If The Profit Being Made Is The Profit That Is Required To Get Food To The Table, Then It Isn't "Obscene"

People will attempt to counter explanations of free market economic principles by giving individual counter examples. The problem with this is that it is not individual behavior that moves markets, it is the behavior of individuals in aggregate that moves markets. For example, a proposed solution to health care costs is to simply pay doctors less. Free market principles tell us that the result to paying doctors less can only be to have fewer doctors in practice. Contrarians observe that if doctor pay is reduced there are doctors who will continue to practice. And this is absolutely correct. However, the problem lies not with these individual doctors who choose to continue to practice, but with those who decide it is no longer worth their while to continue to practice or to start a practice that produces an aggregate reduction in the number of practicing doctors. Reducing pay will not make some people now decide to become doctors as if "I'll become a doctor now that I'll make less money." What will happen is that people will decide it is no longer sufficiently profitable or even possible to keep their practice open and people will decide that it is no longer worth their while to make the huge investment in becoming a doctor in the first place. The only possible result to reducing doctor pay being fewer practicing doctors. And this is the case in any competitive free market.

Many people think that it is possible to choose what is the "right" amount of profit to earn in any market. They are outraged at the perceived "obscene" profits some people make in some markets. They think that it is possible to set by edict, decree, or fiat the profit one can earn in any given market. The problem is that the "right" amount of profit is that which makes supply sufficiently abundant to meet demand. This is why competitive free markets are "genius" in producing abundant supply. They naturally find the right amount of profit that is required to make sufficient supply available to meet demand, no more, no less. This is called an "equilibrium seeking" system.

Profit available in the market increases to entice more and more people to decide that it is worth their time to supply the market in question. Once demand is met, profit stabilizes and stops increasing. Profit is held in check by competitive market forces. It can be viewed as demand drives up available profits to draw in more supply to satisfy demand. Once the demand is satisfied, there is no longer a force to increase available profits any further. The "equilibrium seeking" aspect is that if profits continued to increase, this would draw in even more supply that would now be in excess of demand. When there is an oversupply, this forces prices down which results in decreasing profits. Thus a fully functional competitive market naturally limits the profits that can be made. Furthermore, if profit is reduced, it can only cause some people to reverse their decision to supply the market and available supply decreases. Thus market forces function to find the exact required profit opportunity to keep supply and demand in equilibrium.

Free competition is the mechanism that creates one of the forces that produces the "equilibrium seeking" nature of competitive free markets. Without going into detail on the mathematical principles involved (which I am happy to discuss but are much more involved than necessary for this discussion), the net effect is that market competition culls the players so that those willing to take the least amount of profit are left. No one else is willing to enter the market at the prevailing profit or less profit, or else they would already be in the market. The necessary result in reducing the available profit is that, while certainly there are those who will accept the reduction, there are those who are "fence sitters" at the prevailing profit and would thus choose or be forced to exit the market if profit is reduced. And since all players who would be willing to supply the market at the new prevailing reduced profit already entered the market at the previous higher profit, the is no one to replace those "fence sitters" who exit the market. Thus the result is can only be reduced supply in the market.

We are seeing a real-life experiment on this effect today in Venezuela. Venezuelans had access to food in relative abundance. Then Chavez decides that those providing the food are making "too much profit" and that it was "immoral" to make that much profit in providing food. So he instituted new price controls to reduce the profit these people could make. The inevitable fallout is that many of the providers decided it was no longer worth their while to provide food at the new reduced profit. As a result, the food supply has dwindled and Venezuelans now have much less access to food and some resort to black markets in order to obtain the food they need. For Venezuelans, the "right" profit is not what has been decreed, but that which enables food to be put on their tables.