John reported last night on a short passage in Obama’s speech that he regarded as revealing. I agree totally. “But by avoiding some of the overhead,” Obama said, “that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers.”
As John noted, profits are not part of overhead. Indeed, reducing overhead automatically increases profits because, as Henry Fielding explained in The Miser, a “penny saved is a penny got.”
But I suspect Obama—who obviously knows nothing about business—was just buying into the conventional liberal wisdom regarding “profits” and the evil thereof that dates back more than a hundred years. This “wisdom” is in two parts. First, that business is a zero-sum game, that the profit earned by a business is, in effect, theft. Because public entities don’t make a profit, liberals reason, they are inherently morally superior to private entities. They are not, of course, as profit represents the wealth created by trading what someone wants less for something he wants more. In a trade, both sides benefit (otherwise the trade doesn’t take place—no one trades a $10 bill for a five). In buying insurance, a person trades money in exchange for risk reduction. Many young people, facing little risk, don’t make the trade because they reason, rightly, that they are being overcharged.
Liberals also think that public entities are economically superior to private entities. The lack of need to make a profit, they argue, means that prices can be lower. This is, of course, utter nonsense. Capital costs money, whether that cost is accounted for or not. In government agencies, it is not. Also, it is the need for profit, and the need for profit alone, that forces companies to be efficient and to innovate, in order to increase, or at least maintain, profits in a competitive marketplace. The idea that it is private companies that suffer from excess administrative costs is laughable. Even Obama himself noted a month or so ago that it is not UPS and FedEx that are in trouble—it the United States Postal Service.
In 1917, the federal government, claiming a wartime emergency, took over the telephone and telegraph companies and turned them over to the post office. The Wilson administration claimed that because there was now no need to make a profit, the cost of telephoning and wiring would be less. Practically the first thing that the Post Office did on taking control was to raise prices.
