Thursday, 28 April 2022

Profit versus prosperity

The  goal of corporations is to maximise profits for investors.

This concept has directed and justified the behaviour of corporations for centuries. But is it sensible, is it right, is it useful?


Profit is a holy cow of the Capitalist economic system. It is the fuel that drives the market engine. 

Capitalism focuses on the creation and accumulation of capital through profits derived from trade. The Free Market System focuses on the freedom of individuals to trade with each other. Both favour private property, open competition, and minimal regulation, and rely on the price mechanism.


Profits provide the incentive for investment. Non-shareholders are specifically excluded from a share of profits. Shareholders control corporations. They have a perverse incentive to maximise the profits which accrue only to them, through the appointment of managers whose main aim is to maximise profits. Not surprisingly, these perverse incentives lead to perverse outcomes.


The 21st century has seen the rise of several mega-corporations with unprecedented control over  health, energy, the flow of information, money and goods. These corporations have been very profitable, and have made many investors stupendously rich. They tend to make large annual profits. But have they increased the sum total of human prosperity? In their quest for profit, do they undertake evil acts to the detriment of society? How do you reconcile the freedom to trade with accountability for the consequences of that trade?


Merck discouraged the use of Ivermectin, an effective treatment for Covid but no longer profitable to Merck, in favour of high profit drugs such as Molnupiravir and Remdesivir, with known serious side-effects. Pfizer aggressively promoted their highly profitable mRNA vaccine, despite dangerous reports from their testing process.There are thousands of similar stories.


Most companies and corporations do not make high profits. The average profit margin  for American corporations is around 5%, for those that make any profit at all. Corporations making low profits may be even more desperate to increase profits than wealthier ones. However, I would contend that companies make high profits mostly because of 3 factors

  1. Reduced competition, possibly through monopolistic practices (Banks, oil companies)

  2. Regulatory capture - they manipulate politicians and legislatures to their advantage (Pharmaceutical companies)

  3. Better products and processes (Tesla and Apple)


What can be done to reduce the perverse incentives of shareholder profit? In most countries high wealth is heavily taxed, but the richest are most adept at avoiding taxes. In many countries, the rich provide considerable philanthropy, mostly aimed at the poor of third world countries. Wealth tends to be distributed and reduced across generations of the same family, but not if the family is careful. I have no quarrel with the acquisition of wealth through legal means, only with the perverse incentives that the profit motive gives rise to.


I propose a new goal for corporations. It is based in part  on ideas suggested by Klaus Schwab in his recently published book “Stakeholder Capitalism”. 


The  goal of corporations is to maximise shareholders.


Annual profits above a specific percentage (say 10%) would be used to buy and distribute shares to stakeholders in the corporation. Stakeholders are individuals whose actions contribute to the corporate profit, but do not receive that profit. This would be employees, suppliers, customers, agents, retirees, charities. A company would establish a register of stakeholders, just like the shareholders register. Each year an allocation of shares would be made to these stakeholders funded by the profit in excess of 10%. Various criteria for allocation would be established, such as years of service, previous receipts, age, etc. 


I believe that the incentive to accumulate excessive profit for the benefit of just a few would be diluted by this approach. I believe that an increase  in shareholders amongst stakeholders would be beneficial to the corporation, as more individuals would be motivated by the success of the corporation. I believe this would be beneficial to the prosperity of the community in which the corporation operates. Like Maggie Thatcher, I believe a share-owning population is superior to a population dependent on government largesse.


How would this new goal be implemented? While some may feel tempted to enact laws to enforce this approach, I believe that would be counter-productive.  Let individual corporations freely choose to adopt this approach because it is the right thing to do, because it may result in increased revenue, and because of peer pressure from the public. For example, many corporations adopt counter-productive policies for the alleviation of global warming, because of the public pressure to do so.


Let us remove the excuse of maximising profits from our business language.


Appendix

Definitions

  1. The  goal of corporations is to maximise profits (return on investments) for investors.

    1. Corporation

      1. a legal business entity that is owned by its shareholder(s). It possesses many of the same rights as an individual. The corporation is liable for the actions and finances of the business – the shareholders are not.

    2. Maximise

      1. Make as large as possible.

    3. Profits

      1. the excess of returns over expenditure, after taxation

    4. Investors

      1. Individuals or corporations that make money available to a corporation in expectation of a profit.


  1. What Is profit (Return On Investment)?

    1. Getting more than you put in?

      1. Is this physically possible? Seems to contradict 1st law of thermodynamics (Energy cannot be created or destroyed).

      2. Is this morally acceptable?

      3. Financially, where does the increase in value of investment come from? Is new money created, or is it taken from a 3rd party.

