Economics for Dummies #2: Profit Motive

The profit motive did not exist always, writes Yanis Varoufakis in Talking to My Daughter About the Economy. Really?

“No, it (profit motive) was not. Greed, yes.”

How and why did the profit motive come to be?

 

With agriculture, the sequence was production à distribution à surplus. At some point, when industrial production began, everything changed. Suddenly land-owners found other uses of land, more remunerative than having serfs work the farms. Land too was now a commodity, to be sold or rented.

 

And so the serfs got evicted. Given how their lives had been, you’d think this was a good thing for the serfs. Not entirely. Until then, the serfs at least got some guaranteed employment and thus the basic necessities. But once evicted, how were they earn money? They had to offer their labour to whoever needed it. At the price that suited both parties. The labour market was getting started.

 

But now a new problem arose. An industrial entrepreneur could see that he would make money later by selling, say, shirts. But first, he needed money to buy cotton and pay the workers until production happened. And so the concept of debt really started to take off.

 

You don’t realize it until someone points it out. Notice how distribution (salaries) is happening before production? A reversal had occurred. In fact, one can see how debt is indispensable in such an industrial setup.

 

With debt, the borrower has to always be trying to ensure that he can repay it (with interest) and still have enough left – the “profit motive” had been born. Unlike surplus, notice that “profit motive” is in the mind – it’s something one hopes for in the future, not something that one already has in hand (surplus).

 

That then is the reason why Varoufakis is right in saying that the profit motive is a fairly recent invention.