Sunday, August 30, 2015

Quickies: The Significance Of Profit

     Ace quotes Thomas Sowell on the subject:

     While capitalism has a visible cost -- profit -- that does not exist under socialism, socialism has an invisible cost -- inefficiency -- that gets weeded out by losses and bankruptcy under capitalism. The fact that most goods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency. Put differently, profit is a price paid for efficiency.

     [From Basic Economics]

     It isn’t often that I’m moved to disagree with Sowell, truly one of the finest thinkers of the past fifty years, but the above strikes me as a fundamental error – indeed, an error so pernicious that it’s been used by capitalism’s enemies to attack capitalism morally.

     I would argue that in reality, what we call “profit” is really the wage we pay to reimburse individuals and institutions for:

  • Innovation;
  • Risk-taking;
  • Convenience;
  • Meeting an unmet demand;
  • Compliance with regulatory forces;

     ...and other aspects of the path that leads:

  • From product conception;
  • Through product creation;
  • Through product production;
  • Through product marketing;
  • Through product distribution;
  • Through product retailing;
  • Through product warranting and service.

     Each of those stages in the path from producer to consumer involves work: physical, mental, emotional, or some combination of the three. (Never doubt that last; the emotional cost of the risks a producer must take are almost never appreciated.) Unreimbursed labor will not be performed for long. That’s the true lesson of Mankind’s experiments with socialism.

     As for “efficiency,” there is no metric for it that two economists will agree on, because it involves subjective decisions at every stage of production, distribution, et cetera with which any argument must necessarily be equally subjective. But if “efficiency” cannot be measured, it is merely an opinion – and therefore cannot be “priced” in any inarguable way.

     The only “economists” who claim that “efficiency” is a valid yardstick for an economic system are socialists – and when pressed to define their terms, they invariably refuse, change the subject, or attack the questioner. Remember that the socialist attitude toward market competition is that to have two or more firms making “the same product” is inherently inefficient. Yet socialism fails at the fundamental task of any economic system: delivering goods and services in a quantity and quality and at a speed that pleases the eventual consumer.

     I could go on about this for many pages, but it’s a nice day, so I’ll spare you.

5 comments:

JWMJR said...

The notion that communism/socialism is non capitalist or anti capitalist is another one of those 20th century big lies. The lament of the Soviet factory worker comes to mind. "They pretend to pay us so we pretend to work." All arguments to the contrary, communism is, simply put, the most inefficient and corrupt form of capitalism.

All economic systems beyond that of the hunter/gatherer or bartering operate on the basis of capital and the value of that systems capital is judged by its efficiency.

In the old Soviet block all the production was based on capital just as it is in the west. The difference being that under communism the state is the sole share holdeholderthe sole arbiter of what and how much is to be produced, what wages are paid and how much capital (tax on production) is returned to the state. While communists condemn the west for its "greedy capitalists" it is theirs that is the penultimate system of gwher, where all profits of production are consumed by the political elite. Such a centrally planned system can't help but be inefficient because its very structure is one of conflict of interest. Those who must live and work outside the structures of government quickly see that there is no means of self improvement, there is no reward for innovation so they give up trying. The entire system eventually and inevitably collapses because the the inefficiencies become self consuming. The only efficiency and communism was one of how well the lower level bureaucrat could kiss the backsides of the next higher level bureaucrat in hopes of getting a larger slice of the graft and or promotion. The drawback being that the closer to the top on got the greater the danger of exposure to the system of infighting where various forms of murder became the standard modus operendi. I think we just call it "crony capitalism".

Russell (106) said...

Efficiency is easy to judge, are you turning a profit in a free(ish) market? No? You aren't efficient.

You are? Good! Keep it up.

Or, just as value is subjective, so too is efficiency, as Fran said. And it's a category error to compare two subjective things. Might as well compare your like of ice cream to my disdain of corporate buzzwords to be used as an economic bellwether.

Unknown said...

Efficiency is what a free market delivers. That's a non-subjective definition. Efficiency generally gives us sufficient surplus to purchase justice or fairness, if we want.

Anything less than a free market delivers systematic unfairness, and not enough surplus to purchase fairness.

Communism is deliberately unfair, and delivers no surplus at all. Fortunately, fairness is not the point of Communism, so it doesn't matter that there isn't enough surplus to purchase it.

Francis W. Porretto said...

Wrong, "Unknown." That's not a definition at all. A definition must have:
1. A genus: a category that encloses the category being defined;
2. A differentia: a statement of what characteristics distinguish items in the category being defined from the enclosing category.

You have provided neither of those things.

Russell (106) said...

Is it more efficient for Apple to make iPhones, or Google to make Androids? How about X number of iPhones over Y number of iPads?

No, efficiency in this case can only be decided by the market, and the market is driven by people seeking to fulfill their needs and wants, and those are always subjective.

Since the market keeps buying iPhones, iPads, and Androids by the truckload, Apple and Google are being subjectively efficient.

If efficiency can be applied to business it would be on the assembly line. Does process A produce widgets more efficiently than process B? It says nothing about the efficiency of supply the widgets to the market.

Communism replaces the workings of the market, personal choice in action, and replaces it with bureaucracy, or no personal choice. Even if the bureaucracy had dialed in the potential wants and needs of people, it still would deny them personal choice.

Fairness is subjective, and we're back to compare ice cream flavors to corporate bingo.

Justice is a value, it can't be purchased as such.