Profits: Liberal Theorizing vs. the Real World

September 10, 2013

The Washington Post’s Steve Pearlstein published a lengthy diatribe against corporate profits yesterday. Or at least it was against firms wanting to earn profits now in the current quarter rather than some time period later on. An exception is that a firm may earn lots of quarterly profits right now if, like Apple, it is making customers happy, but only if it doesn’t tell anyone that the profits benefit shareholders. And remember that high corporate profits were a good thing prior to the 1970s, but these days firms that strive for high profits might be doing something wrong.

I’m confused, as I bet other readers of Pearlstein’s piece are. For a clearer understanding of the role of profits in the economy, read this excellent piece yesterday by the Post’s Thomas Heath about a Maryland industrial company. Heath profiles Shapiro and Duncan, which has $100 million in annual sales from making piping for HVAC systems and other uses.

The company earned good profits before the recent recession, but the downturn hammered their sales and they started losing money. At first, the owners decided to go “for revenue instead of profit,” but they soon realized their mistake. To rebuild their business, they needed to focus on maximizing profits. The owners proceeded with a major capital investment to improve productivity. It was a risky bet, but the striving for profitability apparently drove this company’s decision to increase investment and make various cost-cutting changes, which have ultimately benefited owners, workers, and the Maryland economy.

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