Profit

Where do we believe it comes from? Where does it really come from?

Draft: December 2012

 

Where Does Profit Come From?

In a perfect libertarian economy each person profits off of his own work. A person earns his wages through personal work, risks taken, creativity and effort. Many people imagine that America has this type of economy. Many imagine that the wealthy gained their wealth through their own costs, risks, efforts, and creativity. But should be trust this picture to be accurate most of the time?

In reality, as well as capitalist theory, a person can maximize his profit by passing all the costs and risks to others while taking all the profit and benefits for himself.

At the same time, he must prevent others from passing costs and risks to him or taking profit from him. The highest profit occurs when a person takes 100% of the benefits while accepting 0% of the costs and risks. This is known as zero-sum gain.

This raises some obvious questions. Does zero-sum happen? How does it happen? And what can prevent it? Do we see evidence that this happens with specific rich individuals or highly profitable companies?

 

In the diagram to the left, the red arrow shows the 1st party taking 100% of the gains while the 2nd party contributes 20% of the costs and the community contributes 80% of the costs. The green arrow shows the 1st party taking 100% of the gains while the 2nd party contributes 60% and the community contributes 40% of the costs.

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How can it happen?

To determine how likely zero-sum gain can be we can break the discussion into two parts. First, we will look at how profit can be pulled from others to one's self. Second, well look at methods by which costs can be passed from one's self on to others.

First, we list various methods by which profit can be pulled from one individual or group to another.

Coercion

  • Theft: an individual takes wealth by force
  • Resource wars / pillaging: a country or army takes another people's wealth by force
  • Leveraged take over: a large company takes a smaller company's wealth by manipulating the legal system
  • Status leveraging: an individual takes advantage of his position to accumulate a large gain by asking a large number of subordinates to accept small losses
  • Rapid consumption of non-renewable or limited resources

Incomplete & misleading information

  • False claims & advertising: buyers accept a higher cost believing the product to be of greater value than reasonable
  • Status symbols (the Nike effect): buyers spend more than reasonable believing they will gain status by doing so
  • Unknown quantities: buyers spend more than they should not knowing the inherent risks or limits of the product

Second, we look at how a person or company might pass costs and risks to others. As with taking , passing costs to others tends to result primarily from two factors, coercion and incomplete information. Passing costs to others occurs in three primary forms, financial costs, quality of life costs, and environmental costs (destruction of resources.) Let's again, look at major examples.

Costs passed primarily through coercion

  • Conscription / draft
  • Government subsidies to specific industries or companies
  • "too big to fail" bailouts
  • Downsizings and wage concessions to cover costs of actions not involving the workers

Costs passed primarily through incomplete or misleading information

  • Investment schemes - e.g.: pyramid schemes
  • Insurance of intentionally risky behaviors - e.g.: credit default swaps
  • Borrow and not pay back - e.g.: close the company with unpaid debts
  • Indirect subsidies - e.g.: highways benefit big box stores over in-town stores
  • Uncompensated labor health risks
  • Uncompensated labor
  • Pollution & environmental damage (typ.: deregulation)
    • Those downstream absorb the losses
    • Future generations absorb the losses

Does it happen in America?

The first thing we should notice about the lists above is that we have seen all of them in the news and in popular discussions. All of these zero-sum elements are regular features in the modern American economy. We see recurring news reports about wealthy Americans and large corporations that owe much of their wealth to these zero-sum methods. Thus, zero-sum methods actually make up a significant part of our economy.

What Can Prevent it?

Humanity has never created a sure-fire means of preventing zero-sum manipulation. No single method exits that is complete in itself. But we can look at the various methods that do exist and discuss their strengths and short-comings.

  • Morality & ethics
  • Laws and regulations
  • externalities taxes
  • Lawsuits
  • Free market feedback

Each of these methods is incomplete on its own. Morality is only as successful as society's ability to make all of its citizens moral. Regulations can be too specific and costly to implement. The values of externalities can be hard to estimate. Lawsuits are slow and costly and only occur after the damage has already been done. Legal systems tend to favor the powerful and privileged. Free markets tend to reinforce short-term gain and ignore long term costs.
None of these methods alone will prevent socialization of costs. All of these methods together will still leave society with privatized profit resulting from socialized costs. This creates major challenges for the sustainability of civilization. It also creates major challenges for individuals attempting to live ethical yet profitable lives.

Summation

We tend to see zero-sum gains as immoral as we recognize the impact on the environment and other humans. We use charged language to describe zero-sum gain: theft, socialism, gambling, and tragedy of the commons. Yet, it is easy to show that large portions of our economic system are derived from zero-sum gain. We can also see that no known system can completely remove zero-sum profiteering from our economic system. In the long-term large zero-sum elements within an economy are unsustainable - particularly large environmental impacts and large deficits.
We need methods to evaluate what part of the economy actually results from zero-sum transfers. We need methods to determine who and what is being impacted. Methods of identifying and eliminating major large scale long-term are a necessity for our civilization to survive. This site proposes a few.

Since maximum profit occurs when costs are passed to others and gains are taken from others, we would be wise to examine situations where unusually large profits exist to check for zero-sum gains.

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