The horizon is not so far as we can see, but as far as we can imagine

The Correct Level of Profits in an Economy

Sustained high profits, in free market economics, are considered the sign of an uncompetitive market.  De-facto 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.

Originally published April 22, 2014. Succinct and makes a point I want made again, so up to the top.

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  1. Bruce Wilder

    Also, profits on money are totally a bad idea.

  2. Celsius 233

    The Hopi have a word for this; Koyaanisqatsi (system out of balance).

  3. Douglas Lindsay

    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.

  4. someofparts

    “Hope your move goes ok.”

    What move?

  5. Profiteer

    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.

  6. Ian Welsh

    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.

  7. someofparts

    From what I’ve seen of Toronto rents on Craigslist that won’t be cheap. Good luck.

  8. Plague Species

    Considering the implications of the destruction of the living planet, profits should be shrinking because the economy should be contracting. Sure, profit percentage can be maintained to make sure costs are covered during the contraction with a little left over, but in terms of total profit versus profit as a percentage, profits need to diminish substantially.

    One way or another, profit is going to shrink, be it voluntarily via a constructive global agreement to contract or involuntarily meaning one crises after another brings the economy to its knees with no plan in place to mitigate the implications of that.

    China is already doing its part in contracting by powering down and whether this is its intent or not, the effect is the same nonetheless.

    Doesn’t Add Up

    What’s going on? None of the official and unofficial explanations make sense and fall apart upon closer scrutiny as this video underscores. The same applies to America’s labor shortage. None of the official and unofficial explanations make sense upon close scrutiny.

    Is this the Singularity where our previous mental models are incapable of processing the Brave New World that has manifested? I think it is. If so, the Singularity is an Apocalypse of sorts. It’s world shattering and world creating. We have entered a new time that is radically distinct from any times that have preceded it.

    The effects of this are massive and yet cable news for example, is not covering it as a crisis and in fact isn’t covering it at all. The equity markets are hardly affected if affected at all. Think about that. This could cut many corporations’ revenues and profits by half or more indefinitely and yet the equity markets aren’t moved by this. What this means is, the equity markets are reflective of nothing except perhaps ignorant hubris. The algos cannot comprehend it let alone incorporate it into their calculations.

  9. Hugh

    A perfectly efficient company would have zero profits, that is its resources would be perfectly deployed and its prices would perfectly reflect its costs of production. Record profits mean massive inefficiencies.

    Nowadays with the Greenspan-Bernanke-Yellen-Powell put, profitability is irrelevant. The Fed has pumped in trillions to guarantee and increase the wealth of the rich, and continues to do so. Companies have simply become paper proxies to facilitate this wealth transfer. As Sinema, Manchin, and the Republicans are only there for the rich, they do not need and fiercely oppose wasting any money, let alone a lot of money, on a bunch of loser ordinary Americans.

  10. Hugh

    The Republicans were catching heat from their owners and so Mitch has agreed to kick the debt ceiling deadline back a couple of months. Hilarity ensued as Romney who wasn’t forewarned had just come out saying how unified the Republicans were in sending the country over the financial cliff. Personally, I think Biden should have done, mint a ten trillion dollar platinum coin or ten one trillion dollar ones and deposit it/them in the government’s account at the Fed.

    Whether it’s profits or trillion dollar coins, the real question behind both is what kind of a society do you want and hope others want for you. The rest is fairly trivial accounting.

  11. someofparts

    never anything to say
    never stops talking anyway

  12. different clue

    Who is ” furry orca ” ? ” Furry orca ” doesn’t like Naked Capitalism very much, does he?

    Is “furry orca” another name for “plague species” ?

  13. Plague Species

    Never anything to say? FO predicted the Arlington, Texas shooting would drop off the radar almost immediately once the shooter was determined not to be white male or white males. The cable news was ready to roll and hoping the next Parkland. Instead, they got an unmarketable dud. FO was right. I think that’s something to say. I’d say that’s prescient. Highly accurate. Spot on. But I’m sure folks in law enforcement would take umbrage with FO’s opining, especially the FBI who once again has egg all over its face considering the Laundrie manhunt is turning out to be a replica of the Eric Rudolph manhunt. Right, Chris?

    Perhaps SoP and DC can provide some insight into what constitutes the right level of profit in a constructive, functional society rather than attacking other commentators and providing no substance.

  14. Willy

    Well, “Sustained high profits, in free market economics, are considered the sign of an uncompetitive market” does makes good horse sense. Or common wisdom sense.

    But, is this so dumbed down that even the every day MAGA gets it? I dunno. It seems like yesterday when the average economic conservative was selling me that free markets caused a race to the competitive bottom which would mean all kinds of cheap bling for the rest of us and a corporate elite which like Smuckers, had better be good.

    Sure, blinky flat TVs with the ongoing bad capacitor problem are relatively cheap at Costco. But a brief hospital stay not so much. It seems like all the elites did was figure out how to grift better, at everybody else’s expense.

  15. someofparts

    diff clue – I’m guessing someone we know tried to jack into comments at NK and got stopped in their tracks – so now they lob their attacks from here

    way I figure it, if the trolls are actually paying Ian some money to keep the lights on around here, I can work around them

    nobody is holding a gun to our heads making us read them … scroll scroll scroll your boat, as they say

    fwiw, I do need some side income and guess I need to work online because of covid and I would honestly love to find out what a person makes for working for a troll farm – maybe I could do that kind of thing, but just focus on fascist sites. I’m sure I would never get a straight answer from our resident rats, but the idea does cross my mind in more fanciful moments

    also, furzy is on substack, but who knows, maybe that’s some friend our resident rat knows from the troll farm

  16. someofparts

    NC not NK

  17. different clue

    @Plague Species

    Thank you for your interest in my comment. I am always happy to hear from you. Please let me know if you have any other concerns.

  18. Plague Species

    I don’t have any concerns for you, drumlin woodchuckles, but I would like you and sop to provide insight about appropriate levels of profit. I provided insight and you seem to take umbrage with it considering you attacked me rather than addressing the content of my comment. Do you really believe growth in profits can continue into infinity? If you don’t, why did you take umbrage with my comment? It’s the point of my comment. No matter what we believe is acceptable profit, profit must and will diminish considering the depleted resources and the destruction of the living planet. Fyi, no one, me included, mentioned Naked Capitalism in the commentary to this post so why bring that up rather than opining about the content of Ian’s post?

  19. different clue

    All life itself begins with a free lunch in the form of solar, lunar orbital-gravitational, earth-core, and deep space energy reaching the earth surface for free. All we have to pay is attention.

    Before we can even think about what an appropriate level of profit is, we have to understand what “profit” even “is”.

    And we all know that “money makes the monkey jump”. But what makes money make the monkey jump?

    What puts the “oney” in money? What puts the “alue” in value? What puts the “rofit” in profit?

    What even “is” profit and where does it even “come from” in the first instance?

  20. Missus Eleanor Changstein, PhD

    From what I’ve seen of Toronto rents on Craigslist that won’t be cheap.

    Seven years ago. Have they gotten better in Toronto? I can’t get a place here in Mississippi for the paltry sum I’m making at Popeye’s Chicken, and that’s even with the wage having gone up a bit.

    I don’t understand why we don’t just let the wild things come back. I’ve read where most of the United States east of the Mississippi could be fed wholesomely and entirely simply on the bounty of the pawpaw tree, which itself grows rather abundantly on its own.

    Plague Species is an idiot, but the sentiment is apt.

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