There is a paradox when it comes to profits, says economist Arnold Kling: while the profits that accrue to any given individual may be unjust, the profit system itself is necessary in order to have a modern, progressive society. There is no simple way for us to enjoy the benefits of the system while overcoming all of the instances of injustice.
Yet despite the injustice, says Kling, the profit system is the most effective, humane way to organize economic activity. The reason is because the requirements of a modern economy requires “bosses and profits“:
In a modern, large-scale economy, coordination takes place through a combination of bosses and profits. Bosses order people to undertake particular tasks. Profits and losses provide incentives to engage in certain economic activities and to curtail others.
Within any one organization, you take orders from a boss. Your only alternative is to leave that organization and find another boss or start your own organization.
Profits determine the success or failure of different organizations. Organizations that earn profits can continue to operate. Organizations that fail to earn profits have to go out of business, unless they can survive on donations or subsidies.
The profit system helps to discipline bosses. Really bad bosses, who use resources inefficiently (including mis-use of workers), tend to perform poorly in terms of profits. This poor performance eventually gets weeded out, either by the boss’s boss or by the inability of a poorly-performing firm to stay in business.
