Why is this economy not responding to trillions in deficit spending? Why are so many jobs still being lost? It's because Profits have been forgotten as the objective of business. by EJ Moosa
(libertarian)
Thursday, July 15, 2010
As the Nation's economy continues to flounder about like a fish on the deck of a boat, some of the best paid, so called "experts" continue scratching their heads asking what it will take to get this economy going?
The Federal Reserve has injected trillions of dollars into the U.S. economy. The Federal Government has taken the failing and worthless assets off the books of many institutions. We, the People have taken on the risk many of these institutions and corporations previously held upon our own backs, hoping that this would result in a better economic environment. It hasn't.
Government is involved in every aspect of American business, from stimulating supply to stimulating demand. There are credits of all types for hiring long term unemployed. Yet they stay away from tackling the one challenge of American businesses that needs to be addressed.
I continue reading blogs on sites such as The Wall Street Journal, Zerohedge.com, and AJC.com, to name a few. I see long diatribes about all the things that are not working. And one word is constantly missing from all of their analysis: Profit.
Why is that? And why is it such a foreign concept to the citizens of the United States of America that without profits, there is no reason for any expansion of any kind?
Could it be that we have effectively been re-educated? There have certainly been enough shows about the evil businessmen and their profits. Often, profits are referenced to as greed. We have heard President Obama, House Speaker Nancy Pelosi, and many others denounce profits of many industries in the U.S. They have said publicly that they were going to target their profits for public purposes.
Does anyone really believe that we can have a growing economy of any sort without growing profits? Tell me what the incentive would be for anyone to grow their operation without the prospect of greater profits. Is there any?
Profit margins in 2009 were down across the board in this nation, despite the rosy reports of companies beating diminished expectations. And despite a brief rise in profits the first half of 2010, there is not a sane executive around that believes profits will continue to rise with all of the additional burdens Congress has either already passed or announced it wants to pass in the future. So how can you be surprised that these same executives are not hiring? Would you want to hire someone and train them, only to be forced to let them go because Congress has added a new Value Added Tax? Or raised corporate tax rates, which reduces your bottom line?
You cannot give money away to small businesses at this time. The credit contraction is real. But it's not just because banks are not making loans. A small business could get a loan, but if he cannot use that money to make himself more profitable, why would he? It will become a liability in the future that he must pay back. You could end up in a deeper hole as soon as interest rates rise(and they will rise at some point).
As I have written in the past, No Profits, No Growth. Nothing has changed. The economic model called Capitalism does not work without profits. An economic model that has businesses in business for reasons other than profits has never succeeded in this world. And it will not now.
Companies need to know that any profits that they earn are theirs, just as you need to know the income that you earn is yours. And just as you need to know that your income will be steady before taking on additional debt obligations, so too does a company need to know this before they begin hiring additional people.
Until profit growth return to business, we are going no where. So the conversations we need to be in is how do we get government out of the way, so that companies can generate higher profits? And most important in that statement is getting government out of the way. We cannot have a Command Economy directed from Washington that will grow profits for American businesses.
Congress has done nothing at all to improve the profit outlook for American businesses.
For that is not and will never be one of their primary objectives. And we know this because they have told us so.
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There is one problem with the logic of your article:
"Profit for Business" is an "objective" goal. Objective economic goals are exactly what occurs in a "planned" economy. Subsidies, taxes, tax deductions, bailouts, tariffs, regulations, all these programs are put in place in order to reach some objective that some official or authority or agency, etc, believes should be attained is in the best interest of whoever they or he or she thinks should benefit.
You have gone down the same exact path as they have, simply with a different objective and motto.
There are NO OBJECTIVES in a true free economy. The economy itself, the needs of each member of that economy and the work of each member IS the objective.
Profit is completely and totally irrelevant to a free economy and we have no idea if it would even be around. There are no parameters, regulations or guidelines to a true free economy. Anything otherwise is planned and the same animal as what we have at present.
Posted By: EJ Moosa
Date: July 16, 2010 01:39:53 PM
Gede,
I have to disagree with your conclusion. People simply do not go into business to break even or lose money. It is the prospect of profit that motivates.
Of course you can have non-profit and not for profit businesses. But that can also be a wolf in sheep's clothing as many that work for these profit personally rather than on the behalf of the business.
