A Critique of Profit: and other economic issues

Bailouts, corporate greed and American towns that have veritably outlived their usefulness have been at the forefront of current news. But, profit and motive, important variables in these three phenomena, have received much less attention. Who controls profit and why? Why are we shackled to a paradigm unquestionably dedicated to continuous commodity production and what are the effects of this framework?

At its core, it is the logic of unfettered capitalism that has led to the existence of corporations and their charter to blindly chase methods of externalization: that is, the externalization of cost in the pursuit of ever-increasing profits. By definition, this can lead to short-term decision-making (i.e. thinking and acting solely for the business cycle) and can materialize in numerous forms. We see it when companies dump the toxic byproducts of local production in our rivers (or export them to the backyard of another country), put off ‘costly’ factory upgrades that would otherwise reduce environmental damage, devise accounting tricks to hide financial misdeeds, or procure cheaper workforces in less regulated markets (thereby contributing to the detriment of local communities, the exploitation of foreign workers and the debasing of those worker’s environments).

But, when all these short-term decisions accumulate and crisis percolates, the harm is never evenly distributed and the response never managed with any sense of distributed damage control, or economic fairness. Instead, these situations tend to emulate a scene played out on the Titanic, where inhabitants of the lower decks are locked into their position, left to drown with the flawed ship while the ‘higher class’ can use its money, power and influence to ameliorate their situation.

Honing our sights on cheap workforce procurement¹, one of the favorite externalization methods of the day, it is easy to see the extent of the method’s destructive power and to spot the fallacies in the arguments protecting the practice. Firstly, when workers outside of a home economy² are attached to the economy of a certain country, an umbilical cord is created between the two. In this situation the nourishment that would have benefited the proverbial main street of the home country are rerouted to an outside entity. Citizens find themselves out of work due to this labor exportation and in many cases end up with new jobs that pay less. It is almost needless to say that the situation is far worse if one is part of a community nearly exclusively employed by the said industry. And in these cases it is clear that communities, not nameless individuals are the final victims of cheap workforce procurement.

Yet, the proponents of what is dubbed ‘free trade’ seem to miss these obvious points. Instead they state that without the free flow of the market (i.e. including foreign labor procurement at the expense of local communities and national cohesion), prices of goods will increase. And in the same breath these proponents admit that wages are higher before these jobs are exported (precisely the reason why the jobs are being exported in the first place). But, if wages are higher, goods cost more and communities are not destroyed when labor exportation is not practiced, while wages are lower (if one can even find a job), goods cost less and communities are ruined when labor exportation is practiced wouldn’t we want to embrace the first scenario?

Unfortunately, the second scenario is the one in which the United States finds itself today. Because of America’s ideological uneasiness with ‘protectionism’, Rome, New York is no longer the Copper City, Detroit, Michigan no longer a thriving auto-town, Wilmington, Ohio no longer a city living on international package shipments and the list goes on.

Yet, despite the fact that the destruction of these communities were caused by the relentless logic of externalization by auto companies and others, when the time comes, the resuscitation efforts enacted go straight to the players who engendered the situation. And to add insult to injury, the funds given never seem to have provisions either aimed at quelling the community disruption or assuring the prevention of reoccurrence. In short, there are no ‘strings attached’.

Although there are many ways of fixing this issue such as ‘attaching strings’ to the delivery of the resuscitating funds or directing the revival efforts at the representatives of the home economy (the workers), these methods do not plug the gap in the floor that we originally fell through. They attempt to gently fix a systemic problem without truly addressing the system that inherently created it. By going down the route of ‘throwing money at the problem’ we may temporarily climb out of our predicament, but there is nothing to stop us from falling back into it in the future.

So what could be done? Let us take a look at some solutions that break with our current paradigm of concentrated capital and endless growth – first, by setting our sights at our concepts of profit ownership.

In the traditional model of business, an individual or group in the ‘real economy’ begins a venture with raw materials, laborers and machinery. These ingredients react to form a new compound – a commodity. The commodity is then sold on the open market for an agreed price and funds are received. Now this gross income can be used to pay for the raw materials, labor and machinery (including upkeep costs) used in the creation of the said commodity and what is left over is the much awaited profit³. At this point the principals of the business can begin the cycle anew. Traditionally, arguments surrounding this system were based on the fact that the workers had no say in the system, were no better than the machinery (or the raw materials) and could in effect be paid as little as it took for them to return to their job. But, although these observations are valid, our predicament forces us to focus on another issue. The fact of the matter is that the decision to begin the cycle anew is just that, a decision. And this decision is not dependent on the say so of the workers, who, at the bottom of the ladder, have the most to lose. They are virtually held hostage by the system⁴. If the principal(s) do not renew the cycle, the workers are left out in the dark to fend for themselves and variants of this theme have played itself out all over the country.

If the workers are so vulnerable, how should this profit be handled? It is at this point, when this question is earnestly asked, that the possibilities open up. Living wages could be realized with this profit, community and social safety networks could be funded, or a mechanism where workers were given more control of the use of the profit could be initiated. The bottom line is that a more equitable balance must be achieved: it is not the case that the principals should reap no reward for their endeavor, but it is also not the case that the people who make the endeavor possible should be marginalized and merely compensated at a rate that flirts with bare subsistence.

