Chapter 13 – Absurdity #9 – Profit and “what the market will bear”

There is no part of capitalism that is more absurd than the idea of profit. Profit is all of the money that a company makes over and above its costs of production. Therefore, a typical large corporation in America pays for:

  • All of the raw materials it needs
  • All normal employee wages and benefits
  • All of the utterly absurd executive salaries
  • Along with the utterly absurd executive bonuses
  • All of the skyscrapers and headquarters buildings filled with luxurious executive offices
  • All of the executive jets
  • All of the parties, junkets, limousines, helicopters, etc. for executives
  • All of the advertising
  • All of the lobbying
  • All of the mortgage payments on all of the loans for the land, buildings, etc., which the company then takes ownership of through asset capture.
  • All of the research and development for new products
  • All of the failed products the company tries, but that don’t work out
  • All of the lawsuits and legal fees and settlements
  • All of the fines levied by governments for illegal activities
  • And everything else…

The company covers all of these costs. The sum of all of these costs is the “cost of doing business”, or the “cost of production.”

And then, on top of all of these actual costs, the company goes one step further and arbitrarily adds a profit charge. The profit is extra money that the company charges for no reason at all. There is absolutely no reason why consumers should have to pay this profit charge, but in capitalism customers are forced to pay it anyway. A typical profit charge is 20%, above and beyond all of the expenses listed above.

How much profit are we talking about? Take the case of Porsche. At Porsche they tack on an extra $17,000 per car in profit:

[Porsche] posted an operating profit of 3.9 billion euros ($4.1 billion), up 14 percent from 2015. Put those numbers together and it’s on pace to net about $17,250 a car, up 9 percent. In short, every time Porsche sells a 911 sports car or one of its Cayenne SUVs, it could take the profit alone and go buy a brand new Chevy Cruze. [ref]

This sounds like insanity, but this is normal capitalism. Or take Apple:

For the quarter, Apple posted revenue of $52.6 billion and net quarterly profit of $10.7 billion [ref]

That is $10.7 billion in profit in just three months. Again, this sounds like insanity, but this is normal capitalism. Roughly 20% of the price of Apple products is profit. Which leads to headlines like this:

Apple’s cash hoard swells to record $256.8 billion

Apple’s enormous cash pile swelled to $256.8 billion in the fiscal second quarter, up more than $10 billion from the previous quarter. That figure means Apple’s war chest is now larger than the market value of General Electric. [ref]

Where did the $256 billion come from? It all came by overcharging consumers. And then, as a final insult, Apple (and many other corporations) move the money offshore to avoid taxes:

The documents reveal how big law firms help clients weave their way through the gaps between different countries’ tax rules. Appleby clients have transferred trademarks, patent rights and other valuable assets into offshore shell companies, avoiding billions of dollars in taxes. The rights to Nike’s Swoosh trademark, Uber’s taxi-hailing app, Allergan’s Botox patents and Facebook’s social media technology have all resided in shell companies that listed as their headquarters Appleby offices in Bermuda and Grand Cayman, the records show.

U.S. multinational firms are the global grandmasters of tax avoidance schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world,” said Edward D. Kleinbard, a former corporate tax adviser to such companies who is now a law professor at the University of Southern California.  [ref]

Think about Walmart. The vast majority of workers get paid their meager wages. The executives get paid their absurdly enormous salaries – for example the CEO receives $25 million per year or $12,500 per hour. The fleet of 22 private executive jets is paid for. Ads are paid for. The thousands of lawsuits are paid for [ref]. Everything is paid for. And then, last year, Walmart overcharged its customers by an additional $14.5 billion. This is the “profit”. Much of this money was handed to “shareholders” – people who do no work at all to receive it. $3 billion of it was handed to the children of Walmart’s founder, again for no reason.

The company generated $31.5 billion in operating cash flow and returned $14.5 billion to shareholders through dividends and share repurchases. [ref]

Why will the market “bear” Walmart’s extraction of $14.5 billion in profit? Why would the “invisible hand” want Walmart to hand $3 billion per year to 5 oligarchs for doing no work – for no reason at all other than the fact that a Sam Walton sperm cell happened to impregnate a woman? Why would the “invisible hand” want anyone to earn $25 million per year, or for hundreds of Walmart executives to earn their equally absurd salaries? Why hasn’t the “invisible hand” corrected all of this graft and waste? It is because Walmart is a gigantic incumbent and, as such, it is largely immune to competition. Walmart can sell many items at a loss and still make huge profits:

Alex Berman lays out how retailers like Walmart profit even when they are pricing goods, like milk and eggs, well below cost.  [ref]

How can any “normal” store compete against a gigantic incumbent that can afford to sell its most popular items at a loss because of its incumbency? Obviously this is very difficult. Yes, incumbents can fade, even die. But often they extract billions or trillions of unearned dollars before they die through the power of incumbency.

In many cases, like the medical sector, profit can be unbounded. Companies simply set a price according to “what the market will bear.” Since the alternative to paying the price is death, the price can be extremely high. The price has absolutely no relationship with the cost of production. All of the extra money earned is “profit”, and all of the profit goes to a tiny slice of the population known as the “wealthy elite.” The absurdity of this situation is indescribable.

No consumer wants to pay for “profit.” Nor does any consumer want to pay for the enormous executive salaries, or the private jet fleet, or the ads or any of the rest of it. But the consumer has no choice, because all companies are doing it. In a new economy, all of this absurdity and all of the wealth concentrated through profit must be eliminated for the benefit of all of humanity.

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