Profit as a measure of efficiency
Important economic theory of the day:
Profit margins in a capitalist system are an excellent measure of how efficiently the system is working - or more accurately, how IN-efficiently it is working.
Profit at its most basic is the difference between the cost to produce a good, and the price at which you sell it. One of the primary tenets of capitalist theory is that in any highly profitable enterprise, competition should swiftly arise, threatening either to steal away employees (by paying better wages) or steal away market share (by lowering prices). Either of these activities improves the competitive standing of the company, but reduces profit margins.
A company that can improve the efficiency of its operations can afford to undercut its competition and still make a decent profit - until other competitors follow suit or find yet another method of undercutting.
In theory all this competitive operation should reduce the profit margins in any given industry to a slim share, representing a vibrantly competitive and EFFICIENT market that serves consumers and thus society as a whole in a very productive fashion.
So some very 'efficient' industries:
- Airlines (having a hard time scraping by, constantly stabbing each other in the back - perfect)
- Movie rental (big players being wiped out left and right by newcomers - perfect)
And some clearly very 'IN-efficient' industries:
- Software (major OS developers and game publishers are extremely profitable year after year with little change in the space, smaller entrants are routinely crushed or absorbed without effort)
- Banking and Finance (these industries could not possibly be less productive or more profitable - they represent one of the most horrific breakdowns of capitalist principle you could find)
- Music (not the individual artists of course, but again the major publishers have been immovably profitable for decades indicating a severe market force breakdown)
I'm not going to bother to create any kind of exhaustive list, but try to think of it this way:
Whenever you see a news article or announcement about how such-and-such corporation has pulled its Xth year of consecutive record profits or similar announcements, think to yourself why the system ISN'T working there - because for every business like that, there are a hundred start ups that can't move into that space with new innovations and ideas, or lower prices, in order to make your life better.
If the government really wanted to find out why our system is teetering, all it would have to do is examine the top 10 most profitable corporations each year and ask itself 'Is something going wrong here?' - because according to Adam Smith, something is.
Profit margins in a capitalist system are an excellent measure of how efficiently the system is working - or more accurately, how IN-efficiently it is working.
Profit at its most basic is the difference between the cost to produce a good, and the price at which you sell it. One of the primary tenets of capitalist theory is that in any highly profitable enterprise, competition should swiftly arise, threatening either to steal away employees (by paying better wages) or steal away market share (by lowering prices). Either of these activities improves the competitive standing of the company, but reduces profit margins.
A company that can improve the efficiency of its operations can afford to undercut its competition and still make a decent profit - until other competitors follow suit or find yet another method of undercutting.
In theory all this competitive operation should reduce the profit margins in any given industry to a slim share, representing a vibrantly competitive and EFFICIENT market that serves consumers and thus society as a whole in a very productive fashion.
So some very 'efficient' industries:
- Airlines (having a hard time scraping by, constantly stabbing each other in the back - perfect)
- Movie rental (big players being wiped out left and right by newcomers - perfect)
And some clearly very 'IN-efficient' industries:
- Software (major OS developers and game publishers are extremely profitable year after year with little change in the space, smaller entrants are routinely crushed or absorbed without effort)
- Banking and Finance (these industries could not possibly be less productive or more profitable - they represent one of the most horrific breakdowns of capitalist principle you could find)
- Music (not the individual artists of course, but again the major publishers have been immovably profitable for decades indicating a severe market force breakdown)
I'm not going to bother to create any kind of exhaustive list, but try to think of it this way:
Whenever you see a news article or announcement about how such-and-such corporation has pulled its Xth year of consecutive record profits or similar announcements, think to yourself why the system ISN'T working there - because for every business like that, there are a hundred start ups that can't move into that space with new innovations and ideas, or lower prices, in order to make your life better.
If the government really wanted to find out why our system is teetering, all it would have to do is examine the top 10 most profitable corporations each year and ask itself 'Is something going wrong here?' - because according to Adam Smith, something is.