Don’t blame profits – they are a necessary signal for the economy

Rosanna Weber

August 26, 2022

We all know the stereotypes: Scrooge McDuck, whose favourite pastime it is to take a dive in a gold-green sea of his money, stored away safely in a giant vault that functions as a personal swimming pool. Or penny-pinching Ebenezer Scrooge, who wouldn‘t even dream of paying his clerk Bob Cratchit more than 15 shillings a week and a lump of coal.

Both are – within the realms of their fictitious worlds – filthy rich. And filthy stingy. It comes as no surprise then that after years of  manifesting the trope ‘rich=bad’ within the minds of people, eventually, the belief will have established itself enough to guide public opinion, become an effective media angle to rile up readers and be present in high-stakes political decision-making.

The idea that making a profit is somehow immoral, even outright evil, is circulating on record speed amidst rising bills and prices. If those bills and prices are paid, this money of course has to go to someone somewhere. And that someone somewhere is usually the one who gets blamed for the catastrophic price increases over the past months: C-Suit executives, heads of big companies, businessowners.

With perfect timing, the High Pay Centre released a CEO pay survey this week with a set of recommendations to reform the pay-setting process by introducing mandatory “remuneration committees that set pay“. It needs no clarification that the idea behind this is not to make people like Sebastien De Montessus, CEO of precious metals and mining company Endeavour, earn a big bonus on top of his £16.85m salary – quite the contrary.

There is, however, nothing inherently wrong or immoral with making a profit, neither for a small local business or a big international company. The narrative needs to be reclaimed that profits are a fundamentally necessary signal within any thriving economy, without which resources will be misallocated, causing further shortages, increasing poverty and delaying economic recovery.

Venezuela, among many other historic examples, proves how anywhere and at any point in time, restricting a firm‘s ability to make a profit, as president Maduro did in 2013, achieves only catastrophic outcomes.

Freely fluctuating prices and profit margins are the most efficient way to signal to a business what to produce, in what quantities to produce it and – sometimes even more importantly – what to stop producing. Central planning has never solved the knowledge problem behind this organic process, and it never will.

The idea that the big capitalist fat cats simply sit on their profits, sums which pressure groups and union activists alike would consider ‘excessive‘, could not be further from the truth. As economist Henry Hazlitt notes on big profits:

“But that very fact would not only cause every firm in that line to expand its production to the utmost, and to reinvest its profits in more machinery and more employment; it would also attract new investors and producers from everywhere, until production in that line was great enough to meet demand, and the profits in it again fell to the general average level.

With two of the most debated industries at the moment, energy and transport, there is a further incentive not to cut their profit margins short. For transport, any profits that are being made now follow two years of declining passenger numbers due to the stay-at-home policy during lockdown and increasingly greater flexibility to work from home. Union representatives who demand higher wages, no spikes in fares, caps on profits and, at the same time, no redundancies live in an economic dream world. It is simply not feasible.

Energy, in particular, is an investment-heavy industry and with declining gas deliveries from Russia to Europe, other options to increase supply must be taken into consideration, none of which are cheap. Only if supply increases, will prices decrease.

According to Ofgem, the profit margin for an energy supplier is also a lot smaller than most would think. From 1st October, a typical annual bill of a £3,549 merely generates £63 in profit for the supplier, whereas £321 of the bill go towards VAT and green levies, £671 are running costs and £2,491 the wholesale cost. The profits of the latter are, amongst other things, profits on the entire supply chain and necessary for investments in future supply.

The latter could decrease if, again, we were able to increase supply, for example by putting fewer bureaucratic obstacles in the way of fracking. Scrapping VAT and green levies at least temporarily could also take some of the burden off consumers this coming winter. Nonetheless, the general issue of a shortage in supply without a simultaneous reduction in demand remains. To interfere with the high prices, which signal exactly that, would only prolong the crisis.

Let‘s not forget, if it wasn‘t for Ebenezer Scrooge, Bob Cratchit would not be employed at all or work for an even smaller wage; and for anyone questioning Scrooge McDuck‘s wealth, I recommend reading The Life and Times of Scrooge McDuck. It might help in gaining a different perspective on the “richest duck in the world“, as well as the vital process of making a profit.


Written by Rosanna Weber

Rosanna Weber has a degree in journalism and is Assistant Editor for 1828.

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