Daniel McLaughlin | On September 9, 2019

For a wide swath of people, profit is a dirty word. For them, it is evidence that businesses expropriate the value of labor from their employees or cheat customers by charging prices higher than the costs of production. It is the view that all value comes from labor and that price should be determined only by cost. Such ideas are the foundation of socialism, and those ideas have been the prevailing political ideology of most developing countries for many decades.

On the other end of the scale, developed countries are those where markets are or have been free and open to competition and where business owners have been able to profit from their risk in investments, in time, money, or any other resources. The difference is stark. Even developed countries that have adopted some level of socialism in recent decades started from a high level that resulted from a market-based economy with profitable businesses. The prosperity was attained before the parasite attached to the host and not because the parasite caused progress.

The problem with perennially-poor countries is that the host hasn’t generated enough blood to spare for the parasite. They are not developing because there is not a high enough magnitude of profits to enable progress. In many cases there are cultural impediments, deep rooted envy or jealousy, tribalism that stifles or confiscates personal profits, or the lack of a rule of law, without which businesses and people without political connections cannot prosper. A young friend of mine finished his masters degree in business but has gotten a job with a United Nations Agency in his own country, Somalia, not because there is no opportunity there, but because there is a fairly high likelihood of getting robbed or murdered if you own a business. No amount of foreign aid will bring progress there.

Business competition is an exploration process. Some entrepreneurs try a process, product, or service that is not profitable,and they go out of business. They have discovered a system that doesn’t work. To the extent that they lose money, going out of business prevents the wasting of resources that could be put to more effective, efficient use in alternative enterprises. A profitable business demonstrates a process that does work, a system that creates more value than it consumes.

Further, the money that customers pay for goods or labor hours that employees are willing to trade for wages indicate that they value the goods, services, or money they get more than the resources they have to give up. If demand is high relative to the supply, the price will be relatively high, and the business will likely be profitable. A price less than the costs of production necessarily indicates that either demand for the product is low or there are too many suppliers. The lack of profits is the incentive to move resources to other markets or industries where profits are higher. The profits are effective signals about where to increase overall value for society most effectively.

High regard for property rights and the profits that stem from them is the fundamental difference between poor and prosperous countries. It is not surprising that there is a correlation between economic freedom and property rights and economic development. There is actually a causal relationship. Even employees in a market economy tend to migrate to profitable industries and businesses, because all wages are paid from productivity and profits. The more profitable industries and businesses in an economy, the higher the standard of living will be. If people in developing countries want to develop faster, the first step they need to take is to embrace profits, protect property rights, and encourage competition by limiting government’s interference on the economy.

Originally published on Townhall Finance.

Daniel McLaughlin

Daniel J. McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Formerly a finance executive, he is now focused primarily on writing on economics, business, and politics. You can find him at daniel-mclaughlin.com.