"There are NO OBJECTIVES in a true free economy. The economy itself, the needs of each member of that economy and the work of each member IS the objective. "
You say there are no objectives, then state one. So you have lost me there.
Just because those in a planned economy have objectives, that does not exclude me, the private business man from having an objective as well.
Profit is crucial to a free economy. It is the reward for the risks that are taken in the endeavor.
In an economy where no one profits, there will be no economy, except by force.
Posted By: Mike Blevins
Date: July 16, 2010 10:55:13 PM
I concur with EJ--a "free economy" without profit is no free economy at all. The engine of a free economy (and capitalism in general) is enlightened self-interest. (ESI) Profit is a key component of ESI. Are there other motives that drive it? Of course there are! Profit is not the only thing that people can desire, but for a business, profit must be the overriding concern. Any other concerns, as important as they might be, must not destroy profits. There is, after all, a term for business without profits: foreclosure. The very incentive that anyone has for participation in a free market is the opportunity to profit from one's efforts.
Therefore, profit and capitalism are related terms and cannot be separated.
Gede--you say that "(p)rofit is completely and totally irrelevant to a free economy." Frankly, that sounds more like a description of socialism than anything resembling capitalism.
It is probably important to first understand "profit". Although it is defined many ways, most would agree that profit is what is left [positive] after costs. costs can all be covered in one of three categories: wage, interest or rent.
If any or all three of these categories are fullfilled in a transaction, then why be obsessed over the need for what you refer to as "profit"? No one "breaks even" when they have made a wage or received interest or received rent. You can only suffer a "loss" if you work and don't receive a wage, loan capital and don't receive interest or lease land that you don't receive rent for. Inaction is not a loss [or a gain unless you are a social or corporate ward of the state], it is simply inaction.
Personal and individual "objectives" have absolutely nothing to do with a "planned" economy. You and I and anyone can have all the objectives we want, a free market will decide whether our objectives mean didilly squat.
On the other hand, the objectives of those who control the economy are forced upon all of us, with or without our consent. That is the crucial difference.
Again, profit is irrelevant to a free market. The only indicator of a free market is the absolute freedom of all actors to engage in consensual transactions. What value they arrive at is part of that freedom. Whether they experience what you refer to as profit or not, is entirely up to them and the influence of free competiton and completely unrelated to the freedom of the transaction.
There is no "engine" to a free economy or "incentive", other than whatever free actors choose. If you want to describe that as "self interest", there certainly is nothing wrong with that, but you have to remember that is only what you or I might interpret actions as. In a completely free economy, it is whatever it is and could be many things.
The more you define what a free market is or actually will be, the closer you come to the definition of a "planned economy".
Posted By: EJ Moosa
Date: July 17, 2010 07:14:39 AM
Gede,
Some of the statements made just do not stand in the real world.
Not only can people just "break even" while earning a wage, they can lose money, and they could possibly leave a job for a higher wage, and more profit. Also, there are intangibles, such as stress, job location, etc., that can reduce or increase the personal profit for a person. It is not a simple dollars and cents calculation.
Personal/individual objectives do have something to do with a planned economy. They must be suppressed by the powers that be to achieve their collective goals. And anyone that has personal/individual goals stands in their way.
The more I read your statements, the more I believe the sort of free economy you are promoting is where you are free to work or not work, and all the things you need will be provided for you, free, of course.
The only reason two parties engage in a "free" transaction is because it is "mutually beneficial" to both parties. No force required.
For example, you have decided that the $3 in your hand is less valuable to you than the cup of coffee I have produced for you. And the cup of coffee is less valuable to me than the $3 in your hand. We agree, and swap. That's how it works in a free economy.
And one business, such as mine, hiring another worker because demand for $3 coffee exceeds what I can produce on my own is no closer to a command economy than you are to Warren Buffet's wealth because you have a few dollars in your pocket.
A Command Economy requires something you have not mentioned. That would be one government making all the decisions, rather than millions of business people making all the decisions.
Why would people work in this economy of yours if they could "lose money"? That wouldn't seem to be a "free" economy at all. Do they have no other choice than to "lose money" while working? That tells me they are "forced" to work.
See the end of this comment if you wish to discuss socialism. It is important to understand terms before coming to conclusions.
Your quote................"The only reason two parties engage in a "free" transaction is because it is "mutually beneficial" to both parties. No force required."
