GuidoWorld

Economic Myths Part 2

July 7, 2007 on 9:04 pm | In General |

Let’s return to the example of a manufacturer who produces a larger product such as a washing machine. In assembly line production, the hallmark of manufacturing, sales volume is the major factor in being able to make a profit.

If when all expenses such as labor and materials are totaled he finds that each machine will cost him $250 to make, he will then calculate his profit margin. If he decides that the marketplace will accept a 10% profit base he will sell his machines for $275 to retail stores who will again add their profit to the price before selling it to the consumer.

The $25 profit per machine could be used as capital to fund expansion of his business. After selling thousands of washing machines he would be in find shape to open new plants and possibly produce other major appliances. In text book fashion this is the essence of capitalism in which profits (capital) are thrown back into the economy to fuel progress and the raising of the standard of life for all citizens.

Yet, in reality this would not be wealth for the manufacturer. The wealth portion comes from the money that is taken off the table and horded. Some would say that his expanding ownership of more and more factories is wealth. And in many ways it is, but in many other ways it is only potential wealth. Real wealth comes when his standard of living rises faster than his workers or the bulk of society.

Now the workers at these plants are not really partaking in the profit of the business, for their pay is but one component of the overhead the owner takes in consideration when calculating his profit margin. If the workers were the one’s making a profit, the owner would be losing money and the business would fold.

In the real world an owner’s profit serves two purposes. One it allows him to invest a portion of his profits (surplus funds) into expanding his business and thereby becoming a leader in his industry. Two, it allows him to buy more and more creature comforts and invest in areas outside of his business which help procure and define his wealth.

We listed in the previous blog the areas of overhead for the typical business. The more overhead one has, the harder it is to keep the costs of the product down and therefore the harder it is to make a sustainable profit.

Any owner who pays his employees more than his competitors is fighting an uphill battle. Though many people will be able to sight an example or two where a tycoon has paid his employees more than his competitors, the vast majority of businesses have succeeded by using slave labor or finding a way to pay their employees less than their competitors. In many areas of our society the business leaders have successfully convinced the public that they are the good guys and that the worker advocates and unions are inherently bad and corrupt. This along with many other propaganda techniques and strong arm tactics have allowed businesses to foster worker loyalty while having their pay lag behind their escalating profit scale.

One of the strongest myths in our culture is that capitalism and the profit motive are the central, if not sole, reasons that the quality of life and standard of living have improved in industrial societies. Many would go so far as to say that any improvement in the standard of living is impossible without the profit motive.

Who would go thru all the work and effort to make the world a better place if there was no personal payoff? If one didn’t have to work to survive, why would anyone do anything?

If one looks back at many of the discoveries and inventions which had the most positive impact on our society you will find many of them were done cheaply and not for monetary gain. I think it is very unfair to human nature to say that people would not try to improve the quality of life or the standard of living without an economic carrot.

Why wouldn’t a person want to increase the amount of pleasure in their life or the quality of their life if they had the opportunity to do so? Is charity and self-sacrifice no longer a motivator of human behavior? Doesn’t the profit motive often breed selfishness and reduce one’s desire to improve the lot of others?

Many people do things because they find it rewarding or fulfilling and some even find doing these things for money repugnant. There are many people who have hobbies that involve craftsmanship or artistic talent which they could do for money, but don’t. They instead like to give the fruits of their labor as gifts or just do it for their own enjoyment. There are literally millions of people who spend countless hours making art or providing services for others without expecting a penny for their time.

I must admit that greed is a motivator and that many people are basically selfish and self-serving. I also admit that profits have played a positive role in funding research which has led to many important discoveries and inventions. In the early years of industrial expansion one can sight many medical and social improvements which would not have been possible without industrial funds and incentives.

Yet, as time goes on and the power and control of business increases with their wealth, one can find many examples of how industries have stifled or destroyed discoveries and technological inventions which could have improved the quality of life.

