Suppose you are stranded in a desert, without water and close to death. Suddenly, a merchant appears, selling bottles of water. You ask how much he is willing to sell them for, and he responds: $100 per bottle. He has a backpack full of water bottles. Desperate, you empty your wallet - the money has little value to you here compared to water. After quenching your thirst, you turn to the merchant and ridicule him for his greed. You ask how much it cost him to obtain each bottle, and he honestly replies, $1. You then ask if selling the bottle for $2 would have yielded a profit, and he admits it would. You reproach him further for exploiting your dire situation and inquire why he ventured into the desert in the first place. He answers, truthfully, that he came in hopes of finding someone desperate enough to pay such a price.

The merchant acquired the bottles for $1 each—that was the operational cost of his business. Why, then, was the bottle sold to you for $100? If the bottle cost $1, why did it take on a higher value for you? This discrepancy seems unfair. Why must you pay more for the same good?

But consider this: Why was the merchant in the desert? Why did he bring so many bottles of water? He could have purchased only enough for himself, quenched his thirst, and taken the day off. The reason you paid $100, not $1, is because the additional $99 reflects the cost of the means of production required to make the water available to you in the desert. One dollar covered the procurement of the good itself. The other $99 represents the entrepreneurial effort: labor, risk, and the organization of resources necessary to deliver water where it would otherwise be unavailable.

The Role of the Entrepreneur

An entrepreneur is a person who organizes, operates, and assumes the risks of a business venture. If the merchant could only charge you $2 per bottle, he would not have ventured into the desert at all. Instead, he would have sold his water in a market square, where customers are more plentiful and less costly to serve. Without his willingness to take the risk and effort of traveling to the desert you would have no water, and you my friend, would be dead.

Now imagine the merchant charged $1,000 per bottle. This may seem egregious, but if merchants could reliably earn $999 in profit from a single sale, many would flock to the desert. Competition among them would allow you to haggle and reduce the price. Ultimately, the price would settle at the lowest point at which only the most efficient or determined merchants would find it worthwhile to operate in the desert. If that point is $100, it reflects the true cost of sustaining the business venture, including opportunity costs.

Is the Merchant Greedy?

The merchant is not greedy; you are. You expect someone to coordinate this venture, risk their resources, and endure the hardships of traveling to the desert—all for a mere $1 of profit. Meanwhile, they could serve many more customers in the market square. Are you more important than all those people? Do you believe your situation is more dire? If so, you feel entitled to their effort. Yet, how often have you wandered into the desert to save strangers out of charity? Is this a mission you have devoted your life to? Likely not.

Capitalism is an invisible hand, shifting prices amorally up and down in accordance with nature. The merchant didn't make the desert dry. The desert was dry before man stepped foot on it. The merchant didn't impose upon you a need of water, your biology did. The merchant didn't place you in the desert, you arrived there on your own. The merchant however, is an entrepreneur, thus, they risked the trek, in hopes that someone had wandered into the desert, which they knew to be devoid of water, despite the biology of man making no less a demand for it. All the merchant demands is a fair price: $100.

Your frustration lies not with the merchant but with the recognition that he is much like you an actor in a scarce - and occasionally dry - world. He does not exist to serve others out of altruism but to make a profit. And so do you. You wish to obtain a $100 water bottle while paying only $2.

Exploitation

We cannot attribute every perceived injustice to the merchant’s greed. Nonetheless, the critics of capitalism correctly identify an ever present unfairness in the world. However, the outcry is often misplaced. The $100 you paid is in truth a proxy for the labor you endured to obtain it. Unless you minted the money yourself, you likely earned that money by creating value for someone else sufficient in convincing them to part with $100 in exchange for what you provided, instead of that of another's labor. Suppose earning $100 required 10 units of your own labor, where a unit reflects effort, difficulty, or sacrifice undertaken out of necessity. This necessity arises from scarcity—you must labor to survive, just as a machine must be refueled to continue running.

Exploitation occurs when someone robs you of the product of your labor. Imagine the merchant built a fence around a naturally occurring oasis to charge you for water you could have otherwise accessed freely. In this case, he has inserted himself into your life, creating an artificial scarcity to coerce you. The labor you expended to earn $100 could have secured both water and food, but now it must go solely toward the water. The merchant’s intervention has forced you to labor more for the same outcome. This coercion constitutes exploitation, and in fact, having stolen your labor, it constitutes slavery.

By wielding power over your circumstances, he has stolen the product of your labor without fair compensation. A slave labors not as a consequence of their desire of profit over their present and naturally formed material condition. Instead, they labor under the threat of an artificially imposed material condition. When individuals manipulate scarcity to this degree, it becomes the exploitative system critics denounce. This can occur under any economic framework, capitalism included. The problem is not profit itself but profit derived from uncompensated labor, forced by coercion and power imbalances.

Capitalism’s greatest flaw is not the existence of profit but its innate inaction in ensuring that labor is fairly compensated.

The Government

This is why we need government. The government is a group project of like-minded citizens towards a collective idea of what ought to be. The government performs and enables outcomes that would of otherwise not occurred naturally.

Capitalism is an economic system, not a means of producing moral good. For that, a framework that supersedes the economic system must exist.

We want cheap produce. But many would be willing to pay a higher price if it ensured that all the labor expended on it was compensated for. Capitalism is not equipped with the instruments required to ensure this. Where power imbalance can occur, so can coercion. To overcome this we require government. It isn't possible for the average consumer to know precisely the costs involved in the production of every good and service. However, if the citizenry at large merely wish it to be the case that unaccounted for labor is minimized, then a government is more than equipped to act upon it. If capitalism is the invisible hand, then the government is the iron fist.

Regulation

Regulation must regulate capitalist enterprise in the direction of fairly compensated labor. It should not be squashed merely because it does not, of its own accord resolve to equal outcome for all. If we wish an equal outcome for all, we must nurture an economy capable of produce enough.