"mutually beneficial" means nothing in the real world. You just mentioned above that people can lose money while earning a wage. How is that mutually beneficial? Do they think that working at a loss is beneficial to themselves because they are stupid or is it just that they are forced to work at a loss because they have no other option? you can't have it both ways. what is it: "mutually beneficial" or a "controlled economy where workers are forced to lose traction while working"?
I didn't realize that it was "millions of business people" that determined a "free" economy, not just people.
A command economy is simply a "controlled" economy. The state is the obvious choice since the definition of the state is a "monopoly of force within a region". But, the state always has "benefactors", whether they are government officials as in some third world countries and the state socialism of the former USSR; or the state, corporate and social benefactors of our current state of socialism in the US. Benefactors are instrumental in the decision process of the controlled economy.
Again, a free economy is one in which all actors are free to engage in consensual transactions in any way they choose without force from within or without the transaction. Profit, incentive, mutually beneficial,etc., all that austrian fairy tale stuff is possible but not required. Regulation is nothing but forced requirement. If you require profit, then you have a "controlled" economy.
State socialism is the use of the state to coerce a particular action or non action upon non consenting people. State socialism by nature prohibits a free economy since it takes economic means to establish force, which at the least is a tax, which requires others to take action to produce confiscated value.
Mutual [or free] socialism is simply the free association of a group in order to engage in an activity that all involved consent to. That activity cannot infringe upon the freedom of others [those not involved] to be considered "mutual". Your "mutually beneficial" free transaction can be considered mutual socialism as could a "bake sale" or a purchase of a firm by workers. People debate all the time whether the corporation is a form of mutual socialism, mostly on the premise that the shareholders don't have "consent" over the actions of the company. Others say that the ability to sell is the ability to "leave" a decision, so the debate goes on.
Posted By: EJ Moosa
Date: July 17, 2010 12:43:04 PM
Gede,
Why? Because they err in their choices. They underestimate their true costs or overestimate their true profit potential. Irregardless, it is a free choice they have made.
Why do people take any risks that are not in their best interests. Frankly, I don't care. It's their choice.
"Mutually beneficial" means nothing in the real world? Seriously?
All that "Austrian Fairy tale stuff"?
Tell us about a free economy that has no profits, is not mutually beneficial, and without incentives. Can you point to a "real world example?"
If that is the case, then why are you concerned with "profit". You say that lack of profit is because " they err in their choices". Then what is the point of the article if you don't care that people take risks that aren't in their best interests and then don't "profit" by it? And, I thought you said all transactions were mutually beneficial? Then how can people make bad choices in their transactions, if they are all mutually beneficial?
Sorry, but I cannot point to any real world example of a free economy. That is the point.
You also are not reading my comments. I never said that a free economy would be "exclusive" of profit, incentives or mutual benefits. What I said numerous times is that it is not a requirement of a free economy, which you seem to require. Again, the only requirement, if you could call it that, is free, consensual and unforced transaction. Do you have a problem with that statement?
And, you may not be "getting" the concept of profit. Profit is that which exists above and beyond wage, interest and rent.
Posted By: EJ Moosa
Date: July 17, 2010 04:50:58 PM
Gede,
Why am I concerned with profit?
As there is a lack of profit, we are forced to subsidize government spending in many directions, all aimed at the belief that it will create jobs, thus lowering unemployment. If the economy is going to be "fixed", the capability to make a profit must be restored.
Profits have been eroded over the years through taxes, hire employee salaries required by law, and federal mandates. Hidden taxes abound that have sucked profits out of productive purposes and into unproductive ones. Profitable companies are being forced to subsidize unprofitable ones.
Obama and Co say they are "fixing" the economy. But they never mention profits unless they want some of them. Is this an accidental error? I think not.
Can the American economy recover if 90% of the businesses you pass in a week are not earning a decent return on their investment and efforts? Will they be hiring if they are losing money, or making less than they did five years ago with the same level of sales because minimum wage rose by $2? I think not.
It's not working, and it will not work. The powers that be are addressing the symptoms, and not the cause of the symptoms. And the more they tamper, the worst it gets. Why? They have no concern with whether businesses are profitable.
