EKIP– Expert Club for Economics and Politics A Different Opinion
Many naive observers of the market economy dismiss concern for the “bottom line” as a purely accidental social custom. To these critics, it seems absurd that a factory producing, say, drugs or toddler shoes would stop where the owner judges that profit is maximized.
Robert Murphy
It would certainly be physically possible to produce more aspirin bottles or more shoes, but the boss won't allow it because it would "lose money" to the organization. On the other hand, many seemingly superfluous gadgets and unnecessary luxuries are produced every day in a market economy because they are profitable. Observers who are outraged by this system might adopt the motto: "Production for people, not for profits!"
Such critics fail to fully appreciate the necessary service that the market test of profit and loss performs for participants in a market economy. Regardless of the existing social system, the sad fact is that in the physical world there is scarcity—there are not enough resources to produce all the goods and services that people want. Because of this scarcity, all economic decisions involve economic trade-offs—doing one thing at the expense of another. When scarce resources are devoted to producing more bottles of aspirin, for example, there will inevitably be fewer resources available to produce everything else. It is not enough to ask, “Would the world be better off if there were more drugs?” The right question is, “Would the world be better off if there were more drugs and fewer of the other goods and services that would have to be sacrificed to produce more drugs?”
In standard economics textbooks, an economic problem is often defined as a society's decision about how to allocate scarce resources to produce specific goods and services. In reality, "society" does not decide anything. Individual members of society make decisions that interact to determine the ultimate fate of all the resources available to humanity. In a pure market economy, everyone in society follows the rules of private property, which determine the right to own specific units of resources.
In this context, market prices are formed when individuals engage in voluntary exchanges with each other. The prices that are obtained enable entrepreneurs to calculate the (expected) profits and losses from various possible activities. The interaction between property owners in voluntary exchanges is what “determines” which goods and services are produced, but the signals created by market prices – and, therefore, the calculations of profits and losses – help owners make informed decisions.
It may be helpful to step back a bit and look at the bigger picture. Entrepreneurs provide money to the owners of labor, capital, and natural resources. They then use these inputs to produce goods and services that they sell to consumers for money (see the figure below).
When a certain enterprise ceases to operate, it ultimately means that consumers were not willing to spend enough money on the final product to cover the monetary offers that the entrepreneur had to make to divert scarce resources from other entrepreneurs who wanted funds for their initiatives.
To understand this principle more concretely, let's consider an absurd example. Suppose a successful builder dies and leaves his company to his foolish son. His son has the idea of building new apartment buildings covered in pure gold. He correctly predicts that there would be a high demand for buildings where the elevators, hallways, and kitchen shelves are covered in the precious metal. In fact, the son can rent the apartments for much higher prices than the apartment owners in his area.
Of course, that's not the whole story. Even though his income is high, the foolish son's production costs are astronomical. In addition to labor, lumber, concrete, and other necessary materials, he has to spend hundreds of millions of dollars buying vast quantities of gold. His accountants inform him that despite his high income, he is losing an incredible amount of money because of his decision to cover the apartments with gold. He will either have to come to his senses soon, or he will squander his entire fortune. Either way, he will not be in the gold apartment business for long.
Now, if we interview the son and ask him what happened, he might say, “It’s too expensive to use gold in my business.” But notice that this may not be true for all entrepreneurs. After all, the reason gold is so expensive is that other buyers pay such a high price for it. For example, jewelers still find it profitable to buy gold to make necklaces and earrings, and dentists still find it profitable to use gold for fillings. No jeweler would say, “It’s too expensive to use gold in my business.”
In short, the profit-and-loss system transmits the demands of consumers to resource owners and entrepreneurs as they decide how much resource to put into each possible line of production. After all, neither the owners of gold mines nor the heads of major industries determine how gold will be used in a market economy. Instead, these decisions are largely driven by how consumers choose to spend their money. Consumers’ demand for normal apartments rather than gold-plated ones, coupled with their demand for gold-plated necklaces rather than silver, is what makes gold-plated apartments absurdly unprofitable, while gold-plated necklaces seem perfectly reasonable.
