Thursday, October 06, 2011

Competition is the Best Way to Limit Profits

A few observations:

1. Steve Jobs, who passed away yesterday, was one of the greatest innovators in the technology sector. He was also one of the world's greatest business executives. He became a very rich man because his company, Apple Inc. made tremendous profits. He was admired by those on the political left.

2. Warren Buffett is one of the greatest investors of all time. He became a very rich man because his company, Berkshire Hathaway, made tremendous profits. He is admired by those on the political left.

3. When asked about Bank of America's plan to charge its customers a fee for using their debit cards, President Obama said his administration could stop this service charge "If you say to the banks you don't have some inherent right just to get a certain amount of profit." President Obama is admired by those on the political left.

It is true that no company has a right to make a certain amount of profit, but it is also true that in the United States we don't limit how much profit a company can make. A competitive free market capitalistic system does that for us automatically. High profits invite competition. Competition drives profits down.

Bank of America may have made a mistake by introducing this fee. If so, its competitors will pounce. They will begin advertising debit card services with lower fees or no fees at all. Bank of America will notice that it is losing customers.

That doesn't mean government has no role. We need regulations to make sure the banks don't take excessive risks that leave taxpayers on the hook for their mistakes. But we don't need the government telling banks what fees they can or can't charge. As long as those fees are transparent and as long as the market is competitive, consumers can decide for themselves which services they value and where they want to maintain their accounts.