From the time of the ancient Greeks to that of Karl Marx the earning of a “profit” in an exchange has been condemned as unjust and exploitive of others in society. Even defenders of capitalism often become defensive and apologetically speak about the legitimacy of a “fair” or “normal” profit.
That profit is not only just but the essential driving force for all economic improvement is rarely made in uncompromising terms. Such an uncompromising case can now be found in Israel M. Kirzner’s book, Discovery, Capitalism and Distributive Justice. Professor Kirzner has been one of the most prominent and important contributors to Austrian Economics for thirty years.
The Austrian Economists have long argued that economics is ultimately the study of human action and its consequences. Men have purposes, and they apply means to attain them. All human action is an attempt by individuals to bring about a net improvement in the conditions in which they find themselves, and that net improvement is the profit they hope to obtain from the course of action they have chosen.
In turn, every participant in an exchange views what he will obtain as of greater value to him than what he is giving up to acquire it All exchange, therefore, is profit-oriented.
But Professor Kirzner’s purpose is to go beyond this. The question that is central to his argument is, where does profit come from? And his answer is that profit is created Looking backward, after the fact production in an economy appears to be almost “automatic.” Resources and labor are applied in various ways according to the technological blueprints that specify how inputs need to be combined to produce outputs; the finished products are transported to the retail outlets at various points in the economy; and the wants of the consuming public are satisfied. “Profit” then appears to be merely the market reward for the managerial skills that have assured that everything was done properly and in a timely fashion.
What is produced today with labor and resources and made available tomorrow in the form of finished products, however, Professor Kirzner argues, is neither automatic nor guaranteed. It is based upon a vision and conception in the mind of an entrepreneur concerning the possible shape of things to come. It is a discovery process in which individuals perceive opportunities and possibilities in the things in the world around them that others have often not seen, or have not seen in the same way. These entrepreneurs guide the use of resources into the forms and avenues that seem to offer the greatest gains from such opportunities. And the correctness of their perceptions and visions is tested in the market arena of competition where the alternative entrepreneurial visions meet each other and face the consumers who either decide to buy or not to buy among the products created and offered for their consideration at various prices.
If profit is made, therefore, it is because an opportunity was discovered that others had not seen in the same way as the successful entrepreneur. This leads Professor Kirzner to his ethical rule of finders-keepers: “The finders-keepers rule asserts that an unowned object becomes the justly-owned property of the first person who, discovering its availability and its potential value, takes possession of it.” The heart of Professor Kirzner’s argument is that every discovery of a new opportunity is the appropriation of that which had not existed before a human mind had seen the potential in that object. And, hence, the profit earned by bringing that opportunity into existence justly belongs to the creator and discoverer.
But his defense of profit is broader than merely the income earned by the entrepreneur. Professor Kirzner reminds the reader that everyone’s choices and decisions in the market are directed towards a future that is surrounded with uncertainty. Every form of income — rent wages, interest — is earned (if it is) on the basis of an entrepreneurial judgment by each market participant concerning his perception of the best opportunities he can discover at each moment of time. Thus, the finders-keepers rule in distribution of income in society is one that applies to every form of income earned in a market economy and not just to the businessman’s profit in the narrow sense.
Furthermore, it is only in an economic order in which the profits from discoveries are considered just and morally the property of the discoverer, that the greatest incentive is created for individuals to be alert to such opportunities. And it is out of such applied discoveries that there come the improvements in the economy that we call a rising standard of living over time.