What is a fair profit? Why has “acceptable” return on capital gone from about two percent several decades ago to the-sky-is-the-limit level today? How high can it go?
Let’s start with the obvious: “fair” is an inherently subjective quality, and what might be a fair profit to you is going to be grossly unfair to me.
But, assuming that there is some objective way to assess what is “fair,” it is going to have to take into acount dozens of factors and will not be universally applicable across all products and services. Among the things you would have to consider are the cost and effort needed to produce, distribute, and market the product, the social utility of the product, the availability of alternatives to the product, current interest rates and so on and so on. The “fair” profit margin on the manufacture of a car is not going to be the same as the profit margin on a package of M&M’s or the only approved drug to treat epilepsy.
I don’t know where your 2% comes from, but let’s assume it’s accurate. That’s probably a reflection more on interest rates than anything else. If I can earn a 2% profit by investing my capital in a business and can only earn 1% at a bank, I’m going to go into business.
As to “how high can it go,” it can go as high as the free market lets it. If a manufacturer is selling a product at a 5000% profit rate, other manufacturers will come in to compete and bring the profit rate down. The market will determine what is a “fair” profit over the long term.
The increase in profit margins over the years reflects not only the willingness on the part of consumers to pay more for what they want, but also the ability to. Disposable personal income as a percentage of total income has increased over the same period you say that return on capital has. It would be interesting to see the correlation between these two functions; if I had time I would dig up the statistics from some web sites.
FTC forces music CD price reform.
The Libertarians aren’t going to like this…
If Joe is an art lover, and Bob thinks art is a waste of time and money, and Bob somehow acquired a painting, what is the “fair” value of the painting?
What if Bob would happilly give it away (just so its out of his garage) and Joe would pay $1M for it?
The answer is that any price between zero and a million dollars is fair. Why? Because value is subjective. Sure, you can objectively price something if you have reference to a market, but price has little to do with value. In fact, if Bob will get more enjoyment from burning the painting than he will from Joe’s $1M, then he is free to destroy it. He is under no obligation to sell it at all.
The only thing that makes something “unfair” is if coersion is involved. It is not fair to put a gun to Joe’s head and say “pay $1.5 Mil or you die.”