Should Government be Able to Limit Profits

It has often been said that corporate greed and excessive profits are the cause of our current economic state. It has been argued that the government should limit how much an executive can be compensated, or how much profit a corporation should be allowed to make. These claims have been made under the belief that if we limit the wages and profits of some, it will increase the wages and profits of others. This represents a fundamental misunderstanding of wealth.

The truth is that the only way to increase the wages and profits of the lower classes (by this I am referring to economic class) is by increasing the amount of wealth, not by redistributing what wealth we already have. An example should help illustrate my point: If company A has excess cash flow it would be in company A’s best interest to put that excess to use in a way that provides the greatest returns for the company. The most common way to increase returns is by employing more labor in order to increase production. This increase in production would therefore lead to greater returns and further employment of labor. As a result of company A’s employing more labor, all other things being equal, there would be an increase in the quantity of labor demanded and thus an increase in the price of such labor as the quantity of labor available becomes more scarce. As you can see from this example greater profits will lead to greater employment which will in turn lead to higher wages as companies compete for increasingly scarce labor.

There are those, however, who believe that there is no need to increase wealth in order to increase the standard of living for most people. They believe that this country is so wealthy already that all we need to do is take some wealth from the richest people and give it to everyone else so that we might all have a higher standard of living. If this plan were to be carried out we would see that the standard of living in this country would decrease for all. The reason for this is because if companies no longer have significant profits they will be unable to grow and employ more labor. Also, without profits there would be no incentive for anyone to start a new business. Without the growth of established businesses or the creation of new ones the economy would become stagnant and the demand for labor, at best, would remain the same. The problem with this is that while the quantity of labor demanded will remain the same the quantity of labor supplied will increase due to population growth. This excess supply of labor would drive the cost of labor down thereby reducing wages and the standard of living for all.

The answer to our economic troubles is not more government interference but a free economy. “economic distress will teach men, if anything can, that realities are less dangerous than fancies, that fact-finding is more effective than fault-finding” (Carl Becker 1935).