Supernormal Profits

In a lecture, one of my economics professors said that there are only two ways to make more that a "normal" profit over any length of time. Either 1) by providing something no one else can, by possession of a secret formula, for example; or 2) by providing something no one else is allowed to, by possession of a government patent, for example.

No entrepreneur wants to just make a "normal" profit. He or she goes into business to make a killing. Innovation and hard work is the starting point but once you start succeeding, the competition will start to imitate your plan. They might have better financing or more energy. This is where the government connection makes sense. The more power government has, the more it can help. Government can limit entry into your industry, allow you to (or prevent you from) buying up the competition, tax away foreign competitors, mandate the use of your product, there is a never-ending list of possibilities.

Favors, perks, and pay-offs to government officials often helps to smooth the way to higher profits. This is called "corruption." It is usually frowned upon. (For instance, George W. Bush is often accused of giving companies lucrative contracts for government work in Iraq, in return for some pay-off. If his administration did give out contracts without competitive bidding, it may have been because Halaburton was the only company that wanted the job.) Unquestionably, corruption leads to economic inefficiencies. IT HAS NOTHING TO DO WITH WHAT I WOULD CALL FREE MARKETS (see the Basiat quote in an earlier post). Preventive regulation hardly ever works, becomes corrupted itself, and stifles innovation more than it stops corruption. The best preventive is to refrain from giving the government much power to sell. Our founders created governmental checks and balances to limit the influence of this special interest corruption.

Ramming through legislation with arm twisting and political back room favors are exactly where the danger lies. This too used to be frowned upon. The current administration seems to be doing exactly what they accused the previous administration of doing but could never prove. Actually, the Republicans are usually kept in line by the press anyway. Democrats, because they favor bigger government, have always been more usefully to special business interests. Democrats also seem to have immunity from popular press criticism, until lately.