Thursday, April 3, 2008

Capitalism 101: Profits = Good

Oil executives recently were dragged in front on congress by the ears to explain how they could have the audacity to make a profit.

What strikes me as odd is that the same people who are so upset about the obscene, below-average profit margin of the oil companies also think we should get rid of oil in favor of ethanol and biofuels. (More on why those are bad ideas another day.) This is evidence of a fundamental misunderstanding of the free market.

When a resource becomes scarce, its price goes up. The rising price may mean a good profit for oil companies for now, but it also signals something of the future. There are two options:

1) The oil companies will realize that they must invest their profits in the development of other forms of energy if they want to survive in the future. As gas prices go up, consumers will demand alternatives.

2) Oil companies will ignore alternative forms of energy, and then go out of business when other, smarter companies find better alternatives and sell them for less.

Either way, the consumer and the environment win, without the need for a single government hearing.

On a related note, a pop quiz:

When companies make a profit, who keeps the money?

A) The CEO
B) Stock holders
C) Fat, suspender-wearing guys with cigars
D) None of the above

If you answered D, you're right! Profit, by definition, is what's left over after everyone else has been paid. Profits, then, are used to re-invest in the company, creating jobs, fueling innovation, and other evil free-market plots.

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