profits are good
by Matthew Roberts, Certified General Real Estate Appraiser
These days, even in America, profits are viewed negatively. The common belief is that they are the result of greedy exploitation. Seeking profit is often seen as shameful, and actually earning a profit is almost criminal. While holding that view of capitalism may be fashionable, it is flat out wrong.
The truth is, profit is the result of the efficient use of capital.
A capitalist system is one that allows the free exchange of goods and services. In this type of system, anyone can be an entrepreneur, and it is the entrepreneurs who organize the methods of production. However, entrepreneurs are completely subject to the will of the masses, that is, consumers. If entrepreneurs fail to give people what they want and when they want it, they will suffer losses and lose their place as an entrepreneur, and a new entrepreneur who better serves customer demand will take their place.
Profits are possible when an entrepreneur employs factors of production that are underpriced in relation to the future prices of their respective finished products. When the prices received for the end-user product is less than the total costs of production, the difference is profit. Conversely, if an entrepreneur misjudges the demand of products in relation to the prices of the factors of production, costs will exceed prices at which the products can be sold, and the result is economic losses.
Therefore, profit and loss can be indicators of success or failure - in serving consumer demand and employing available resources effectively. Because consumers make their choices to buy, or not to buy, based on their self-interest, entrepreneurs are automatically forced into the business of customer satisfaction. With their dollars, customers vote daily on which entrepreneurs are satisfying their demands most efficiently. When entrepreneurs correctly predict consumer demands and correctly employ necessary capital, they are rewarded with profit.
Demonizing and punishing profits does not help anyone, and it likely delays or prevents some consumer demands from ever being met. At the same time people enjoy the things they buy, they also envy and despise the entrepreneur. One economist put it like this “There would not be any profits but for the eagerness of the public to acquire the merchandise offered for sale by the successful entrepreneur. But the same people who scramble for these articles vilify the businessman and call his profit ill-got.”
When profits are earned in a free market, they should be celebrated. Profit is proof that lives are being improved, both those of consumers and entrepreneurs.
The same holds true for profit in real estate. The bringing together of buyers and sellers, construction of improvements, and arrangement of leasable units can all create value. At Spurgeon Appraisals, we recognize that earning a profit is a sign of economic value being created, and if you are successful, you should hold your head high.