The market test of profit and loss provides structure to the free-trade system. People are free to start new businesses and sell their resources (including the labor services of their bodies) to whomever they choose. In a market based on the institution of private property, profits arise when an entrepreneur takes resources at a given market value and converts them into finished goods (or services) with a higher market value. It is in this important sense that profitable entrepreneurs do a service to everyone else in the economy. Without the feedback loop of profit and loss calculations, entrepreneurs would never know whether the resources used in their business ventures were used economically.
Translated by Michael Tonchev
Robert Murphy's original article, "The Social Function of Profit-and-Loss Accounting," is located at http://mises.org/daily/5654
Separately from this article (in the right sidebar of the page, not Team) there is a commentary on Darwin's theory and its relationship to libertarianism. There I see the following:
"Put simply, the whole of Darwin's theory is a great metaphor of the working of a free market."
("Simply put, Darwin's entire theory is a wonderful metaphor for the workings of the free market").
The above is simply not true. If I am not mistaken, the claim that the free market operates according to these rules is Marx's and is accepted even by current economic theory.
This is a distortion of reality. I am pasting my opinion from my website below:
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The process of economic competition is often compared to that of animal competition in natural selection in nature. It is vividly described how in nature animals tear each other apart so that the stronger and more adaptable survive at the expense of the weaker. And it is believed that market competition is the same, i.e. that it is violent and therefore bad as such. And people wonder how something bad in itself leads to good results. There is nothing more false than the above view. Let us compare the competition in natural selection (in nature) and the one that is available in the economy (in a free market) and see if the above analogy is applicable.
The first and most important difference between the two types of competition (natural selection and free market) is that in the free market, competition is NON-VIOLENT. I emphasize again, in the free market (when it is, however) competition occurs without violence. Yes, here too, the best and most adaptable companies survive, but there is no physical violence. For example: a company produces something and puts it on the market. Due to the fact that there are better manufacturers on the market (who produce at a lower price and/or with better quality), no one buys the company's products and it goes bankrupt. Here, as you can see, there is no physical violence, because no one is forced to do something against their will. Consumers are offered a new product that they are not obliged to buy and they simply make their choice. It is not that one company eats another, but simply that consumers refuse to support a given company and it goes away. On an interpersonal level, the equivalent is if I offer you to buy one of my pants and you refuse. Your refusal to buy my product (pants) does not constitute violence against me, but nevertheless I have no income from the unsold pants and I stop producing them. This is the main difference between the two types of competition: violent in natural selection and non-violent in the free market.
A second major difference between the two types of competition is that while in natural selection the competition is for consumption, in the free market it is for PRODUCTION. In other words, in nature animals compete to eat the other, while in the market the competition is to produce a better (cheaper, better quality) product. Let me emphasize again: in natural selection the competition is for consumption, and in the free market - for production. This is a fundamental difference that is usually simply overlooked, and should not be.
A third major difference between natural selection and the market process is this. In natural selection, competition is for a limited resource. For example, a certain number of lions compete for a certain number of zebras. The number of zebras is fixed and the lions can only reduce it, not increase it. In other words, the resource they compete for is limited. In the free market, however, competition is for the production of UNLIMITED quantities of goods and services. This is a very serious difference. The possibility of creating goods and services is unlimited. Anyone who can offer something new and useful, or old, but at a better price or quality, is welcome. In other words, competition in a free market has no limits on what it can produce.
A fourth main difference between the two types of competition is that while in natural selection the loser dies and disappears, in market competition this is not the case. In natural selection the stronger and more resilient wolf will survive, and the weaker one will disappear. In market competition, however, the resources of the weaker company (labor, machines, buildings, etc.) do not disappear, but simply go to another owner. That is, the resources of the losing participant are not lost, but go to a more productive place. In nature, this is not the case. There, the loser practically disappears. Even when there is some benefit from it (like meat, for example), it is small. The equivalent of natural competition in a market environment is, for example, the trucks of a bankrupt company going for scrap metal. Yes, there would also be some benefit from selling them for scrap, but it is small. In market competition, these trucks go and work for the more competitive company (they are not lost). This also applies to everything else, such as labor, buildings, etc. That is, there is no loss of resources, or if there is any (for example, certain machines are unusable), it is minimal.
Let's contrast the two types of competition again:
Natural selection – forced, for consumption of limited resources and associated with resource losses,
Free market – non-violent, for the production of unlimited goods and services and without waste of resources.
