01 January 2008|
Get 'Em High
Four Benefits of Corporate Profits
1. They encourage entry into the market and create competition (because everyone and his company wants a piece)
Business loves profits. The public loves competition. The good news for economic matchmakers and the public alike is that the two often combine in a highly successful union. High profits encourage new businesses to enter the profitable industries, and the entrance spawns competition.
This elementary piece of common sense is also an economic law that states that high profits, in general, tend to encourage competitive entry into a market. Where profits are made, in other words, competition generally follows. This is a good thing.
But it's not always the case, of course. Our sharper readers would be thinking of oil companies, who are currently raking profits, yet we see few start-up oil companies. Here's the answer. The reason for this is that the oil market is over-regulated, from development, through production, and into retail sales. The entry costs in the oil industry are extremely high. Corrupt African dictatorships must be bribed and greased for access to precious resources, overweening regulations from the EU and the US nag your every move, Latin American nationalization threatens from Left and Right, and most notably, reactionary Arab and/or Islamist governments who happen to sit on the plurality of the world's known oil reserves. Companies who dare to enter the market under these unsavory conditions also face competitors who have successfully funnelled billions of dollars over decades to influence the lobbyists, legislators and leaders who created and maintain those high entry costs. This is why high profits for companies aren't spurring entry into the oil market - entry is just too difficult as it is.
But nearly everywhere else, the profit motive wins, and new companies jump in. And where money is made, capital then flocks. The increased competition creates more choice, better quality and lower prices for consumers. But you've all had the economics lesson before.
But even those who failed economics can get this one. Once one company makes bank, everyone else wants a piece.
2. The profitable ones can eat recessions for lunch
The ability for an economy to survive a recession is substantially reliant on the value and profitability of its companies. Example: Declining sales for a year don't hurt when you're coming off of a decade of solid profit growth. Large profit margins mean fewer sales are necessary to sustain the investment (see point 3) that the company currently makes, avoiding the necessity of nasty cost-cutting measures like downsizing. (Are you listening, Michael Moore?)
Every kindergartner knows that the opposite of profits, i.e. loss and bankruptcy, harms many people. Employees lose their jobs, businesses lose customers, and government loses revenue. Avoiding these losses, by the same principle, demonstrates how profits are beneficial.
American "blue chip" stocks are those of companies generally thought to be relatively risk-free investments nearly guaranteeing any investor sustained share gains, no matter what the economic conditions. What's the secret? Profitability secures the luxury.
3. Where do you think wages, investment and research come from? A stork?
Every expense that the public would like businesses to freely make - research and development, sustainability, wages, vacation pay, health insurance, graduate school for employees, ad infinitum - all require the surplus revenues to support them. (These revenues are called profits, for all you business students out there.)
Like all great economic principles, the socialists have implemented policies ignoring it to disastrous results. An example occured in the oil industry, of course. (The oil industry is also where socialists reinvented the American definition of "queue" by implementing price controls on gasoline to atrocious results, you'll remember.) The Crude Oil Windfall Profit Tax of 1980 was a worthless Marxist experiment not dissimilar from the 2006 prescription of the American Left: slap an extortionate tax on oil company profits. After all, as Bill O'Reilly would remind us, it's just not right.
The results were predictable. According to a study published by the Congressional Research Service, the tax discouraged investment in the American oil industry so severely that US oil production declined 3 percent to 6 percent as a result, and foreign oil imports grew 8 percent to 16 percent accordingly to fill the gap. There's a headline: "Oil Company Profits Shown to Reduce Dependence on Foreign Oil." Almost. But it does confirm what common sense implies - that companies must make money to spend money, whether it's new technologies or employee perks.
4. Don't hate, participate
Investment in a company is the easiest way for any Average Joe to enjoy a piece of corporate profits. Profitability increases the current market value of a company as well as its future expectations, which drives up the stock price of the profitable company. Why deride it, socialists, when you can make money off of it yourself?
Yes, we can see the NYSE ad campaign now: "Hey socialists, invest in the stock market. You can take a corporation's money as soon as it makes it. It's the most efficient form of simultaneous taxation and redistribution to enrich yourself that has ever been devised by the mind of man! Come and get it, comrade!"
The reality is that high profits certainly benefit investors, but it is also that anyone can be an investor and also benefit. If none of the other points in this editorial were valid (not likely), this one would remain so. No matter the social value of profits, they will always directly benefit anyone who simply invests in the company who makes them.
Let's end the class warfare and just get rich off of other people getting rich. It's the American way, after all.
In the end, we don't care much what's good for the companies. We just notice what is good for us.
The above work is the opinion of The Prometheus Institute.