Sunday, February 19, 2012

Stranger than Friction

Barry Schwartz argues in this morning’s New York Times that capitalism is all about efficiency, and the problem is that too much efficiency can be a bad thing.  A more profitable company, he says, is a more efficient one, and capitalists are right to pursue profit, but maybe we should slow them down a bit—add some friction to the process.

I am reminded of the students I have every year, and there are a lot of them, who just can’t accept the idea that “equilibrium” in a market does not necessarily imply “good”.  You can have equilibrium in a market for slaves, or for nuclear weapons, or simply for your ordinary neighborhood drone.  How markets work and whether we are better off because they work that way are two entirely different questions.

So also with profit.  A more profitable company is not necessarily more efficient in any sense other than better at making profit.  Transferring more of the value added from paychecks to dividends is not more efficient than the other way around, but it is more profitable.  To be more precise, to be sustainable a business has to be profitable, but a more profitable business does not necessarily contribute more to society than a less profitable one.  (Note: in a stakeholder economy the goal of business would be to maximize the probability of being profitable over a given time horizon, not to maximize profit per se.)

It is distressing that Schwartz can muse on the implications of the financial crisis for his notion of profit-seeking but never consider the concept of risk.  Higher profit purchased at greater risk is not always such a great bargain, especially in a world of limited liability, not to mention bailouts of the systemically hyperconnected.

How did it come to be that conventional wisdom, which was once skeptical of profit—maybe even too skeptical—has now embraced the assumption that more profit means more better?


Daro said...

" be sustainable a business has to be profitable"

I disagree. Profit is a return over and above the costs (including opportunity cost) and payments of return to the owners of the business. Profit is a indicator of inefficiency in that market that will attract other businesses in to access the excess income until parity is restored. Well, that's what I was taught in economics anyway..

Peter Dorman said...

Maybe this is another opportunity to forget what you learned in economics. Businesses either make money above their opportunity costs (profit) or they lose money. Unless you have a sugar daddy, losing money on a regular basis is unsustainable -- and even if you do, sugar daddies have to get there sugar from somewhere else.

Daro said...

Uncanny. Coz I DO have a sugar momma right now. Looked right through me with those econo x-ray specs.

Ben Leet said...

The Earned Income Tax Credit reached 27 million families with children, and another 6 million were eligible but did not apply for it. Where was the profit? Was society better off? The profit motive, and its efficient production that ensues, does not realize a better allocation of resources always. Government could also "tax credit" enterprises that serve the public good -- schools, public housing and hospitals are examples, but the list could be expanded. Efficiency, profits and social good do not always coincide. Take slavery, for instance. Alternative methods for resource allocation should be expanded beyond the profit motive. Functional Finance, for instance. Socialism for another.

john c. halasz said...

Really, this isn't the first time you've noticed the distinction between absolute and relative surplus-value, is it?