Beside the question of profit control is the question of motive. Why is the practice of continually creating commodities of all stripes so essential to the economic system that in and of itself has been created to reinforce this practice? By the talk of traditional economists one quickly comes away with the feeling that ‘growth’ is vital, that without endless growth at multiple percentage points per year, the universe will cease to exist. Here the words of Albert Bartlett should disruptively take center stage, crashing the hedonistic party of unrelenting ‘growth’: The greatest shortcoming of the human race is our inability to understand the exponential function.
Simply put, when a system steadily grows at a fixed percentage and the new, larger system grows at that same fixed rate, we are in the classic realm of exponential growth. And, at a reliable rate, this system will continually double in size. For example, at seven percent growth per year, the system in question will double its size roughly every 10 years.

But what does this mean for standard economics? Behind the growth numbers is the real economy and behind the real economy are real, physical, tangible resources. Resources that are transmuted into the commodities sold by the polluting factories, eventually breaking, tearing or malfunctioning according to their planned obsolescence and finally ending their life-cycle in a dump. This is what grows exponentially and doubles at a reliable rate when the standard model functions as planned. But, our societies and environment can’t function in this manner forever.

¹ Which in effect includes two phenomenon a) companies who export their labor forces to reduce cost and b) companies who find themselves unable to compete as a result of other firms flooding the market with cheap goods, enabled by their decision to outsource their own labor.

² By home economy we mean those who broadly reap the benefits of economic activity as opposed to the upper echelons of the economic order – or simply, ‘main street’ as the parroting media outlets like to put it.

³ Depending on whether the payment system is based on credit or pre-payment come of these costs of venture can be incurred either before or after commodity production and sale.

⁴ It could be said that the strength of the grip on the workers by the mechanism is positively correlated to the amount of options the worker has. With this in mind, a town with no other industry inhabited by people who have no real chance of looking for work outside of town (due to lack of capital, contacts, education, etc.) could be said to be held totally hostage.

9 thoughts on “A Critique of Profit: and other economic issues

  1. “Because of America’s ideological uneasiness with ‘protectionism’, …”

    Correlation is not the same thing as causation.

  2. True, but we shouldn’t forget that correlation is a necessary condition for causation.

    Regardless, the point here is to generate thought on the subject…

    I’d love to see some thinking regarding the role of profit in light of the fragility of workers, the logic of endless growth, environmental impacts due to continual growth (i.e. capitalist driven consumerism), etc.

  3. “Prediction is hard especially when it’s of the future.”
    -Niels Bohr

    In the context of what this discussion, that should be interpreted to be mean that we don’t know what innovations the future will hold. Don’t fall into the same trap as Karl Marx; technology will not remain stagnant.

    On another note, the existence of businesses do not lead, inexorably, to short term thinking. Capitalism generally thought to be founded on creative destruction. In such an environment only the companies that think long term will end up surviving. The current banking crisis exists because the biggest banks were thinking short term; however, I believe that they were doing so because of the tacit agreement with the US government that they would get assistance if they got into trouble. But there are smaller banks that have made rational decisions and have not needed to accept funds from the government. So what would happen if the government would allow the worst banks to fail and to assist the banks that are in better condition to pick up the pieces? That, in my opinion, would be the best course of action to mold a long term mind set for these institutions and the economic environment as a whole.

    …but maybe I’m taking some of what you wrote out of context 😉

  4. …I'd also like to point out that the version of economics that you've portrayed seems to be right out of an 19th century economics book.

    I'll give you an example: I went to H&R Block and (let's assume) I paid them to do my taxes (I actually left once I realized that I would be better off doing it myself). Voila! I've increased GDP by some infinitesimal amount! It's didn't require a factory or materials. The same goes for the security guard's (e.g. modern day scare crow) who try to scare off potential robbers. That's not to say that either of these things are necessarily "beneficial to society". The fact that we actually need security guards is evidence of deeper problems in society (which always have and will exist in my opinion).

    The point, however, is that many people are employed in areas that do not require the same capital intensive structure of the 19th century.

    On the opposite side of that coin lies the question, 'Why doesn't the US produce more within the US?' That is a complicated question to answer. In part, however, it's because there isn't much of a financial incentive to do so. What could be done to change that? Corporations that are designated in the US are keeping upwards of $1 billion in foreign assets in bank accounts outside of the US. They do this to avoid having to pay taxes on it when they bring it into the US. The result is that it is much more advantageous to invest that capital in other parts of the world.

    As part of the stimulus, why don't we allow that money to come back into the US at a low tax rate (maybe 5%) if and only if it is invested in long term projects within the United States? That would go a long way to revive the economy and it would wouldn't leave us with the humongous budget deficit that effectively now have.

  5. I agree with all your thoughts you said in your post, especially at the beggining of your article., this info is very valuable. Keep up the good work! You’ve got +1 more reader of your blog:) Isabella.

  6. Awesomeblog you write. I’m happy that I came here because I have a chance to finally understand what’s going on in the economy. Important for me especially after the crisis. Crop to know how it all works, so little provision for the future.

  7. This is a great endeavor, Jacques. Very commendable. True capitalism is not practice in the US at this time, in my opinion. When government interfere and even attempt to monitor, manage or control private enterprises, it is not capitalism. It is a mixed enterprise system and will not yield sustainable economic utility because, the government participation create bias and distort the profit motives and capital will go where its return is the highest. Division of labor work best when it is guided by self interest not by government regulations. All the best.

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