Is America Trying To Destroy The Profit Motive?

Monopoly ManRecently, I’ve been experiencing a growing concern over the long-term viability of the profit motive in the United States. What does that mean exactly? When I say profit motive, I’m referring to the incentive motivated individuals have to work hard and make a profit. This tied to the intrinsic belief that the quality and quantity of the work one does is directly correlated with the financial reward that comes from it. In other words, the harder and better someone works, the more money they get to make AND keep. Now, let me address some of the most obvious questions here: Why would I be concerned with the viability of the profit motive? Is it even in danger? Why is the profit motive important?

I’m concerned about the viability of the profit motive, because I’m seeing a trend in our society and government of trying to destroy it. New legislation continues to be enacted, that places undue burdens on entrepreneurs and employees alike in middle class and upper middle class America. Many of these laws are designed to control abuses by large corporations, but they ultimately end up simply crippling people who have nothing to do with the situation.

For example, there’s a push in Washington D.C. to enact a living wage. A living wage is essentially a minimum wage employers must pay its hourly employees so that they can afford life’s necessities (food, rent, etc) in one of the most expensive cities in America. Let’s be honest, $10/hr doesn’t go very far in the district. At face value, forcing huge corporations with deep pockets like McDonalds, CVS, and Starbucks to pay their employees $20/hr instead of $10/hr sounds great! After all, those corporations can afford it, right?

It’s incredibly shortsighted to think that the only businesses that employ people are large multinational corporations. In fact many, if not most, businesses that employ people in a city like D.C. are small to midsized businesses. They are owned by entrepreneurs, who’ve taken on incredible risk (their livelihoods and futures are tied up in their businesses) to bring products and services to the marketplace. Unfortunately, the vast majority does not have deep pockets and simply can’t afford something like living wage legislation. It’s not that they don’t want their employees to have all of their needs met and to live comfortably, but they simply can’t operate at a profit and/or offer competitive prices (maintain a steady stream of business) when their labor costs are doubled.

So let’s put this into a practical example. Let’s say Bill Wong owns and operates a small grocery/convenience store in the city. He employs ten people all of which make $12 (Bill is generous) and has a profit margin on his goods of about 20% His monthly balance sheet could look something like this:

Revenue = $251,300
Labor Cost (35hrs/wk x 10 ppl x 4 weeks x $12/hr) = $16,800
Overhead (Rent/Utilities) = $9,500
Cost of Goods = $200,000
Before Tax Revenue = $25,000
Taxes (35%) = $8,750
Profit = $16,250

Under that model, Mr. Wong is making about $195,000 per year. That pays for living expenses including providing for a wife and two kids.

Now let’s say there are a bunch of protests against companies like Starbucks demanding that they pay their workers more. Legislation gets passed and now Mr. Wong is required by law to pay his workers $20/hr. Let’s see what his balance sheet looks like now

Revenue = $251,300
Labor Cost (35hrs/wk x 10 ppl x 4 weeks x $20/hr) = $28,000
Overhead (Rent/Utilities) = $9,500
Cost of Goods = $200,000
Before Tax Revenue = $13,800
Taxes (35%) = $4,830
Profit = $8,970

With that labor increase, Mr. Wong is now making just $107,640 per year, over $85,000 less than what he made before the law passed. That might be peanuts for Starbucks’s executives, but it’s a ton of money for Wong. If things stay like that for Mr. Wong, he could lose his house, won’t be able to pay for his kid’s college tuition, and struggles to provide for his family.

It’s unlikely that much of the extra money he was paying his employees would be spent at his store and return to him in the form of revenue. Furthermore, Wong can’t raise his prices that much because he would lose customers to his corporate competitors that can afford to absorb the extra labor costs. Consequently, Mr. Wong’s profit motive is deeply wounded and won’t recover unless he does something drastic, like cutting staff, shopping hours, etc. all at the stake of the business he’s worked so hard to build. He’s collateral damage from legislation that was intended to help hourly wage employees. His American dream is crushed.

Hopefully you can see by my example what happens to the profit motive when the government steps in to enact “fairness” legislation. There are dozens of other examples of laws and bills that work like the one in my example. Unfortunately, they’re becoming increasingly common as well. While I don’t have time to cover them all, I would encourage you, my reader, to investigate the effect they would have on the profit motive.

Ultimately the profit motive is what drives entrepreneurs like Mr. Wong to work hard, build business, and employ people. It’s a great thing for our economy and we have a responsibility to protect it. The profit motive also provides people like Mr. Wong’s employees, who want and need to make more money, with an avenue to do so. They too can work hard like Wong did and bring new products and services to the market. Best of all, there’s no legislation required!

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