On transactions-because one believes that they are mutually beneficial, does not mean it will be in the long run. But they enter into it believing that the transaction is at least beneficial to their half of the transaction. Why do I not necessarily care? Because there is no system in the world where one can be free yet not be responsible for their own choices.
No, I do not have a problem with your statement. If you wanted to lose on every transaction that you enter into, so be it. One, however, cannot go on forever that way.
Two economies, A and B. A is a profitable economy. B, people lose on every transaction. Which one survives in the long run?
Okay, here is where i think the difference is occurring.
Again, the definition of profit is the excess above wage, interest and rent.
I also mentioned that it is impossible to lose on a transaction if you receive any of the above for labor, capital or land.
With that in mind, let's picture a free economy without profit [which, again, I never proposed, I noted that a free economy does not require profit to be free]
Those that labor receive wage, those that give out capital receive interest and those that lease land receive rent. What they receive is determined by free competition.
Without "excluding" profit, where do you see the need for profit for the economy to be free, if all are receiving competitive payment for their labor, land or captial? And we can also consider the "health" of the economy. Wouldn't free competition allow wage earners to earn a wage that is a "sustainable" wage? If they have free choice and free and equal access to competitive land and capital, why would they work in a situation where they are "losing" if they are not forced?
Wouldn't free capital reach a competitive rate? land rent? how could there be free competition and non competive interest rates or land rent at the same time?
I think you may be misunderstanding the issue because you mingling profit with wage, rent or labor. If the struggling businesses you mention [and i agree] were receiving and fullfilling wage, interest and rent, including the return of wage, interest and rent for the owner [dependent on his involvement in those areas], where is the problem?
It might also be helpful to consider that if say a landlord were receiving present rent on land, then he is not losing on that transaction. But, if his rent on the same land is higher than what he can receive, then he is losing on the past transaction on the same land, that he is held accountable for.
The government completely understands the problem. They are just acting to reach the end that they wish to profit those that they wish. There can never be a free economy and a coercive or most likely any government.
Posted By: jonmaguire22
Date: July 18, 2010 02:42:32 PM
Moosa,
I must agree. As a decision maker in a small business, our bottom line is almost always driven by profit. We price our services based on making a profit - and when we can't make what we want to - we price it to make less of a profit. We do almost everything around making and keeping profit - from the small jobs to the overall picture.
We aren't making great profits right now - which means we are not investing in new equipment, researching new products or spending any more than we need to on advertising. If we can change things internally to make more profit - then we may return to doing these other things.
If we don't make a profit - as the owner said 2 weeks ago in a meeting - he'll close shop, sell the building and live his life comfortably.
Posted By: Bentree
Date: July 18, 2010 07:56:48 PM
Since B is losing a little on every deal he needs to buy a bigger truck which will enable him to make it up in volume. This strategy seems to be working for Obama, just ask him.
Posted By: EJ Moosa
Date: July 18, 2010 09:22:15 PM
Gede,
Without the potential for profit, why would I start a business?
I'll summarize it for you:
Without profit, there is not a chance of a free economy.
I will also ask again why your focus is on wages, interest and rent only? Where is the profit from sales in this economy of yours? We call that production. And no one would produce anything except for their own use if there was not the potential for profit.
All government operations, of course, would be excluded from that requirement.
Let's see..............maybe for the same reason people labor for a wage?
"Without profit, there is not a chance of a free economy"
oh, okay, if you say so, even tho you have yet to refute even one of my points!
No one would produce anything for wage, rent or interest? and again, for like the tenth time, I did not say that profit could not exist in a free economy, I simply said that it is not a "requirement" of a free economy and you have yet to tell me why it is, you simply state that it is necessary like some ancient religious doctrine I shouldn't question.
you call production profit? i thought production was referred to as production?
no one would produce anything except for profit? Why do people go to work and produce things now for wages?
do you even understand that the manager and owner [if he is involved in the work] are receiving wages, even if all they show is "profit"? if they have capital invested, they are receiving interest even if it shows on your bottom line as "profit"? what if they own the building free and clear? their rent will show as profit on the balance sheet, but it IS RENT not profit.
does this make any sense, because this conversation is pointless without some basic understanding.
