In the past I have tried to dance around the language of economics a bit. Any critique of capitalism seems to confirm that the critic is a Marxist/socialist/communist.
The philosopher in me loves capitalism and holds it as the superlative economic system, regarding it as the mathematical observation of the fair and natural allocation of resources.
The philosopher in me also loves the teachings of Jesus of Nazareth. I think it’s a superb moral philosophy. That does not, however, mean that Christianity is a bastion of morality. I criticise religion on a somewhat regular basis despite my love of those teachings because there is in fact a great divide between the nature of a thought system and the human application of said system.
With capitalism, I adore the idea of supply and demand governing values associated with things, as well as the class mobility conferred by such a system. The harder one works (contributes to the economic system), the more one receives (from that same system).
Capitalism as we know it is not the academic take set forth by Adam Smith. It’s a perversion of that system by those who already have to have more.
I wrote about this previously here, but then along came the capitalist defenders with various arguments about how “there’s no objective fair value,” “owner shouldn’t receive anything for their work?” and the popular “fair value is what one is willing to pay.”
Today, we re-engage the topic from that perspective. My position did not reform in the wake of those comments because those comments neglected key pieces of the original argument. Rather than reconstruct the entire position though, let us focus on these counterpoints.
The critical point here appears to be that we cannot determine a fair price for a good or service because what the consumer is willing to pay, a highly subjective value, is a key component of that equation.
My position, and this is the part that felt missed by several readers, is that what the consumer is willing to pay is not a key component. It is a component, to be sure, but not to the extent that some believe.
The reason for this is that in the context of pricing a good or service, the principle concern is not what consumers are willing to pay for it. The principle concern is what consumers must pay for it in order for that good or service to be worth producing in the first place.
The principle concern is what consumers must pay for [a good or service] in order for that good or service to be worth producing in the first place.
Everything that goes into producing a good or service first requires that the person or organisation expends resources. These things are myriad, from the raw materials needed to construct a physical good to the materials, even simple things like office supplies, needed to support the operation. It includes compensation for the worker time spent producing, delivering, or supporting the good or service. It includes compensation for the executive leadership. It includes rent on the buildings where the operation occurs.
All of these things are cost. And while an organisation will source these resources for competitive pricing, it will total to a minimum required to produce their good or service.
Only at this point does a question of what the consumer is willing to pay enter the equation. If we pursue this avenue of production, can we recoup those costs from the consumer in the form of revenue?
If the answer is no, then no matter how amazing or life-changing the good or service is it will not enter production. Doing so would cause the organisation to operate at a loss, bleeding their resources until they no longer have enough to function.
This concept of cost is the one central to the discussion. While what the consumer is willing to pay is a subjective concept, to be sure, the concept of cost is not. Cost appears on the financial statements as the accounting history of the organisation. We know what resources the organisation controls and the amount paid to acquire them.
The device on which you are reading this story? We know to the penny how much it costs to produce from the research and development that created it to the moment it arrived in your hands.
To reiterate, everything associated with the organisation is part of the cost of its good and/or services. Everything. Every single thing. When you buy a pack of staples on Amazon, Jeff Bezos gets a piece of that. The idea that the management or owners for a company receive nothing from the operation of the organisation is incorrect (*except perhaps at the beginning of a small operation where the owner might waive a salary to get things running).
The point of the criticism is that companies deliberately mark up the price of their goods and services above the cost as much as possible to maximise profit. When revenue exceeds cost, profit is what results. When cost exceeds revenue, loss occurs. These terms are not interchangeable – revenue and profit are two different concepts.
The nature of capitalism is that cost and revenue match as closely as possible because that is the fair market value of the good or service. This not communism because resources are still privately owned. The individual trades goods and/or services to acquire those resources.
Thus, the more one contributes and the harder one works, the more one receives. The wealthiest people in that society are those who work the most to provide resources and they receive compensation for it.
In our society, the calculation is “how high can we make the price for our supply before it starts to adversely impact demand?” Yes, this does reflect the “what consumers are willing to pay” aspect of the equation. If people are not willing to pay that price, the cost of the good or service must come down.
Two issues with this.
First, “willing to pay” becomes a somewhat loaded concept in the larger economy. We receive most of our goods and services from for-profit organisations, and the Republican ideology in particular stresses the privatisation of further things like education, prisons, and possibly the postal services.
What that means is, while a certain degree of competition exists in the market everyone is seeking to maximise profit. Collectively we could rally against the cost of, say, smart phones, and refuse to purchase them until prices reduce, but in the meantime we are purchasing other items that are priced above cost (because literally everything we buy is priced above cost).
We are “willing to pay” the prices we do in the sense that we have zero choice in the macro sense of things. If we purchase absolutely nothing, companies will fail, people will lose jobs, and we cripple our ability to produce anything. Plus, no one will have anything. I don’t mean luxury items like smart phones and televisions – I mean food and medicine, both of which are also sold for profit.