From the above description it can be concluded that the two types of competition are not comparable to each other. They are fundamentally different. Man as such is much smarter than any animal species and has created a different, non-violent, creative competition. For this reason, the application of the “animal” analogy is absolutely incorrect. However, it must be admitted that this analogy is very vivid and impressive and therefore easily remembered. Hence its widespread use, however false it may be.
Team, where do you find these authors?
A young man, but his thinking is from 70 years ago.
The picture is from then, the examples - gold fillings, etc., are also from the same period. For at least 30-40 years, economic processes have not been driven by entrepreneurs, but by managers, etc., etc.
He must have copied from some old textbooks.
Not that what he says is fundamentally untrue, but with this approach he will achieve nothing other than pushing young people away.
@Toto5
This impressed me too. The most curious thing is the picture. In the middle of it stand the entrepreneurs, who are shown as rich men with top hats, tailcoats and walking sticks. Just as the socialists describe entrepreneurs: rich, flaunting their wealth and being different from the others around them (they are in work clothes). If he were also fat and with a cigar in his mouth, it would be a complete picture of the "nasty capitalist - exploiter".
@EU
Notice the users - hands in pockets, golf club - almost some privileged class of mama's boys.
In the modern economy, things look quite different.
1. The business of large, and to a large extent medium-sized companies, is managed by professional managers - i.e. they are not managed by entrepreneurs, but by hired professionals (something like workers)
2. A large part of ordinary work is done by self-employed people - (in practice entrepreneurs). Self-employed people in some countries are over 50% of the workforce. That is, entrepreneurs, in addition to managing small businesses, are also workers.
3. The main resources are provided by investors, and almost everyone is an investor - directly or through shares in mutual and pension funds.
4. Investments are also managed by professionals - employees.
5. Everyone together is a consumer.
6. A significant portion of the more active and educated people perform all functions simultaneously. That is, they are simultaneously workers (employed), entrepreneurs (have their own business), investors, and of course consumers.
@Toto5
I think you are right about what you are explaining. Things are no longer as simple as they once were. Indeed, a person can work, be an investor (through a fund, stock exchange, etc.) and at the same time (and inevitably) a consumer.
Something interesting I read:
For professional managers. The criticism of them is as follows: A professional manager is hired to deliver results. And these results, for lack of more objective criteria, are evaluated by the growth of the company's revenues. Accordingly, when the company has higher revenues, his bonus will be increased. So far so good, but what comes next? A professional manager is not an owner. He cannot lose if the company goes bankrupt or simply goes bad. In the worst case, he will be fired. That is, for him the situation is as follows: If the company wins, then everything is for him, and if the company loses - he loses nothing. That is, he is in a more favorable position than if an investor were at the helm of the company. The investor would take both the profits and the losses.
The consequence of the above asymmetry in managers is that the manager has a great interest in the company making big profits in the short term (while he is there), and then: he has eaten dogs, he will no longer be there to reap the consequences. He is not interested in the long-term development of the company.
For example: A new manager is appointed. He looks at which people in the company are earning the highest salaries and simply replaces them with others, new and inexperienced, but cheap. In fact, he has replaced the most capable and knowledgeable people, but the results of this do not come immediately. In the near future (months, even years) the company is running almost as before, but with much lower costs. The profits are huge, the investors are happy and, accordingly, huge bonuses for the manager. After half a year, he successfully retires at the peak of his fame or, if he does not retire, finds a job elsewhere, and this is easy by mentioning in his resume that he increased the profits of a given company by 50%. After he leaves, however, the company declines because there are no qualified people. In the short term, he has increased the profits at the expense of future ones. And the reason is that he has nothing to lose. And the company may eventually go bankrupt, but he will not care about it at all or very little. This is what the above profit/loss asymmetry leads to.
That's right, EE. You're very right. The problem is even more serious because those who are supposed to control the managers - the board of directors, and the representatives of the shareholders themselves - are also professional managers and are driven by the same incentives.
Example: TOP-3 - largest shareholders in:
Goole
FMR, LLC - 6.75%
Vanguard Group, Inc. - 4.68%
State Street Corporation - 4.05%
Apple
Vanguard Group, Inc. 4.90%
State Street Corporation - 4.11%
FMR, LLC - 3.41%
Microsoft Corporation
GATES WILLIAM H III - 4.54%
Vanguard Group, Inc. - 4.30%
State Street Corporation - 3.95%
Besides Bill Gates, do the other shareholders care which product of which company will be better? It's the same story here. FMR representatives on the three boards are only interested in current profits. If you look at the shareholders in more detail below, apart from the different arrangement, you will not find any differences.
