The Free Market 32, no. 8 (August 2014)
This article is a selection from “The Ethics of Entrepreneurship and Profit,” a lecture delivered by Prof. Hoppe at the University of Reading, England in June 2014.
The capitalist entrepreneur acts with a specific goal in mind: to attain a monetary profit. He saves or borrows saved money, he hires labor, and he buys or rents raw materials, capital goods, and land.
He then proceeds to produce his product or service, whatever it may be, and he hopes to sell this product for a monetary profit. In Human Action, Mises notes that, for the capitalist, “profit appears as a surplus of money received over money expended and loss as a surplus of money expended over money received. Profit and loss can be expressed in definite amounts of money.”
As with all action, a capitalist enterprise is risky. The cost of production — the money expended — does not determine the revenue received. In fact, if the cost of production determined price and revenue, no capitalist would ever fail. Rather, it is anticipated prices and revenues that determine what production costs the capitalist can possibly afford.
Yet the capitalist does not know what future prices will be paid or what quantity of his product will be bought at such prices. This depends exclusively on the buyers of his product, and the capitalist has no control over them. The capitalist must speculate what the future demand will be. If he is correct and the expected future prices do correspond to the later fixed market prices, he will earn a profit. On the other hand, while no capitalist aims at making losses — because losses imply that he must ultimately give up his function as a capitalist and become either a hired employee of another capitalist, or a self-sufficient producer-consumer — every capitalist can err with his speculation. Actually-realized prices can fall below his expectations and below his accordingly assumed production cost, in which case he does not earn a profit but incurs a loss.
While it is possible to determine exactly how much money a capitalist has gained or lost in the course of time, his money profit or loss does not imply much if anything about the capitalist’s state of happiness, i.e., about his psychic profit or loss. For the capitalist, money is rarely if ever the ultimate goal. In practically all cases, money is a means to further action, motivated by still more distant and ultimate goals. The capitalist may want to use it to continue or expand his role as a profit-seeking capitalist. He may use it as cash to be held for not-yet-determined future employments. He may want to spend it on consumer goods and personal consumption. Or he may wish to use it for philanthropic or charitable causes, etc.
What can be unambiguously stated about a capitalist’s profit or loss is this: his profit or loss is the quantitative expression of the size of his contribution to the well-being of his fellow men, i.e., the buyers and consumers of his product, who have surrendered their money in exchange for his more highly valued (by the buyers) product. The capitalist’s profit indicates that he has successfully transformed socially less highly valued and appraised means of action into socially more highly valued and appraised ones, and thus increased and enhanced social welfare. Mutatis mutandis, the capitalist’s loss indicates that he has used some more valuable inputs for the production of a less valuable output and so wasted scarce physical means and impoverished society.
Money profits are not just good for the capitalist, then. They are also good for his fellow men. The higher a capitalist’s profit, the greater has been his contribution to social welfare. Likewise, money losses are bad not only for the capitalist, but they are bad also for his fellow men, whose welfare has been impaired by his error.
The question of justice: of the ethically “right” or “wrong” dimension of the actions of a capitalist-entrepreneur, arises, as in the case of all actions, again only in connection with conflicts. It arises with rivalrous ownership claims and disputes regarding specific physical means of action. And the answer for the capitalist here is the same as for everyone, in any one of his actions.
The capitalist’s actions and profits are just, if he has originally appropriated or produced his production factors or has acquired them — either bought or rented them — in a mutually-beneficial exchange from a previous owner, if all his employees are hired freely at mutually agreeable terms, and if he does not physically damage the property of others in the production process. Otherwise, if some or all of the capitalist’s production factors are neither appropriated or produced by him, nor bought or rented by him from a previous owner (but derived instead from the expropriation of another person’s previous property), if he employs non-consensual, “forced” labor in his production, or if he causes physical damage to others’ property during production, his actions and resulting profits are unjust.
In that case, the unjustly harmed person, the slave, or any person in possession of proof of his own un-relinquished older title to some or all of the capitalist’s means of production, has a just claim against him and can insist on restitution — exactly as the matter would be judged and handled outside the business world, in all civil affairs.
