Profit and competition are inherently intertwined.
Profit is always being pushed down by competition. So profit is an unnatural thing. So you always have to to think: how can I make a profit? and once I make it how am I going to keep making a profit knowing that I’m going to attract competitors? — Stephan Kinsella, “Your Welcome” with Michael Malice 001 – Intellectual Property with Stephan Kinsella
The above concept is at the very core of profit-driven business strategy.
I wanted to dig deeper into what Kinsella meant by profits being “unnatural” so I pinged him on the twitters. Here was his reply:
Profit is in a sense unnatural–it tends to be driven down to the natural rate of interest as the market tends to equilibrium. Profit is hard to maintain in the face of competition. This is fairly standard Austrian economics AFAIK, though my argument doesnt depend on this insight — Stephan Kinsella
By the way: What he means by the “natural rate of interest” is the interest rate of borrowing money if we only consider the time-value of money and ignore the risk (and therefore increase in interest rates) associated with the borrower defaulting on their loan. Don’t worry if the natural interest rate part isn’t clear – I needed him to explain it to me as well and it’s not the point anyway.
Profit and Competition
More from the podcast:
When you’re selling a good on the market (or a service) you have to think “How can I make a profit on this good?” Because we know from economics [that] profit is – in a way – unnatural because profit is a deviation from the natural rate of interest and as soon as you make a profit you’re going to send a signal through the price system and through your activities to the market and you’re going to tell people “Hey! this guy is doing something that satisfies consumer welfare.. so come in and compete with him.
Kinsella added a few additional tweets as well to further flesh out the relationship between profit and competition:
Every entrepreneur who comes up with a business venture to make profit know that if he’s successful he’ll face competition and his initial profits will start to be eroded, so he has to keep on his toes an keep finding news ways to please consumers. — Stephan Kinsella
That’s why it’s hard to make a profit–you have to successfully forecast for the future in a world of uncertainty. But when you do this you make profit and this attracts competition, pushing down your profit, so you have to keep innovating. — Stephan Kinsella
Thanks Stephan – I appreciate the quick reply and economics lesson! FYI: Stephan Kinsella is the leading authority in the US arguing against intellectual property protection. Follow him on twitter (@NSKinsella) and check out his YouTube channel / podcast.