Saturday, June 23, 2007

Why Profits Don't Make Private Operations More Expensive

Robert Murphy used to write mainly for, but now he also writes for conservative columnist page Needless to say his columns are somewhat less radical on than on, but that doesn't mean they can't be insightful.

He for example here analyses the student loan industry. In accordance with the less radical tone he apparently believes he must have on, his discussion isn't about abolishing federal subsidies to it. But it is still interesting as he refutes a common myth, namely that profits make goods and services more expensive for consumers. This is in light of Democratic presidential candidate Barack Obama's argument that the federal government should lend directly to students instead of using middle men.

He points out that profits in the accounting sense can be divided into two parts: pure economic profits and (implicit) interest on invested capital. The latter part will exist regardless of whether the government directly or middle men runs it. Pure profits will only arise if entrepreneurs discover superior techniques that provide higher value or lower costs and is furthermore likely to be temporary as the higher rate of profit will attract competitors. The upshot is that in the long run the cost savings of private businesses will more than well compensate for the "costs" of the profits they make and so they will run things more cheaply than the government.


Post a Comment

<< Home