You and I are the only two people on the fictional planet of Fruitiper. The resources of the planet exist in equal quantities and are equally available to each of us with one notable exception: my land produces only apples and your land produces only oranges. At the end of the season, we each find ourselves with 100 of our respective product.
For the sake of variety, I decide that I want some of your oranges. The simplest solution, it would seem, is for me to offer some of my apples in exchange. Anything else in my possession you have as well, so that presents no incentive. It will have to be a straight trade. As we each have the same number of items, the trade is also easy to determine: for every apple I give you, you provide me with one orange.
Same scenario, but let’s throw a small wrinkle into it. I have 50 apples and you have 100 oranges. My apples are now twice as valuable in the exchange, so even though we are discussing the same items in the same market, fairness dictates that you surrender 2 oranges for every apple I offer.
Another wrinkle: let’s assume the seasons offset. I have 50 apples now, but you will not have the 100 oranges until six months from now. You still want my apples and I want your oranges, but they are not available for trade at the same time. In this case, I could accept a note from you for the value of the apples provided that I can later provide back to you for the equal value in oranges. This is currency – on our planet, apparently based on the fruit standard.
Obviously the real economy has a handful of additional wrinkles. The workings of the world economy are complex, almost beyond comprehension. It’s a natural system, like the environment. Supply. Demand. Exchange.
The point of this piece is not to dissect the economy. I am not an economist and the topic is well beyond the scope of a single blog entry. This is (another) informal examination of one particular topic: profit.
The example scenarios set forth at the beginning of this piece refer to the free, equal, and open exchange of goods in a market. We have no particular compulsion for the transaction other than the interest of the parties, and the values for the exchange are set by the market itself. That is the free market economy that came to understand as a young accounting student.
Yet something strange occurs. For example, I decide I want to buy a new watch. It consists of various metal parts, glass/plastic, etc. Someone harvested those raw materials, perhaps fabricated them into a synthetic material, and provided them to a group who manufactured the watch. The manufacturer sold that watch on to a retailer, transporting it to their store where I will eventually purchase it.
Materials. People working on various aspects of the process. People managing those processes. Research and development. Marketing. Time costs associated with the process. All of that goes into the watch that I examine at a counter. We refer to all of these items collectively as cost.
I decide that I like the watch and hand over currency in some form (brief aside: currency that I received as compensation for my own contributions to the market previously – more on that later) in exchange for it. We refer to my part of the exchange as revenue for the jeweler.
The difference between those two values generally results in one of two things: profit or loss.
Kidding – I say generally to highlight the point of this piece. We do not see things exchanged at cost. Exchanging things at loss to the seller is just as rare. The difference between those two values, from the perspective of the seller, is profit.
My simple question: why?
A colleague of mine likes to debate this point. To his mind, the value of the good or service is whatever one is willing to pay for it in the marketplace. I want to address that perspective first because it is, in my experience, the most compelling argument for profit.
Yet I maintain my opposition to it. Why? The principle of “what I’m willing to pay for it.” If I feel like splurging on that new watch and they say, “It’s $700,” then I have to decide if I am willing to pay $700 for it. That part is true.
However, based on the description of the economy I just provided, I also know the watch is not worth $700. The people who sell the watch did their research and determined that people will buy enough of that watch at $700 to justify manufacturing them and selling them at that price – so they can earn a profit. The cost of the watch might be something comparatively cheap, like $150, with the rest being profit.
So, yes, I am willing to pay $700 for the watch in the sense that I want the watch enough that I have accepted $700 is the cost of acquisition. If you said to me, “You can get that watch for $450,” well, I am no longer willing to pay $700 for the watch.
What changed? Not my willingness to spend my money for the same item – that’s the same in both instances. No, what changed is the availability of the good for a lesser price. I cannot manufacture a watch like that – I don’t possess the materials or the manufacturing knowledge to go about that. If I want the watch at all, I must rely on someone else for it. The people who control watches in the market hold them hostage behind profit.
Fundamentally, I might be willing to give up that much money to acquire an item, but I understand that the item is not worth that much.
And where does my money originate? I provide services in the market – in my particular case those of analytics. My time and effort is part of a corporate process that results in other goods and services that my company will eventually sell for profit. My compensation for my services in that pipeline – that’s a cost associated with their profit. I perform my services at cost. The company for whom I perform them turns around and sells the final product for profit to a consumer who provides revenue.
Why beat around the bush at this point: I’m calling profit unethical. All of it. Every penny of profit is an unethical endeavour. Why? Because every single person on this planet exists as part of the global market as contributor and consumer to some degree, but only a handful of individuals profit from that market. Everyone else receives a compensation and then participates in transactions at a personal loss.
The milk you bought at the grocery store? Someone received money in the form of profit for that. You paid more than the market required. The gasoline in your tank? Yep. Air conditioning? Yes. Mortgage? Absolutely. Interest on said mortgage? Also yep. Every transaction results in their profit. That’s why they do it.