Here is an example with Facebook
FMR, - 4.17%
Vanguard Group Inc - 2.54%
Invesco Ltd. - 2.00
Here State Street Corporation is in seventh place.
Accordingly, Invesco Ltd. is 10th in Google, 6th in Apple and 8th in Microsoft.
@Toto5
The problem is that the above companies you listed are not one-day companies. If the problem is really that big and strong, then they should fall like pears. I exclude Microsoft, which is so big and strong that it buys lobbyists all over the world. Since there is no better investment than politics, it can survive for a very long time. However, I have not heard of others being guaranteed survival, and they somehow survive despite the "managerial" problem. Maybe their competitors' problems with managers are even bigger?
@EE
They've got a special trick here - the founder entrepreneurs are still working in the companies. There was a lesson in the sector - the firing of Steve Jobs, the subsequent downfall, the return of Jobs and the subsequent successes. Now no one dares to think about replacing Larry, Sergey or Mark. The interesting thing is that unlike Bill Gates, all three do not feel any sentimentality, but act very coolly and rationally.
For example, if you look at Google's Insider Transactions, you will see that Sergey Brin receives 83,334 shares of the company every month + some additional amounts for certain months. He sells everything on the same day he receives them and currently has only 3,230 shares. That is, the person works as a manager for about 70 million per month plus additional bonuses.
Well, in older companies they don't have that luck and they pray they hit the right person.
Speaking of Bill Gates, today they wrote that three of the 20 leading investors in Microsoft Corp are lobbying the board to pressure Bill Gates and force him to leave. Apparently, something is going on there too.
http://www.investor.bg/softuer/458/a/akcionerite-v-microsoft-iskat-glavata-na-bil-geits,158776/?utm_source=dnesbox&utm_medium=link&utm_campaign=footer
@Toto5
I was thinking about the management problem. One possible solution is to make the manager a co-owner. You pay him a certain amount of money (for life) and the rest in shares, which he is not allowed to sell until X (months, years) after he leaves the company. That way you can probably stimulate long-term interest in the company. I don't know if it's applicable.
Regarding the "sentiments" of Bill Gates (I assume you mean his charitable activities), and also those of the so-called "oracle", which is pushing to raise taxes on the rich. Today's society raises people with a sense of guilt that they became rich (it doesn't matter at all how they became rich, though). And people like them try (most likely) to atone for their sins by paying for foundations and generally pretending to be Santa Claus. I have discussed this issue in another forum, but let me say it again:
When people think of a rich man, for example, a factory owner, they imagine him as Uncle Scrooge, who has a huge safe with money and from time to time goes there to swim in the gold. And since you have this money, why not share it with others? According to today's understanding, anyone who is not altruistic is automatically selfish. The problem is that the money that businessmen have is mostly in assets, i.e. in machines, enterprises, shares (rights to assets), etc. This is practically at least 90% of the businessman's money. That is, if a rich man has, for example, 1 million leva, then 900 thousand of them are not available. They are in the form of a factory. However, a factory is capital, and capital serves society, not its owner. A car factory, for example, produces cars for the market, not for its owner. Even if the owner wanted to, there is no way he could change his car every day. 99.99% of a factory's output goes to other people (the market). My point is that capital typically works for society, not for its owner. And de facto, the owner is a scumbag who worries mainly about the public interest without understanding it. Yes, he gets richer (if he is successful), but his wealth goes back to capital, and capital serves the public interest. That is, I get richer by another million and they build a new car factory. Only what the businessman spends directly on his own consumption is not for the benefit of society.
In short: being rich means that you have contributed and are contributing a lot to society (when, however, you acquired your wealth according to the rules of the free market, and not with political patronage or violence in general). However, modern society makes the rich feel ashamed of their wealth and feel guilty. Not that there is no reason sometimes (for example, in Bulgaria, a large part of the wealth was acquired through theft, violence, political games), but no distinction is made that some people earned it themselves. And as such, they should be respected, and not lumped into the general group of "rich criminals".
@EE
Regarding the "sentiments" of Bill Gates (I assume you mean his charitable activities), and also those of the so-called "oracle", which is pushing to raise taxes on the rich.