    2. Re-arranging stuff to be more efficient or useful (intellectual investment).

    3. Growing stuff

      1. Turning seed and soil into food.

      2. Mixing labour with nature to achieve growth.

  2. What is the goal of most individuals? To maximise return on investment? To survive and reproduce? To make a mark on history?  Examples

    1. Children

  1. if you invest resources in children, they will pay back your investment in old age (perhaps)

  1. Experiences

    1. no physical component, ephemeral

    2. hard to measure, hard to quantify

  2. Friends

    1. Investing in friends for profit is regarded negatively

  3. Life partners

    1. While desirable, probably not profitable

  4. Financial investments

    1. Profitable investments provide satisfaction, security, comfort, retirement

    2. Only 10% appear to achieve this goal. (Independent retirement stats)

    3. Dependent on previous successful investments, inheritance, chance

    4. Subject to risk of loss

  5. Physical investments

    1. Who dies with the most toys wins

    2. Transitory

    3. Useful - housing, transport, food, entertainment

The role of profits

  1. Profits provide the incentive for investment

  2. Investment is linked to growth

  3. Growth is linked to increase in prosperity (Happiness and contentment arising from financial success) for shareholders

    1. Growth may occur at the expense of non-shareholders

    2. The search for growth may exceed good judgement and ethical limits

      1. Weapons industry stimulating demand by promoting conflicts

      2. Pharmaceutical industry stimulating demand for dodgy drugs

      3. Advertising industry stimulating fake demand for non-useful products

      4. Banking industry selling known dodgy assets

      5. Industries suppressing competitive inventions or patents

  4. Alternatives to profit motive

    1. Stakeholder empowerment

    2. Regulation

    3. Taxation

    4. Public shaming

    5. Non-profits, who invariably get their funding from for-profit companies

Questions and observations

  1. With massive reductions in competition in many industries due to consolidation and mergers, the US economy has become profit inefficient, with record profits occurring in recent years.[3] This creates a deadweight loss to the economy.

  2. Critics of the profit motive contend that companies disregard morals or public safety in the pursuit of profits

  3. Competition is the key tool by which markets overcome the individual firm's profit maximization incentive. In the absence of meaningful competition, profit may be unrestricted

  4. Profit is the reward for business success.

  5. is the quest for profit a perverse incentive with a frequent bad outcome? Should laissez-faire apply? Do people have a right to spend their money as they see fit? Corporations do not use coercion to achieve profit. They engage in willing buyer/willing seller transactions.Do corporations have no option but to maximise profits? If they don’t make a profit, they go out of business. Is there a model which would provide reasonable alternatives to the maximise profits paradigm.

  6. As an individual, is your goal to maximise profits? Is this not akin to maximising food consumption, or sexual activity, or wealth accumulation. Does wealth accumulation justify lying, shady practices, harm to others. Why then do we give corporations a free pass for profit.






Sunday, 10 April 2022

Just because it is written doesn’t mean it's right

We have a disastrous tendency to think that written laws have some magical air of authority, of wisdom, of special insight that elevates them above the mere opinions of their authors. Some subset of a subset of pollyannas have a cathartic collective experience on a committee, reel off a series of mindless misanthropic motions, and suddenly we have a law we must obey? Include me out.


Why do people  I did not vote for, whom I do not like or respect, who happen to have received an arbitrary number of votes in an election I did not engage in, now get to tell me what to do, with all the force of law?  Well, that’s democracy, you say. It's the best we've got, you say. It's how  we’ve always done it. Some must suffer so that all may prosper.  What bollocks!


What regulations does your local supermarket enforce upon you? Only one, really, and it's unwritten. You must pay us for stuff you take at the price we advertise. As Walmart demonstrates, you can pretty much wear what you like. You can take as long as you like during opening hours. You don’t have to complete any forms, submit any documentation, speak to any manager, in order to complete your shopping experience. And they go to extraordinary lengths to minimise the time you stand in queues


This regime of regulations, this riot of rules reached its peak during the recent Covid insanity. Petty health officials spewed forth a cascade of life threatening rules, unscientific, impractical, and deeply contemptuous of citizens' rights.  But because they were written down, somewhere, because they were “officially” approved, because they came with draconian “legal” threats, we rolled over in our millions with barely a “baaah”. 


“But a society without rules would be anarchy,” I hear  you bleat. “We must have road rules to prevent chaos. People would die!” The fact that people do die, in their millions, despite the many road rules, should give a smart person pause for thought. Perhaps there are better ways to manage the roads than by adding endless layers of rules? One recommendation (not even a rule), practised in enlightened countries all over the world, reduces road accidents dramatically - AVOID COLLISIONS. 


Rules, even when written in very big letters on very expensive paper, do not guarantee compliance. Compliance is a cousin of consent. If I think your rules are stupid, if you force them on me, I will not comply with them, even when they are occasionally sensible. I will not consent. If you want my cooperation, convert your rules to suggestions. I might consider them, if they make sense. As opposed to a knee jerk rejection of your compulsion, I might even recommend them to others.


Ninety percent of the rules you need for life you learnt in kindergarten. Don’t hit others. Don’t take their stuff. Be nice. Be wary of strangers. Have fun. 


If you wish to see the 4 rules that I recommend, have a look at the Individualist Manifesto at www.individualist.one.






Profit versus prosperity

The  goal of corporations is to maximise profits for investors. This concept has directed and justified the behaviour of corporations for ce...