Posted By: Bentree
Date: July 19, 2010 07:31:36 AM
Adam and Eve, a married couple in the fig leaf business. Adam has always been the picker, Eve the shipper. Due to a previous over supply of fig leaves they suffered a serious cash flow problem, consequently they were unable to make the payments on their Fig orchard, now "somebody" Else's trees. As luck would have it Eve's parents just happen to have an orchard that A&E can lease/rent. The fig leaf cycle has cycled and there is money to be realized in leaves once again. As luck would have it the Politburo instituted a variable vat tax which oddly enough is the exact amount left over after A&E paid themselves wages, paid the rent on the orchard and interest on their line of credit. Luckily they live in a cabin owned by his parents, rent free and grow their own food, but they are happily still in business and they are considering hiring illegal aliens next year to pick the leaf crop. Adam has taken a job in town at the local burger joint, Eve is delivering mail on a rural route. They are hoping to have money left over next year, which they will use to buy a bigger truck. Strictly for tax purposes mind you.
Posted By: EJ Moosa
Date: July 19, 2010 07:34:30 AM
Gede,
If someone owns their property free and clear, there is no rent. Do you grasp that someone who has chosen to own their building has taken on a different level of risk than someone that rents?
You are defining interests with a definition that is not commonly used. Interest is a product of principal times an agreed upon rate over a period of time. And that is not what you are referring to. They are principles in books that attempt to be simplistic and yet all inclusive. But they are simply not how people think in the real world.
A business owner is not thinking in wages, rent and interest. He is thinking bottom line. And if his expenses are rising, and his profits are not, he is going to cut something. Today, employees are being released, and not being rehired. This is real world.
Acknowledge that if more (in your terms) rent and interest were generated, that there were be more hiring, which was the point of the column. And when there is less rent and interest generated, there are less wages generated.
Using your definitions, tell us what change would boost hiring, if you disagree.
Just because you can envision the principles behind wages, rent and interest, and it explains some of what you see around you, there is one major flaw in all of that. People do not make decisions that way in general. They make real-time decisions based on factors that are in constant flux. There is not only one answer that is the right answer.
Unfortunately, theoretical academics cannot grasp that. They believe that a central authority making the one right decision yields better results for society in the long run. They believe they can make better choices than millions of businesses all making the choices for themselves based on the information the businesses have that are all unique entities. But they cannot. There is just to many different variables than can be analyzed by a central authority to make the best decision for each unique business.
It does not, however, keep the academics from trying. We have an academic president, surrounded by academic councils. But they could not all get together and run a McDonald's for a week and have it run smoothly. Why? Because things do not go as planned. A learned man learns to adapt. An academic will want to argue with you why it should have worked, and that he needs just a bit more control over the scenario. The only problem is, he will need control over the behaviors of the customers to control it all.
As long as there is a building there is rent [by the way, buildings generate interest not rent, land and resource generate rent]. someone may not be collecting it, but the rent is there. if they are not collecting it, they are showing a loss. if they collect more than the market rate, they show profit.
Interest is simply return received from loaned capital.
maybe if your business owner thought in terms of interest, rent and wage, he wouldn't be letting people go.
a free economy would boost hiring, to the point where those that wished to work would work. problem is, a free economy would step on too many toes of those benefitting from our controlled economy.
people can make decisions any way they want, it is not my concern.
theoretical economics are primarily used to justify an exploitative condition. and, if you think they actually believe they are attempting to achieve "results that are better for society in the long run", then i have some swamp land to sell you. economists are salesmen.
the issue i have, and i think you understand it now, is that you wrote an article about "profit" using a financial definition, yet you wrote an article that can only be classified as political theory. that's like writing about how great lebron is at volleyball.
Saying that government should do things to help the "BOTTOM LINE" is simply another form of central planning and in fact is what they do all the time. i sympathise if they are increasing some one else's bottom line, but that's the breaks. any tax at all, even one dollar is going to increase someone's bottom line [and lessen someone else's], so all politics is simply an argument over who gets the money. both sides of the argument are parasitical and socialist.
Posted By: EJ Moosa
Date: July 19, 2010 10:53:44 AM
Gede,
Government should quit doing things that are destroying the bottom line.
And wow, I never would have thought that the reason businesses are contracting in the US is because we are not thinking in terms of wages, interest and rent. That must be what they are doing in Canada, as they are adding jobs, while we are not.
It's not political theory that companies with growing profits will be hiring more employees.
The person who gets the money, that should be the person that earned it.
