is little question that the present laws and the practices of unions are a de­cided drag on entrepreneurial activity.

Also it should be pointed out that powerful unions have the ability to demand and get uneco­nomic wage increases which act as a force for encouraging monetary inflation by the administration in power.

If labor demands and gets in­creases of, say, 8 to 10 per cent per annum, and if the Administra­tion holds to a policy of a very limited increase in the money sup­ply, the result would be increased unemployment unless wage in­creases are offset by productivity increases, which is highly improb­able.

Thus, the effect of labor union power is to create a condition which could lead—and generally does—to a new cycle of inflation. Since Washington is sensitive to fears of recession, the tendency is to validate excessive wage in­creases by excessively increasing the money supply. The old inflation is barely curbed before a new one starts. So the nation goes from one inflationary plateau to anoth­er, due to the inexorable pressure of monopoly labor unions.

Conclusion

The image of the entrepreneur in the mind of the American pub­lic corresponds only vaguely to the function of the entrepreneur as defined by economists. The public believes that the entrepreneur is an innovator or promoter of some­thing new, and generally is a small business. The fact is that big business and small, innovators and traditional businesses, all are entrepreneurs because they are seeking to make a profit. The basic question, then, is: What does the American public think of profits and profit-making?

I have outlined briefly some of the hard evidence on which we might base a valid conclusion—public opinion polls, the Acts of Congress supported by the public, the climate of opinion among those who teach in the colleges and those who write for the gen­eral public, investment attitudes of the public, and so on. Sub­stantially, this evidence indicates that the man in the street has a rather ambivalent attitude toward the entrepreneur and the vital im­portance of capital accumulation.

On the negative side is the growth of restrictions on entre­preneurial activity. A major in­fluence along these lines has been the teaching and writing of left-wing intellectuals who favor in­tervention. Inflation also gives a tremendous impetus to restrictive measures. Curbing inflation is es­sential to perpetuate a healthy free-market system.

On the more hopeful side is the fact that the intellectual left does not have, and never has had, mass support in the United States for a broad-scale political attack on free enterprise. Also, the invest­ment activities of more than 25 million citizens indicate their de­sire to participate in entrepreneur­ial activity.

While the progress of interven­tionist measures may give a feel­ing of hopelessness at times, it must be realized that the profit system is so powerful that it has, nevertheless, accomplished mira­cles of capital accumulation and production. It bears the heavy burden of interventionism remark­ably well.

Finally, it must be noted, there is a heartening increase of activity by free-market advocates in the academy and in journalism and in politics.

There are fashions in political and economic thinking; and the fashion of the past generation may be altered through education of the American public.

—FOOTNOTES—

¹ Frank H. Knight, Risk, Uncertainty and Profit (Boston: Houghton Mifflin, 1921), p. 36:

"No a priori argument is necessary to prove with general foreknowledge of progressive changes, no losses and no chance to make profits will arise. This is necessary to provide opportun­ity for the enterpreneur’s judg­ment and talents. Wherever the future is uncertain, the abilities of the entrepreneur come into play. Uncertainty is the basis of the risks he takes. It is his per­ception, estimates, and judgment about the future which permit him possibly to make a profit and accumulate capital.

According to the above theory, practically everyone is an entre­preneur who employs the factors of production toward fulfilling the needs of the citizens. Some do so the first principle of speculation and is particularly familiar in the capitaliza­tion of the anticipated increase in the value of land."

Ludwig von Mises, Planning for Free­dom (South Holland, Ill.: Libertarian Press, 1952), pp. 119-120:

"Profits are never normal. They vary only where there is a maladjustment, a divergence between actual production and production as it should be in order to utilize the available material and mental resources for the best possible satisfaction of the wishes of the public. They are the price of those who remove this maladjustment that disappear as soon as the maladjustment is entirely removed. In the imaginary construction of an evenly rotating economy there are no profits. There the sum of the prices of the complementary factors of pro­duction, due allowance being made for time preference, coincide with the price of the product…. It is the entrepre­neurial decision that creates either profit or loss. It is mental acts of the mind of the entrepreneur from which profits ultimately originate. Profit is a product of the mind, the success in anticipating the future state of the market.”

² Claude Robinson, Understanding Profits (Princeton: D. Van Nostrand & Co.), Ch. 2, "What the Public Thinks of Profits," pp. 30, 31, 32, 33.

³ Ibid., p. 29.

***

In Retrospect

The entrepreneurs are neither perfect nor good in any meta­physical sense. They owe their position exclusively to the fact that they are better fit for the performance of the functions incumbent upon them than other people are. They earn profit not because they are clever in performing their tasks, but be­cause they are more clever or less clumsy than other people are. They are not infallible and often blunder. But they are less liable to error and blunder less than other people do. Nobody has the right to take offense at the errors made by the entre­preneurs in the conduct of affairs and to stress the point that people would have been better supplied if the entrepreneurs had been more skillful and prescient. If the grumbler knew better, why did he not himself fill the gap and seize the opportunity to earn profits? It is easy indeed to display foresight after the event. In retrospect all fools become wise.

LUDWIG VON MISES, Profit and Loss