Joseph Alois Schumpeter
Democrats (as well as some Republicans) don’t understand the crucial role profits play in a vibrant economy. Their plans for higher income, business, payroll and death taxes, not to mention new exactions such as a levy on carbon emissions, would make for a bleak future, because such taxes would seriously harm the key sources of capital: savings and profits. Without investment the economy will stagnate. As the legendary economist Joseph Schumpeter (“creative destruction”) pointed out, profit is essential for progress. It, like depreciation, is really a business expense. It funds expansions and the cost of productivity improvements. It must replace the capital destroyed by new technologies. The internet, for instance, washed away tens of billions of dollars in legacy newspaper and magazine wealth. Most startups flop, consuming savings. Existing businesses constantly fail, eradicating capital. Schumpeter recognized that commerce’s successes must not only cover their own expenses and reward their investors but also, in essence, recover the costs of unsuccessful ventures.
Ample capital for startups is essential for the discovery and development of new products and services that will enhance future living standards. Like experiments in the laboratory, startups and research and development are crucial to gaining new knowledge that will enable us to advance.
Profit also provides critical information about people’s preferences. A high-margin product or service will attract competitors, which will, in turn, offer buyers an improved and/or cheaper version.