I am not condemning everyone who receives profit as the embodiment of evil. This is how things work, I get that. We have plenty of incentive to strive to be on that side of the equation. All I am saying is that inevitably the nature of economics and fairness states, in no uncertain terms, that profit means one party to the transaction is taking more from the transaction than what is fair.
The even rarer core of individuals who control the resources at the heart of these processes – yeah, I will step off the diplomatic fence and deride them as evil. It’s their contribution to the the global market to manipulate supply, fabricate demand, and hold the world hostage in a situation where if you want the thing at all you are going to give us more than it’s worth.
Sure, one can bargain shop for the place that will offer the lowest cost, but make no mistake – it’s profit to one pocket rather than another. I don’t know that getting ripped off less is much of a principled improvement on getting ripped off in general.
And it’s the entire global economy.
“James, invent something. Get out there and earn your own profit.” You know, the typical Republican response to “socialists” who complain about this system.
Yes, with the appropriate work and research, I could develop a new thing that allows me to earn ungodly amounts of profit. In doing so, though, I would require goods and services from the existing market. My efforts to profit would enrich people who are already in a position of profit. It would further punish consumers of my good or service who are not.
My evidence for this? The increasing gap between rich and poor. The Haves continue to have more. The Have Nots receive less and less. How could it be any other way when the transactions exist in an unequal fashion?
Ironically, the less an individual has, the more expensive everything becomes. I do not mean that a $3 item costs $5 for someone because they earn less – I mean that $3 is way more significant to the person who has less.
Where does one see profit? Everywhere – which includes essential things like food, shelter, and medical care. Need one of those things but cannot afford it? No worries – we have entire cottage industries set up to offer predatory loans for those individuals. Pay for the thing you need (above the cost of thing) using our loan, then pay that back to us plus interest so we can profit from this transaction as well.
The biggest argument I hear in reaction to my opinion about profit is that of “socialist” – the mistaken idea that I believe people should not see rewards for their efforts or that everyone should make the same.
No – different careers and positions have different monetary values in the market, and they will shift over time. The skill of the individual in a position should affect earnings as well. Work harder – earn more.
From the top of the pyramid, invent something new and one should absolutely receive their due from the global market. Am I suggesting that the people behind the personal computer did not deserve to rise from obscurity to wealth because of what they did? Absolutely not. What I am suggesting is that their due from the global market already exists in the form of the cost associated with producing the goods or services. The research that went into the project, their physical efforts, the time they spent managing others towards producing the computers – all cost. Produce a lot of computers that many people want – earn a complementary income.
To develop the new product and then tack profit on top of everything though? That’s greed. That is stealing from the consumers who want the product. Quite literally, the value of the goods and services brought to the market are the cost – at that point the individual is receiving fair reward for that they contributed.
Instead: “Yes, this computer cost us $1,000 to get it to this point. I know you would like it. I will give it to you for $1,200. This is the only place where you can acquire it, so take the deal or leave it.”
Patents, copyright laws, other laws – so many tools available to the Haves to corner newcomers out of the market who pose a threat to their profit margins. We have an entire cottage industry now that is people sitting around leveling patent and copyright infringement lawsuits against innovators – not because of actual infringement but because the law is structured in such a way that degenerates have uncovered a way to profit from filing the lawsuits.
We have companies like Wal-Mart who could identify a small manufacturer producing an in-demand product. Wal-Mart has the power to say to them, “We’re going to sell your product for $X.” That $X amount means profit for Wal-Mart. It may mean loss and eventual bankruptcy for the manufacturer. The alternative? Reject their offer and face a retailer of their scale keeping the manufacturer out of the market altogether. Go bankrupt now or go bankrupt later.
This has become epidemic. It does not feel dramatic to make claims like, “We’ve reached end-state capitalism” as industry after industry consolidates into blatant oligarchy, if not monopoly.
The wider the gap becomes, the more desperately individuals near the gap will leap across. They make the situation more desperate for those left behind while enriching those already on the secure side of the gap – until eventually those on the dangerous side of the gap lose their ability to consume and the bottom falls out of the entire thing.
Why? So a handful of individuals can have. I don’t know why they need to have. For some I imagine it derives from a psychological place – a need for control, overcoming insecurity through resource hoarding, narcissism, etc. For some it may be the inevitable outcome of a process. There is a legitimate, natural market attempting to survive under the suffocating weight of profit – that will inevitably force individuals to a point of profit.
(For example, I have said that as a professional athlete, I should think I would prefer to take a pay cut as part of a contract negotiation if it meant staying in a competitive club that I enjoyed and allowing their more room to invest elsewhere in our success – the players’ associations, however, would never allow that as such a decision would hurt the bargaining position for other athletes. It’s about profit, not about fair compensation – and I don’t mean necessarily mean the players’ profit.)
We need to come together to find a capitalist solution to the problem of profit and we need leaders on the secure side of that increasing gap who will help. We need it now before we cross over into the mathematical inevitability of the bottom falling out completely, because the free market can only sustain the manipulation so long before it undergoes a correction that amounts to the Yellowstone caldera erupting.