Richard A. Epstein says both the Bishop of Rome and the Oracle of Omaha are dead wrong on economic policy :

Denouncing those who put ‘profits before people’ may stir the masses, but it is a wickedly deformed foundation for social policy. Profits, like losses, do not exist in the abstract. Corporations, as such, do not experience gains or losses. Those gains and losses are passed on to real people, like shareholders, consumers, workers, and suppliers. It is possible to imagine a world without profits. Yet the disappearance of profits means that investors will be unable to realize a return on either their capital or labor. Structure a system that puts people before profits, and both capital and labor will dry up. The scarcity of private investment capital will force the public sector to first raise and allocate capital and labor, though it has no idea how these resources should be deployed to help the people, writ large. A set of ill-conceived public investments will not provide useful goods and services for consumers (who are, after all, people), nor will it provide sustainable wages for workers (who are also people). Poor investment decisions will lead to a massive constriction in social output that harms all people equally.

The proper response to these difficulties is to treat profits as an accurate measure of the cost of capital, rewarded to those individuals and firms who supply some desirable mix of goods, services, and jobs that people, acting individually and not collectively, want for themselves. The genius of Adam Smith, whose musings on the invisible hand are too often derided, was to realize that private markets (supported, to be sure, by suitable public infrastructure) will do better than a command and control system in satisfying the individual’s wants and needs.

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(Via: Justin Taylor)

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