If you want to do business in Venezuela, you will have to let the government do your bookkeeping to make sure you aren’t making too much. Venezuelan president Nicolás Maduro’s decree, called the “Organic Law of Fair Prices,” sets a maximum “fair” profit at 30 percent of costs.
Besides the practical problems of implementing such a measure, the ceiling rests on a basic misconception: the idea that there is such a thing as “fair” or “excessive” profits misunderstands the function of profit — and loss — in a market economy.
To bemoan a capitalist earning high profits is like complaining about a surgeon saving too many lives.
The Profit-and-Loss Test
The great Austrian economist Ludwig von Mises cherished the market process because he thought it was a wonderful institution for using the world’s scarce resources in the way that best serves consumers. The market prices of various resources, from labor hours to tons of iron to acres of farmland, show entrepreneurs how valuable those resources are in the most valuable activity — as judged by the spending decisions of consumers — and thus provide the right incentives to deploy them rationally.
As I detail in my new book on Misesian thought, Choice: Cooperation, Enterprise, and Human Action, we can understand Mises’s perspective by imagining a silly scenario where a building contractor decides to coat apartment interiors with solid gold. Surely tenants would be willing to pay a lot more in rent if their apartment had gold-coated countertops. So why would this be a foolish move for our entrepreneur?
The answer, of course, is that even though revenues might be much higher, the use of gold would drive the monetary costs of the project higher still. The decision to start using large amounts of gold would transfo…