The Correct Level of Profits in an Economy
Sustained high profits, in free market economics, are considered the sign of an uncompetitive market. De-fact if an industry or business makes high profits regularly, and certainly if they do so for more than a decade or so, the market is not competitive.
The response to that should be political: either make the market competitive, or if it’s the sort of market which can’t be or is too much trouble to be made competitive (most utilities, if you’re sane; certainly utility distribution; any insurance required of almost anyone; roads, etc…) then either make them government run, or heavily regulate them.
Cable companies in the US make 97% profit on their internet provision — they are an unregulated oligopoly which is also damaging America’s competitiveness with their lousy product. Cell phone makers are another unregulated oligopoly because of the interlocking patents which make it very difficult for others to make almost the same smartphones for literally a tenth the price and are a strong argument for reducing the length of patents, getting rid of algorithim patents entirely, and for mandatory licensing at low prices.
Banks and financial firms, with their ability to create money out of thin air by lending, and to bounce various debt instruments back and forth to stack leverage, are the ultimate in abusive oligopolies. They are granted the ability to literally make money, and should be expected, in exchange, to work in the public interest, not to enrich themselves, impoverish the public and go running to government for bailouts when they manage to mess up a sure thing.
The general level of profits in a society should, actually, be pretty low. 5% plus inflation is a good level to aim for. If high profits are available in parts of the economy, every other business gets starved for cash, as money runs to the high profits. Economics says that those opportunities should run out and there should be a regression to the mean, but in oligopolistic economies with strong protected works and vast amounts of government corruption, that doesn’t happen—until there is a crash, at which point the most profitable businesses are bailed out, because they used their profits to buy government.
Individual businesses want high profits, but societies want low profits, and should view sustained high profits as a sign of economic illness which requires intervention.
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Also, profits on money are totally a bad idea.
The Hopi have a word for this; Koyaanisqatsi (system out of balance).
Well, yes, & it’s all a social construct,but the *natural* mean rate of profit won’t remain constant over time.
Profits will tend to fall in mature economies. It’s possible to do a buyers’ strike to drive prices down to a *fair* price only on goods which aren’t necessities. As more goods aren’t necessities, the average rate of profits will tend to decline. And to the extent that the rate of profit determines the rate of return on investment, new investments become less likely. Which makes it more likely that money is invested to, ahem, “seek to consolidate market share” rather than to produce new goods.
Secular stagnation probably is a thing.
Hope your move goes ok.
“Hope your move goes ok.”
What move?
Great Post Mr. Welsh. I would add to the list of sectors that make outstripped profits are healthcare and the energy sector. Drug (pharma and biotech) companies especially are able to easily cover their dividends and invest billions into research and development costs because drugs like Epogen cost $500/injection. Some cancer drugs cost upwards of 100,000 dollars per year to the patient.
The regulations on drugs like Biosimilars, available in europe but not in the USA, restrict companies like Amgen to compete in the Biologics drug class, a vastly more expensive to the consumer drug class.
Adam Smith noted, many years ago, that profits are low in the most prosperous societies, not high. Corrupt societies have high profit margins.
Yes, I’m moving into a new place (assuming I can find one, my original plans fell through). Posting my be irregular starting on the weekend.
From what I’ve seen of Toronto rents on Craigslist that won’t be cheap. Good luck.