It is ridiculous to think that a business would not protect their interests, and the interests of their stock holders. In modern international law it is often illegal not to take any action which protects the maximum profit growth of the corporation. Therefore, if a corporation had the ability to suppress or destroy a new technology that harmed or could even destroy their profit growth than it is a business moral imperative to do so.

Years ago when the electric trolley car and electric railroads looked to be the wave of the future it took a mighty effort by the automobile, oil and construction lobbies to kill the budding industry. The oil industry in particular bought and shelved the technology while popularizing creative reasons why the electric technology was inefficient and impractical.

In todays medical universe we see the war for profits fought on many fronts. The AMA, insurance companies and drug conglomerates all are protecting their interests often at the expense of the consumer. Just as the recycling industry is dependent on increased waste and inefficiency so are the above interests dependent on sickness and tending to symptoms rather than cure. Issues such as universal health care and cheap prescription medication are just two of the fronts the battle is being waged.

What would a pharmaceutical company do if someone found a true cure for all cancers, or found a way to prevent all heart disease? Would they produce it if it threatened their very existence, or would they suppress it? Sure a cure for a minor disease would be good for business, but what about real cure and prevention is it something that a profit based economy can afford?

Let’s take a look at another myth of our capitalistic system and that is the law of supply and demand. Just as was the case in the myth of the profit motive, there is some truth to the law of supply and demand, but there is much where this so called rule does not apply.

If the law of supply and demand were a law then we would expect everything in society to follow this rule. We would expect that the largest profits be made in areas where there is a high demand and a short supply. We would not see a situation where an ample supply of unimportant things would be highly lucrative.

In our society things which we need seldom have a high profit scale. Food and clothing are two of our basic needs and neither has been a business in which high profit margins dominate. In fact the highest profit margins are made in luxury foods or in highly processed ones which have little nutritive value. Even at times when the food supply is low, there still is little room for profit. The cost of food increases at those times, but the decrease in volume of sales makes profits stay the same or even shrink during lean times.

In our society things that are truly needed often have some of the smallest profit margins. As grains became more vital to our total diet, being used for oils, spreads, sweeteners and additives in thousands of products plus their traditional use in cereals and breads the profit margin for them came down even as their demand skyrocketed. Individual farmers failed and commercial farms took over.

The general cost of produce and grains is very low when you consider their overhead. You have the cost of the seed, the machinery used to plant and harvest, the cost of watering, all additional labor and the cost of transportation, and despite this you pay less than a dollar a pound for many goods.

In our society it seems that the more essential something is, the cheaper it costs. This seems to defy the law of supply and demand. Instead it seems to bear out the law of profit. If people spent their money on necessities they would have nothing left to use on the thousands of generally useless things which make our consumer culture possible. If people spent the bulk of their money on necessities their would be none left over to spend on things which give us the impression that we have economic progress or a higher standard of living.

People spend gobs of money on recreation, vacations, gifts, entertainment and art. None of which are in short supply or are a real need. Top professional athletes, entertainers, artists and authors make quite a bit of money while the rest of their ilk make almost nothing. Supply and demand in these areas is highly subjective and therefore proof is hard to come by. Logic says that the highest demand should be in areas where need is present, and none of the above professions are mentioned when one talks of the fight for survival. Many artists will talk of how the bulk of the money is made by middle men and promoters and the artists themselves bank relatively little.

I personally have worked in human service agencies in which the people who work with the clients and actually provide services work numerous hours under highly stressful conditions and make far less than their supervisors. These service providers are truly what is needed, there is a high demand for their services. The people in human services who make decent money are the administrators and public relations people at the larger agencies. The rational for this, is that the administrators have more responsibility and usually are older and more educated than the line staff.Though this often is true, the fact remains that they are not as essential or in as high of demand. No one is clamoring for more bureaucrats and feeling that their is a shortage of people in these positions.

In the next post I hope to talk more on how our system creates and is dependent on increased disparity between the profiteers and the consumers.