Companies are meant to keep one another in check with respect to profit because we can turn our attention from one organisation to another. If Apple charges too much for their smart phone, people can go to Samsung. That incentivises Apple and Samsung to keep their prices “reasonable”.
Over time, conglomerates have extended their control over the market and while few true monopolies exist it would be folly to deny the oligarchy that is most industries.
Look in any given space and while countless competitors may exists, a precious few dominate the market share for that space. Some defend this practice, saying that a few stellar operators can produce more efficiently than many smaller ones. However, in practice we see predatory tactics and economic détentes.
One of my lead criticisms of Wal-Mart for years (not sure if this still occurs, but I imagine it does) was their cannibalisation of the supply chain. If a smaller company produced something that Wal-Mart wanted to sell, Wal-Mart would set the price for the good. That disregarded the desired sell price for the supplier, but with Wal-Mart’s market share it effectively left the supplier with the following choice: sell your product with us at a loss or we will carry this product via one of your competitors. Either sell nothing and go out of business now, or continue to sell and bleed slowly.
Once the larger competitors dominate the space in their industry, rather than compete they seem to establish a détente where one monopolises a particular service area (such as cable-Internet providers).
When an innovative company appears on the scene to challenge the status quo, the larger companies move to acquire it. Rare is the innovative company that survives independently to reshape the industry landscape.
The second issue is that I find the concept of profit itself unethical. Some countered this point not with arguments that it is ethical, but that it’s amoral. I agree that in the purest form of capitalism all of these concepts are amoral, just as environmental phenomena are amoral. A massive hurricane is tragic, but there is nothing unethical about a hurricane. It’s the natural result of atmospheric imbalance correcting itself.
Profit is unethical though because this is not a natural process. This is a conscious decision process, and one with ever-increasing elements of manipulation baked into it.
One of the largest examples of this is the industrial revolution (and now we see it happening more with the technological revolution). Among the innovations of the industrial revolution we saw the automobile. It connected people. It made life better for many people. It was a luxury.
Then, it became popular and society shifted around it. We saw the associated rise of the highway system, roadside motels, fast-food eateries, and countless other elements. It created the very concept of the suburb and commuting because the introduction of this new resource changed the calculations across the board. Hosting employment in industrial centres (i.e. the cities) and seeking housing in the outlying areas proved the most cost effective for everyone.
But, as in science where the act of observation itself has an effect on the subject, changing the definition of “cost effective” in certain respects changed it in others. The rise of the automobile made things cost prohibitive.
Consider not the world of Henry Ford’s first Model T but the world of today. Is an automobile a necessity in the food/water/shelter sense of the word? No. But they have become a practical necessity. Where housing is cheapest, jobs do not exist. Where jobs are plentiful, housing is more expensive. Being able to transit between home and work is a necessity and therefore so too is transportation.
But transportation itself is prohibitively expensive for many people, and the cost of vehicle ownership extends beyond the acquisition of the vehicle. Taxes, registration, licensing, maintenance, fuel – and many of these things are also done for profit.
A way to subsidise the prohibitive expense of transportation for people is to provide public transportation, but society insists on either for-profit public transportation (which creates a similar problem) or low-cost municipal transportation – except the people who can most afford to contribute to such a setup refuse to do so because they are the least likely to use it.
See, in too many cases, “willing to pay” is more like “obligated to pay if you want to survive comfortably”.
The worst part of this is that it’s all part of a profit pricing model. An organisation determines that it costs $x to produce their good. If they sell that good for $y, they will receive the most money for it before it becomes so expensive that consumers seek out alternatives or, in some cases, it’s so expensive that they’d rather suffer without it than deal with the greater suffering of having acquired it.
See people delaying/ignoring necessary medical intervention because of the associated costs.
And for what? Why is anyone entitled to profit, let alone maximising it? Yes, I believe that a person deserves compensation for their time and effort, commensurate with their skill.
But that is part of the cost, not the division of profits. Profit is, by definition, the excess of that compensation. It reflects the most selfish impulses of humanity – I know what this is worth to me, but I’m going to take as much as possible from someone else in exchange for it.
To me, the worst part of this is that the greed of profit serves no one in the long-term. As fewer individuals possess more of the wealth, the masses lose their purchasing power. With that loss of purchasing power comes increased competition among the wealthy elites for each individual dollar.
When one can no longer afford to put food on the table and take necessary medications, one must decide which category receives that dollar.
As people become unable to patronise organisations (or entire industries) they might otherwise like to patronise, that organisation must find ways to survive. In the wake of increasing revenue the only solution is to cut costs, and a principle cost is the workforce. As people lose work, the economy loses further purchasing power.
This whole notion of doing things to maximise profit has created such a poor distribution of wealth that it will eventually cripple the whole of society. The amassed wealth of the few means nothing in a society where the mobility of resources stops.