No, I mean sentiments towards his "own" company. Bill Gates is still one of the largest shareholders in Microsoft.
His mentality is that of an owner. He, Buffett, Soros are from the old classic generation of entrepreneurial capitalists. These people hold on to ownership, have a sense of some responsibility, and take on both the risks and the rewards of the business they run.
Young lions have an "investor" mentality. Ownership has little or no meaning for them. That's why I say they are rational and cool-headed. Their portfolio is distributed, their money is managed by professionals, and they hold almost nothing in their "own" companies. Mark Zuckerberg has 217 shares in Facebook, Larry Page currently has 85,000 shares in Google, and Sergey Brin - 3,230. These are symbolic numbers against the background of the size of the companies, and the money that all three have. That is, they hold enough shares to be on the list of shareholders.
The world, and the very mindset of entrepreneurs, has changed dramatically over the past 30 years. This is exactly what I understand by the desire of Gates, Soros, Buffett, and a number of other entrepreneurs/owners for higher taxes. Apparently they don't like today's world very much, they want their own and they think this is one of the ways to get it back.
@EU
"I was thinking about the management problem. One possible solution is to make the manager a co-owner."
This mechanism worked until 20-30 years ago. It is possible that it is still relevant in smaller companies. In recent years, companies have become larger and more complex, and there are very few people who can effectively manage them.
That is, not the companies, but the managers set the conditions. They are still given shares, but the shares are sold when the managers decide. For example, Eric Schmidt from Google currently has 109,474 shares, and this year alone he has received many times more. If you think so, you can check it yourself: http://biz.yahoo.com/t/66/4245.html
@Toto5
"Young Lions have an "investor" mentality. Ownership has little or no meaning for them. That's why I say they are rational and cool-headed."
It is not "rational" at all for ownership to have no meaning for them. In the short term it may be rational, but in the long term it is not. By looking at the immediate profits and not the long term picture, you are making the company worse off. In the long term, everyone loses (the whole society).
From what I've read, the claim is that in today's society, short-term profits are in fashion, and the future is a turnip to eat. For example, Reisman tries to explain this process with the presence of inflation, but I'm not very convinced by his specific explanation. Do you have an opinion on what it is due to (if at all)?
@EE
"It is not "rational" at all for ownership to have no meaning for them. In the short term it may be rational, but in the long term it is not. By looking at the immediate profits and not the long term picture, you are worsening the condition of the company."
And why should the company be of primary importance? Ownership is a responsibility, and it also significantly limits the space of the individual. By freeing themselves from ownership, modern entrepreneurs gain absolute freedom. The whole world is theirs. They can do whatever they want and do things that interest and excite them, and not be slaves to their company. I am from the old generation - entrepreneur / owner, but I completely understand the young and I do not judge them.
"Reisman, for example, tries to explain this process with the presence of inflation, but I'm not very convinced by his specific explanation. Do you have an opinion on what it is due to (if at all)?"
I think the processes have nothing to do with inflation, but are due to globalization and the development of capitalism.
Capitalism was created by conservative people who relied on their property and qualities such as hard work, thrift, consistency, responsibility, patriotism, etc. to succeed.
In today's world, to succeed you need to have completely different qualities - creativity, communication and persuasion skills, flexibility, continuous learning and improvement, mobility, etc. Ownership is not mandatory, and to a large extent it hinders the development of the above qualities. Therefore, if before entrepreneurs went public to attract capital and expand their company, now they go public to monetize their labor, to free themselves from ownership and to gain the opportunity for new horizons.
I completely understand Bill Gates, but I would never reproach Mark, Larry, and Sergey.
Here is another confirmation of the attitudes of young entrepreneurs:
Even before Twitter's IPO, Biz Stone, one of the founders, sold everything and owns no shares. Jack Dorsey, the other founder, has a 4.9% stake. For comparison, Evan Williams, the company's former CEO, has 12%, and Peter Fenton, who is a member of the board of directors, has 6.7%.
After going public, most likely everyone will remain (if at all) with a symbolic stake in the company's capital, as long as they are registered in the shareholder register.
http://www.investor.bg/socialni-mreji/454/a/ot-ipo-to-na-twitter-shte-izleze-samo-edin-miliarder,159088/