Entrepreneurial Profit Follows Good Decisions, Not Exploitation

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Michael Njoku
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Within the social order, characterized by the division of labor and private ownership of the means of production, there exists instances of human action—purposeful behavior—whose origins consist in the motive and choice to attain one’s ends. In entrepreneurial endeavors this entails outperforming fellow participants in serving consumers. Acting man in his entrepreneurial capacity, striving to expand the boundaries of attractive opportunities available to consumers in the market, much more than his competitors. This could be in the form of differentiated products of better quality, lower prices, or a combination of both.

We find a readiness to outperform behaviorally, concretized in the dispositions of certain market participants, namely, an ongoing entrepreneurial alertness to underpriced factors in the market and steady quests into the most efficient combinations and allocations of various scarce resources. Furthermore, this alertness and preparedness to act on underpriced factors in the best service of consumer wants. This is coupled with inequalities in natural endowments of various human skills, including foresight and perceptiveness, and very often puts them in unique positions of gainful discovery. This ultimately translates to differentials in performance and outcomes obtainable in the market. In other words, the cause of successful entrepreneurship consists in greater responsiveness to rapidly-changing market structure, adoption of the most economically-feasible means, and conveyance of more attractive opportunities to consumers.

Additionally, there exists certain entrepreneurs, formally identified as “supramarginal” producers. These currently enjoy higher profits because they produce at the least marginal cost in relation to price. These are contrasted against the other class of entrepreneurs—marginal producers—within the same lines of production, producing at higher marginal cost, and who incur losses at the slightest drop in prices, imply the effectiveness and suitability of the choices of action of the former in the given lines of production.

Entrepreneurial Profit Signaling Success of Past Actions

As every product and service offered in the market is evaluated by consumers according to the expected degree of satisfaction to be derived from it, consumers would come to prefer products of certain entrepreneurs over those of others. These preferences are demonstrated in their buying and abstention from buying. The socio-economic effects of these social relations become the profits and resultant increases in wealth of these entrepreneurs who are responsible for making these preferred goods. As Mises writes in Human Action: “There is in the social system of the market society no other means of acquiring wealth and of preserving it than successful service to the consumers.”

Theoretical Foundations of Anti-Entrepreneurship

Marxist exploitation theory attempts to explain profits and so-called “surplus value” accrued to capitalist-entrepreneurs as the outcome of exploitation and expropriation of labor. Basing the elaboration of this theory on the erroneous labor theory of value advanced by the classical economists, they set out to make various inferences on surplus value, thus arriving at the misleading conclusion that profit is plunder of the workers.

The exploitation theory contributes enormously to the opprobria attached to entrepreneurial profit. In the attempt to explain the emergence of surplus value, socialist authors like Johann Karl Rodbertus and Karl Marx likened wage-contract to slavery, thereby transferring the connotations associated with the latter to the former. Thus, according to Rodbertus, as quoted by Böhm-Bawerk in Capital and Interest: “...the contract is only formally and not actually free, and Hunger makes a good substitute for the whip. What was formerly called food is now called wages.”

Contrary to the exploitation theory, labor’s remuneration (wage rate) is set according to its discounted marginal value productivity (DMVP), that is, labor’s contribution to the final product. Furthermore, every interpersonal exchange within the market system is based upon voluntarily-entered contractual agreements in which the terms of contract are spelled out in advance. As long as the market—the mechanism of social cooperation—remains unhampered, there is always mutuality of advantage amongst the parties to contracts. That a laborer proceeds to exchange his labor at a given wage rate implies that he values the satisfaction to be attained by the product of his labor over those to be attained by competing alternatives like leisure and other employment of his time.

Public Opinion on Profit as Shaped By Marxism

It is most unfortunate that the exploitation theory, as popularized by Marxist authors, has gained general acceptance among the masses due to its sentimental appeal. The common man, and the bulk of politicians relying on public opinion, are unable to form a complete view of the subject matter. This is due to a lack of cognitive disposition in following through consistent chains of reasoning. In their opinions, entrepreneurial profit is exploitation and plunder, and so, the social apparatus of coercion must be unleashed to correct this “capitalist injustice.”

One of the social consequences of this line of thinking is that, in present times, we find the force of public opinion directed against “big business” and wealthy entrepreneurs who have earned their wealth by outperforming competitors in serving the consumers. And, as every policy is theory-laden, the exploitation theory has become the basis of policies aimed at wealth redistribution and egalitarian ends. This is particularly true of so-called progressive economic policies of the left whose chief weapon is progressive taxes levied against corporate profits and entrepreneurial income.

Of course, government interventions of any sort are not without consequences which, judged from the point of view of the initiators, are considered unsatisfactory. Policies aimed at expropriation of entrepreneurs and producers must inevitably produce contrary outcomes. As Hans-Hermann Hoppe succinctly writes in his book A Theory of Socialism and Capitalism:

By taking part of the income from production away from the owner-producer, however small that part may be, and giving it to people who did not produce the income in question, the costs of production (which are never zero, as producing, appropriating, contractings always imply at least the use of time, which could be used otherwise, for leisure, consumption, or underground work, for instance) rise, and, mutatis mutandis, the costs of non producing and/or underground production fall, however slightly.