Wednesday, September 01, 2010

Profit a social construct as well

Why? Because despite what people say about The Market, profit is always a choice by companies. Profit is simply the money you make above and beyond costs, and the way you make it is by pricing your products higher than what they cost to produce. Granted, when you do this you face competitors who are willing to take less profits in order to reduce prices and sell more than you, which in turn pressures you to reduce the amount of profit you make off of each item you sell, but companies still choose to make profit and in fact to try to make as much profit as possible, which devolves into a combination of profit in through a markup in prices and a high volume of sale. One of the classic question in economics, or at least what used to be one of the classic questions, is why exactly profit exists in a competitive market? If a market is perfectly competitive, with lots of players, the amount of markup that a company can afford to put on their products is reduced to zero. In practice, it's 'marginal utility' that determines how low profits go, which means it's as low as it can go before people are willing to throw in the towel and not participate in the industry anymore. As you go from perfectly competitive to less and less competitive there's more and more opportunity for companies to maximize profit through higher prices in the form of more takings. People point to monopoly as the be all and end all for this, but there are lots of levels short of monopoly where profits through takings can be made.

Since profit is determined by takings modified by volume sold, a common approach it to optimize volume sold, or market share, in a semi-competitive economy, one with imperfect competition, meaning that there aren't enough players to reduce the amount of takings to zero. Maximizing market share opens up another layer of social construction. On the one hand the ideal is to fairly cut costs in production and increase the desirability of the product sold so that more people buy it, at a lower cost. Desirability in theory would mean a generally better product in terms of both quality and satisfying a need. But in practice, companies adhere to norms about what's a legitimate way to cut costs and what's a legitimate way to get people to buy more stuff that are frequently dishonest and immoral. And no one is forcing them to do it. In the United States we're very permissive in what we think it's 'right' for a company to do, because our culture has been saturated with the idea that the market is always right, and that it's the market that 'forces' people to do this. In other countries different norms apply, and things that would be considered legitimate business practice in the U.S. are looked at as completely out of bounds there. In reality it's not market forces, but people's response to market forces, that determines what businesses do. The pressure is to make a buck, and it's the call of the business community about how they want to go about doing this, about what's right and what's wrong with regards to actions taken, with the consensus frequently being that there are no rules for right and wrong, for moral and immoral behavior, and that any action taken to raise sales and cut costs is justified. It's a moral-free zone, with the idea of social norms shaping business behavior being routinely ridiculed by economists as being not scientific. The problem is that underlying mainstream U.S. economics is an implicit series of very un-scientific values that in fact shape what economists think is proper and not proper for companies to engage in. The absence of morality is still a type of moralism. You can't get away from the human factor and you can't get away from the impact that shared values in the business community have on business behavior.

And let's talk about costs for a second. But first, maybe it would be better if business' takings in the form of profit were regulated in some way and not left up to the discretion of the businesses themselves to set. Ok, back to costs. When a business breaks even, doesn't lose money, doesn't make money, they cover their costs. Now, when most people hear the word cost they think of the cost of producing one unit of whatever is being sold. Fair enough, but costs also reflect the amount of money paid to both workers and managers, and executives. A company simply breaking even could still be paying its CEO a million dollars a year. Of course, one of the ways to cut costs would be to cut executive pay dramatically, but, well, it's the executives who set their own pay rate and they're not really willing to compromise. It's good to set your own salary. Of course, a board is theoretically in charge of this, but most boards have taken the kool-aid that says that enormous compensation for executives is needed to attract people with skills, something promulgated by executives themselves. And the inclusion of very high salaries in the normal cost of doing business isn't just limited to CEOs. It percolates down through the pyramid, with folks closer to the top necessarily being insulated from cost cutting measures because in one way or another they run the place. The pyramid's base is middle management and to a certain extent lower management. Workers aren't part of the pyramid at all, unless they're very skilled white collar workers, and so when costs are cut they're the people whose wages suffer, who get laid off, whose work place becomes unsafe, and whose hours increase. This is because they're not part of the managerial pyramid and don't have any influence over it whatsoever. Unions are the only way to get some influence, and they're of course vehemently opposed by management, for that very reason, the same management that wouldn't consider putting its salary under the same microscope that workers wages are put under.

So 'necessary costs' and 'necessary cost cutting measures' are socially constructed as well. It's a 'necessary cost cutting measure' to cut employee pay, to lay off people, while the management retains sky high salaries and bonuses, which are all considered to be 'necessary costs'. No one is forcing them to behave this way. It's a choice, one that's established by the character of the corporate culture in the United States and elsewhere voluntarily, in response to the profit motive and to the desire to maximize sales and market share.

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