Under a free-market, a profit is made by creating something of economic value that is more than the cost of producing it, as judged by other producers in their role as consumers.
When an entrepreneur enters into a productive endeavor, one starts with a given sum of capital (unspent wealth). If after a period of time, if one is left with more than one started, one has earned a profit. If one is left with less then one started, one has incurred a loss.
The profit motive is the pursuit of making a profit from one’s production. The opposite is the loss motive — to pursue a loss. The pursuit of profit is the moral right to pursue one’s happiness applied to one’s economic endeavors. To pursue profit is to pursue creation. It is an act of virtue and not a vice.
Stealing wealth from others, through fraud or force, whether done by a private citizen or government bureaucrat, is not profit, but theft (initiation of force). Whether that theft is called a mugging, welfare, or “voluntary” taxation [a contradiction in terms], it is still theft.
Is there such a thing as an “excessive profit”? There is no such thing as a profit that is too high or too low. That is, there is no such thing as an “excessive” profit. There is only the profit that men earn.
What happens when a company starts to make a higher profit in its industry, in comparison to other industries? If any company is a single seller in any industry and starts making profits higher than other industries, due to high prices; it will attract competition into its industry, as other capitalists move their capital from less profitable markets to more profitable ones. If the profits are due to lower production costs, which other companies are unable to match, then the company deserves its profit.
What happens if a business attempts to charge prices lower than his competitors (“dumping”)? If a business attempts to “corner the market” by charging prices that are too low (i.e., below its’ variable costs of production), the business may drive competitors out of the market temporarily (at the price of eating up its financial capital and eroding its profits); but, as soon as the business raises its’ prices (in order to reap profits in order to build back the capital it has given away by selling products below their variable cost), new competitors will enter the market. The only way a company can gain profitably gain market share by lowering its’ prices, is if it can lower its costs of production. If a business can charge the lowest price because it has figured out how to build a better mousetrap (i.e., produce more for less), then it deserves whatever market share it can obtain.
What happens if a business attempts to charge higher prices than its competitors (“gouging”)? If any business attempts to charge prices higher than the market will bear, he will lose all his business to his competition, since he cannot force his competition out of business. The businessman’s power is dollars — not guns.
Are profits extorted from labor? The profits of capitalists are not the surpluses extorted from labor, but are the result of the proper use of one’s capital, as losses are the result of the improper use of capital. If an employer pays a worker a lower salary than the worker wants, the worker is free to leave the job and look for a higher paying job. Let any worker in Soviet Russia, Nazi Germany, or Communist China try to attempt such a feat as leaving his job without the permission of the state, and he will soon find what actual exploitation means.
Do laborers have a right to a share of the capitalist’s profits, in addition to their wages?* Why are the laborers who demand a share in the capitalist’s profits, silent in demanding their share of the capitalist’s losses? Why don’t they return their past wages when a business ends up running at a loss for the year? If labor is the cause of profits, then is it not also the cause of losses? A moment’s reflection will point out that laborers are only responsible for their job description — they are not directly responsible for the losses or profits of business — and that the cause of an enterprise’s profit and loss lies primarily with the entrepreneur. * Assuming the employee has not entered into a voluntary profit-sharing agreement with their employer — which is really considered as wages. Capitalism does not forbid such arrangements so long as they are voluntary.