A lesson in profit

Guest post by Marsha Enright and Gen LaGreca

Addressing a joint session of Congress on health care, President Barack Obama reiterated his often-expressed aversion to the profit motive:

    [B]y avoiding some of the overhead that gets eaten up at private [health insurance] companies by profits and excessive costs and executive salaries, [the public insurance option] could provide a good deal for consumers, and would also keep pressure on private insurers to keep their policies affordable and treat their customers better . . .”

    Is this true? Is profit wasteful, as Obama implies? Does it lead to higher prices and lower value to consumers? Can the government, unburdened by profit, do the same job as a private company, only cheaper and better?
    To answer, let’s consider one business, one product, and one profit-seeking man who lived at a time when the market operated largely free of government subsidies, bailouts, regulations, taxation, and other “progressive” intrusions.
    Henry Ford, at age 13, saw a steam-driven land vehicle, a “road locomotive,” which filled his imagination with the vision of a horseless carriage and fueled a passion to create one. As a young man, he worked day jobs, while trying to build a car in his free time. Realizing a viable car could not run on steam, he sought to develop a new kind of engine.
    On Christmas Eve 1893, the 30-year-old inventor clamped his first gasoline engine to his wife Clara’s kitchen sink. With the home’s electricity providing ignition, the motor roared into action, sending the sink vibrating and exhaust flames flying while Clara prepared the holiday dinner.
    In pursuit of his dream, Ford and Clara moved eight times in their first nine years of marriage. He quit a secure job at the Edison Illuminating Company, banking everything on his vision. He co-founded the Detroit Automobile Company—a venture that failed. Jobless, Ford moved his wife and child into his father’s home. But he kept working on his car. “It is always too soon to quit,” he said.
    Ten years passed from the roar of the little engine on Clara’s sink to the launch of the Ford Motor Company. It took five more years to produce his big success, the Model T, and additional years to master its mass production.
    Why did Ford persist through years of hardship and uncertainty? How much would his love for the work have sustained him without the hope of eventual profit? Imagine if he had lived in a system where politicians could, at the stroke of a pen, seize his profits or decide how much he could keep. Would he have risked so much or worked so ferociously to bring a world-changing invention to market?
    Would an Amtrak [or KiwiRail] employee devote a decade of free time inventing a new train, only to rise a notch on a civil-servant’s pay scale? Dream big, work hard, create something earth shaking, but be paid small is the antithesis of the American dream.
    The pursuit of profit not only motivated Ford, but also his bold investors who had the foresight to realize the horse was doomed.
    In 1903, a school teacher invested $100—half her life savings—in the Ford Motor Company. Sixteen years later, she sold her stock for a total gain of $355,000. Why would she and others place their money on a highly experimental venture, were it not for the hope of tremendous gain should the enterprise succeed? What kind of person would deny her the reward for recognizing Ford’s vision and risking her own money?
    The pursuit of profit also impacted every aspect of Ford’s business operations.
Ford didn’t need a politician’s scolding to lower prices—only the desire to make huge profits by reaching mass markets. Because early cars were expensive, people viewed them as mere playthings of the rich. But Ford sought to “build a motor car for the multitude.” This led him to develop his moving assembly line, significantly reducing manufacturing costs and, consequently, prices. The original $825 price of the Model T finally bottomed at $260. That price-lowering strategy brought him the millions of customers that made him rich.
    Similarly, Ford’s pursuit of profit didn’t result in bare-subsistence wages for employees, but in phenomenal pay increases. He shocked the world by introducing the $5 workday, more than doubling the era’s prevailing wage. Why? To attract the best workers, whose talents increased product quality and company efficiency. High pay also decreased employee turnover and training costs, again increasing Ford’s profits.
    Ford typifies the successful capitalist, whose profit-driven innovations lower prices, while raising wages and living standards for all.
    Even today’s Ford Motor Company, a much-fettered child of our mixed economy, demonstrates the superiority of private- over government-run companies. Ford refused TARP bailout money, choosing to operate without government strings. The result? Ford’s profits are up 43 percent, while bailed-out GM and Chrysler lag behind.
    In Henry Ford—a thin man who was the fattest of fat cats—we see an embodied refutation of President Obama’s worldview. Ford developed a new form of transportation vastly cheaper, faster, more convenient, and superior to the old mode. He continually lowered prices so that everyone, rich and poor, would have access to his product. He created thousands of jobs. He raised employee wages. He did all this good without government grants, bailouts, stimuli, subsidies, or coercion, but simply as a result of the honest pursuit of personal gain.
    This achievement was possible only because a private individual had the freedom to pursue his own self-interest, in cooperation with others who supported his vision and shared in the rewards, unencumbered by government.
    By eliminating profit, Obama implies that everything else about an enterprise would remain the same, only the product would be cheaper and better. Actually, by removing profit, nothing at all would remain the same.
Contrary to Obama’s notions, profit is not an overhead cost, but a vital gain sought over and above costs in order to reward a company’s risk-takers. According to economist Ludwig von Mises,

    Profit is the pay-off of successful action.” And “The elimination of profit . . . would create poverty for all.”

    Eliminate the hope of profit, and you extinguish that spark which ignites the human engine and powers it to explore uncharted roads: the creative mind. Profit is the proud product of the creative mind, and the creative mind is an attribute of the individual. Obama’s attack on profit is an attack on human creativity and innovation, which is an attack on the individual.
    Obama’s antipathy for the self-interested individual is explicit.

    In America, we have this strong bias toward individual action [he said in an interview in the Chicago Reader.]  But individual actions, individual dreams, are not sufficient. We must unite in collective action, build collective institutions and organizations.”

    It was Henry Ford’s individual actions and individual dreams that brought motorized, personal transportation within reach of everyone in the world.
    America is rooted in the “pursuit of happiness”—which means the right of each of us to create, to produce, to rise, to succeed, and to profit from the fruits of our labor. Contrast this worldview with that of a president who disparages the individual and seeks to limit or expropriate his profits on behalf of a faceless “collective.” Obama’s war on profit is a war against the individualist heart and soul of America.
    Profits are a badge of honor earned by someone who offers others something they value enough to buy. The first buyer of the first car of the Ford Motor Company was a doctor. He was tired of hitching up his horse and buggy for night-time emergencies. Ford’s product enhanced his life, as it later enhanced the lives of millions. Profit is the medal Ford received from his customers for a job well done.
    If our nation is to cultivate productive geniuses like Henry Ford, it must proclaim that the quest for profit is moral and noble.

POSTSCRIPT: Transportation Secretary Ray LaHood recently announced “the end of favoring motorized transportation at the expense of non-motorized.” This means that the federal government, with its vast powers to fund highway projects, “liveability” initiatives, and other aid programs, as well as to tax gasoline, now intends, in LaHood’s stunningly brazen words, “to coerce people out of their cars,” in favor of walking or cycling. A century ago, Henry Ford, through capitalism and the profit motive, brought motorized transportation to the world. Now, an alarmingly anti-capitalist government is reversing that historic achievement and pulling us back to the pre-industrial age.

Gen LaGreca is author of “Noble Vision,” an award-winning novel about the struggle
for liberty in health care today. Marsha Familaro Enright is president of the
Reason, Individualism, Freedom Institute, the Foundation for the College of the United States. Incidents from the book “Young Henry Ford,” by Sidney Olson appear in this article.