On the business of life

[drwex]

I'm mostly dumping this here so I can reference it later, but commentary is welcome. This came out of a discussion of the relationship of WiiTID to the profitability of the enterprises that employ people like me:

Profit is like health, to a corporation. You have to have it, and more is good. But it's not the reason for existence.

Comments

[mrf-arch.livejournal.com]

Except that profit is the reason for a corporation to exist. The ostensible business of the corporation is merely the means.

I learned this the hard way - architects are told that we make buildings, and perhaps artistically, that's true. But at the table, the Owner, Architect, and contractor show up to make a profit. If we all profited and a building didn't come out the end, probably nobody would cry.

[drwex]

...except the people who wanted the building in the first place? Would such an enterprise stay in business long if it was known to make money but fail to deliver product?

[mrf-arch.livejournal.com]

The developer isn't building a strip mall because he feels an existential need for a strip mall in his life - he's building it to sell it, or lease it, and to profit thereby. He'll be upset if he doesn't get his strip mall, but not because he wanted the mall per se, but because taking his money and denying him a profit opportunity will make him cross.

The only exception are the two classes of Owners who build buildings intended to lose money from the start - governments and school districts.

[mrf-arch.livejournal.com]

(I suppose private homeowners might also be construed to be a class who build without regard to profit, but since homeownership is generally considered a major asset for a family, I'm inclined to exclude them.)

[dpolicar]

Although homeowners doing custom construction for residential use will often make decisions that maximize their enjoyment of their home rather than maximizing the profit they'll realize on liquidation of assets, which seems like damned weird behavior if we say their primary goal is making a profit rather than owning a home.

[mrf-arch.livejournal.com]

Homes are usually considered an asset - but they are rarely a well-managed one. :-)

Though, in fairness, unless your time frame for turning over a property is fairly short (say, three years or under) chosing to maximize enjoyment is rational, insofar as it becomes extremely difficult to predict what features will be considered desirable by consumers in the more distant future. It could also be construed as rational in that you're more likely to want to take care of a house you like over the long haul, and thus preserve its value.

[feste-sylvain.livejournal.com]

From a zero-based, non-cheating perspective, "profit" is the difference between "price" and "cost". "Price", of course, is the function of supply versus demand, and "cost" is what it took to get the product (or service) delivered.

Which means that "profit" is the value that you're adding to the base materials.

So I have to disagree: the reason for the corporation's existence is to add value to the world. "Profit" is the measurement.

[dpolicar]

Hm.

If that's true, then it follows that corporations have no motivation to artificially reduce supply or increase demand, since all that does is screw up the measurement without actually providing more of the thing they exist to provide... it's like cheating at solitaire.

Do you actually mean to say that, or is this more an abstract-definitions-in-hypothetical-land kind of conversation?

[feste-sylvain.livejournal.com]

Yes, that would be "gaming the system", or "cheating". That's why I started with "zero-based, non-cheating".

But the trick is, sometimes "gaming the system" is better considered "innovating", and actually does add value to the world. Life is complex.

Moreover, many economic models are based on the spurious notion of "perfect information flow" (i.e., building a better mouse-trap is all that's required, because the world will instantly find out and beat a path to your door). This is patently false. So producers advertize. Is this "artificially increasing demand" or just "informing consumers that a more cost-effective solution exists"?

[dpolicar]

(nods) I noticed the "zero-based/noncheating" disclaimer, but wasn't sure if you meant by that to exclude the actual world, or if you meant to assert that the actual world was like that.

I'm still not quite sure which you mean, actually... your addition of "gaming the system" and "innovation" add complexity to the discussion but I don't quite follow the argument you're making with them.

I would certainly agree that sometimes an innovation changes the world in ways that make previous understandings of value irrelevant, if that's what you mean.

And I would agree that haring off after false notions of value isn't a good thing, and that the inability to make a profit can mean that you aren't providing accessible value, even if it's your goal to. So when someone says "I think this is valuable, but it's not making a profit, so I'm going to stop doing it" we can't yet conclude that they're primarily profit-seeking. Nor can we when someone says "I don't think this is valuable, but it's making a profit, so I'm going to keep doing it." We need to know more about the situation to make that decision. So in that sense, yes, real life is complex.

So producers advertize. Is this "artificially increasing demand" or just "informing consumers that a more cost-effective solution exists"?

So, first off, let's be clear that the question "is advertizing an example of artificially increasing demand?" is different from the question "is artificially increasing demand possible?", although the way you bring it up makes it tempting to conclude that if one denies the former one also denies the latter.

Regardless, though, as stated I can't answer it, because "advertising" as a single category doesn't cleanly fall into either bucket. But I think you can arrange individual ads and ad campaigns on a continuum between those two extremes.

To pick an extreme example for illustrative purposes, I have trouble imagining how an ad that contains deceptive information could be considered "informing consumers that a more cost-effective solution exists"... whereas I have little difficulty considering it an example of "artificially increasing demand".

[feste-sylvain.livejournal.com]

I noticed the "zero-based/noncheating" disclaimer, but wasn't sure if you meant by that to exclude the actual world, or if you meant to assert that the actual world was like that.

