Steve Forbes on the role of profit (and the contrasting views of Adam Smith and Joseph Schumpeter)

Smith, Marx and Keynes all believed in various ways in what you might call an equilibrium, that the economy is a steady state and you get disruptions from time to time, whether wars, earthquakes or new inventions.  You get some turmoil and then things settle down and you have an equilibrium, which is why even John Stuart Mill became a socialist (not because of the influence of his young wife).  He couldn’t understand the role of profit. 

Even Adam Smith did not understand the role of profit.  If you have an economy where you are striving for a perfectly competition equilibrium, there is no role for profit, other than as a bribe for entrepreneurs to do things.  Schumpeter was an infidel, in the words of Peter Drucker.  That is, he saw profit as a cost of doing business, as a moral force.  Why?  Because in his mind the economy is always dynamic.  A free market is dynamic, always changing, what he called creative destruction.  You focus on the creative side.  But it’s also destroying, which means it’s destroying capital and you have to replace that destroyed capital with new capital. 

Also, how does an economy advance?  It advances with new knowledge.  Where does knowledge come from?  Through constant experimentation by entrepreneurs in the marketplace.  Look at Silicon Valley.  Look at Peter Thiel.  He says eight out of ten ventures, even with great brains like his, will fail.  Only two out of ten, maybe one out of ten, will really be successful. 

So, profit is essential if you’re going to have a growing economy.

~ Steve Forbes, "Full Remarks by Steve Forbes On the Presentation of a Triple Crown in Economics to Mark Skousen," July 19, 2018