Greenberg: The High Price of Economic Ignorance

Thank you, Mr. Greenberg.

"THE HIGH PRICE OF ECONOMIC IGNORANCE

By Paul Greenberg
Tribune Media Services

"The indignation shown by many people today at the mention of the very word profits indicates how little understanding there is of the vital function that profits play in our economy." - Henry Hazlitt, "Economics in One Lesson," Chapter XXII: The Function of Profits

It was a futile effort, but a game try. The other day, the president of Murphy Oil, whose worldwide headquarters are located at El Dorado, Ark., tried to explain why the oil companies shouldn't be blamed for seeking a "reasonable return on capital."

It was like waving a red flag in front of very angry bull. You could almost hear the hoots from drivers paying almost $3 a gallon for gas here in Arkansas. Hey, we'd heard about Exxon Mobil's first-quarter profit this year: $8 billion! How justify that?

Consumers are mad as xxxx and we aren't going to take it anymore. What's all this about a reasonable return on capital? What we want is a scapegoat, and Big Oil is made for the role.

When Claiborne Deming, Murphy Oil's president, claims that oil companies are just asking for a "reasonable return" on their investment, just what does he mean?

If you'll forgive me for sounding like your textbook in Economics 101:

When a company makes an investment, it does so in the expectation that it will earn a reasonable return, and this reasonable return is determined not just by the cost of the capital - which is what the company is required to pay bond holders and banks in interest, and shareholders in dividends - but the need to compensate the company for the risk on that investment. Because there's no such thing as a free lunch or a risk-free investment.

When oil execs like Mr. Deming try to explain all this, they're drowned out by all the anger out there.

Maybe that's because news about rising gas prices and oil companies' billions in profits tends to make the front page. The risks those companies take don't."

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