Oh, the actual world is emphatically not like that. I don't mean to exclude the actual world entirely (or we're talking about how many angels can dance on the head of a pin), but rather to strip away a large number of layers of history.

your addition of "gaming the system" and "innovation" add complexity to the discussion but I don't quite follow the argument you're making with them.

Sometimes, it is possible to reduce costs (and, assuming the retail market holds steady, thus increase profits) by acts of fraud. We can all agree that this is bad; the original American "war profiteers" were the scam outfits who provided "boots" to the Union Army in the Civil War which had cardboard soles. This reduced costs, but we'd be hard-pressed to consider what they provided to be "boots".

But other times, such substitutions can be made legitimately. For example, when McDonalds was having problems with consistent dairy sources for their milk-shakes, they started using seaweed instead, and changed the name of the menu item to "Triple-Thick Shake". It might not have been a milk-shake anymore, but it is arguably more nutritious than the item it substituted. This was lower-cost, more consistent (and thus of higher quality), and much more profitable. It was another value-add. I'd therefore not consider this fraud (especially as they stopped claiming that the item was a "milk shake").

[marmota.livejournal.com]

I'd certainly agree. I was taught that from an engineering perspective at least, 'profit' is a sign of waste. That is, it's the noise in the system between the resources *required* to produce an optimal result and the resources *claimed* to produce that result... which of course misses the point that the process of engineering a result does not exist in a vacuum, and is rather more likely to exist within a complex infrastructure where the money to make something happen is not directly provided by making it happen. I tend to think of this as a fundamental reason why businessmen and engineers frustrate each other so much.

[dpolicar]

I was taught that from an engineering perspective at least, 'profit' is a sign of waste.

How... odd.

I can sorta see that perspective with respect to raw materials (I think it's wrong in the way you describe above, but I can see it).

But it seems downright incoherent with respect to labor.

[marmota.livejournal.com]

Sure, it's incoherent on a number of levels, particular the way it focuses entirely on supply cost and ignores demand. If anything, though, it's kinder to labor than most models in that it at least acknowledges labor as part of the cost of producing something, or at least leaves very little room for ripping off a worker to make the inefficiencies even more obvious by enlarging the profit noise. Viewing a production cycle from a resource efficiency perspective goes well with mrf_arch's architect example; not only is the goal to produce a house, the goal is to do it while paying the true cost of everything that went into it, and getting paid it all back when you're done. The differnce between the two is profit or loss. In reality (such as it is) though, you get weird things like developers getting paid a million dollars to go build somewhere else (or not at all), and everyone walks away happy even though nothing got produced, let alone had any value added. And I just realized I need a *shrug* icon.

[feste-sylvain.livejournal.com]

it at least acknowledges labor as part of the cost of producing something, or at least leaves very little room for ripping off a worker to make the inefficiencies even more obvious by enlarging the profit noise.

I'm less than convinced. Let's say that there are several parts of construction which require skilled labor (which shouldn't be a stretch). Let's further suppose that the supply of skilled labor is shorter than the supply of unskilled labor.

From an engineering perspective, changes which allow more of the construction to be performed by cheaper unskilled labor will increase profits; how is this "a sign of waste"?

[heinleinfan.livejournal.com]

I think if someone wants to start using "health" comparisons when speaking of corporations then "cancerous parasite" should be included in there somewhere.

[feste-sylvain.livejournal.com]

No, no, dear; that would be "government".

[drwex]

I've been re-skimming some Peter Drucker on this topic and he makes some interesting points I can't fully summarize in a comment but here's what I take him to be saying:

- the stated purpose of a corporation may be to make profit, and other concerns should not enter into the equation, except that...

- corporations are composed of, and must hire/depend on, moral beings (people).

Therefore, it is impossible to achieve profit goals without factoring in the very moral principles that corporations supposedly excluded by design.

What's not clear to me is how he thinks that ought to be implemented in practice. Drucker's mostly a theorist so I don't completely hold against him this lack, but my thinking is still cloudy.

[feste-sylvain.livejournal.com]

Here's a recommendation for you: Suicidal Corporation, by Paul Weaver. In it, he distinguishes between "company" and "corporation", and shows how some fast pussy-footing in the late 19th century was responsible for much of the corporate legal infrastructure we're saddled with today.

Weaver mostly decries the long-term effects of the overly-cozy government/corporate relationship, but he also unveils many of the post-Smith pre-Nash assumptions which went into the formulations of legal corporate infrastructure.

All this is a long-winded way of saying that Drucker overstates his case when he (correctly) claims that "other concerns should not enter into the equation". That's the way we've currently got it, but that's not the way that it should be (according to Smith's analysis of mercantilism distinguished from capitalism, and Nash's analysis of optimal outcomes).

[gentlescholar.livejournal.com]

Actually, it is part of the legal definition of a corporation that it is NOT ALLOWED to have any other goal but making money.

See The Corporation, the documentary, for details, or ask a lawyer.

[drwex]

See my comment to feste_sylvain above. You're describing an ideal that turns out not to exist in the real world for very good reasons.