I was meeting a friend yesterday, who was late. Whilst waiting I recalled a conversation on the nature of profit I had with another friend quite recently, and recorded a comment on it largely for their benefit, but then thought I would share it here. Please understand that this was made in one quick take, and outside, but I hope that the points I have to offer on the nature of profit make it of interest:
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I think maybe you need to write that down.
For a very short word ‘Profit’ certainly does carry a great deal of baggage.
I argued many years ago, around the time of the Electricity privatisation, with someone who thought it a wonderful idea that our electricity companies would become profitable , that the real profit of electricity generation and distribution is the electricity and by extension what we can then do using it. (Like write and convey this particular missive; and even be able to see the keyboard in the dark, and hopefully a great deal of more useful things !) What we regard as the financial profit from this is in reality an impost on society.
From an MMT perspective ‘profit’ is the government deficit. Some of it useful and some of it deadweight.
On the micro scale, in simplistic market terms ‘profit’ is a measure of whether an activity is worth doing. Do the input material and labour costs generate a product or service that enough people are willing to buy in order that the costs are covered and the business can carry-on sustainably.
The sums look very different dependant on whether the product or service is essential to society or mere frippery. We cannot realistically look at military security spending and claim it as profitable, yet for millennia the military by virtue of it’s plundering activities was a great profit generator.
It would be an interesting and very instructive economic exercise to try and evaluate whether the US military-industrial-security complex is in any sense ‘profitable’ or the total waste of money and resources that it seems at first sight. It is after all probably the biggest financial profit-mill in the history of humanity. We probably ought to know, or at least be interested in, what ‘profit’ it yields, or whether it is the world’s biggest ever turkey. I think this fairly significant at time when the US banking system is only functioning at all because the Fed is piling money in to keep it afloat. Quite how classical or ‘neoliberal’ economists explain that I really don’t know. They seem not to be trying and pretending the system is not on its knees.
Andy, re the Military Industrial complex, I read on Facebook a couple of days ago that the Pentagon had somehow mislaid $1trillion, so, of course, Trump’s Congress simply increased the financial life support system, by giving them more money!!!
@ Andrew (Andy) Crow:
For what it’s worth, here’s a list of the major private beneficiaries of the MIC – https://howmuch.net/articles/20-companies-with-the-highest-revenue-from-arms-sales. The economic aspects of war is a very interesting and complex topic, and certainly one in which the word ‘profit’ takes on a number of different meanings.
As usual, Richard is ahead of the curve. Not only do we urgently need ‘a new politics’ but with it a radical new lexicon with substitutions for emotive words such as ‘profit’ & ‘debt’. Although it’s a long-term project of re-education at grass-roots level, I sense it’s already started. The prevailing orthodoxies are increasingly being challenged. Another area of close collaboration required among EU progressives. Oh, shit, we won’t be part pf that after 31st Jan, will we.
Thanks
Luca Pacioli (1447-1517) is generally considered to have provided the foundational text in accounting and double-entry bookkeeping. In the innovative world of Renaissance Italy, and especially the leading commercial state of Venice, profit could be reliably established in a dangerous and lawless world because a business venture was generally a closed entity. Profit could be definitively struck only at the close of a venture; typically the return of a ship with a cargo, perhaps of silk and spices that will pay for all the attributable costs of the venture, and produce a residual surplus on the total investment: the real “profit”.
The problem with “profit” in the modern era, it has always seemed to me, is essentially intractable. Accountants and economists have attempted to square the circle; to provide the closed venture, on which the concept of “profit” depends, with immortality. This has been achieved through a plausible looking conceptual sleight-of-hand: the creation of the “going concern”. Here is the current going-concern statement, as best I could find it in ICAEW (IAS 1): “IAS 1 requires management to make an assessment of an entity’s ability to continue as a going concern.” The actual definition of ‘the specific term “going concern”, oddly I have found much more elusive, but one ICAEW document, I do not know whether still extant or official, at least provided this clear, concise and explicit definition: “The entity is viewed as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or ceasing to trade.”
The fundamental problem with the “going concern” concept is that its most critical consequence is that it turns a specific, clear, identifiable, and real “profit”, into a fiction. A theoretical number is produced that has no substantive existence in the real world. It is contestable because the creation of the fiction (the ‘profit’ that is both fixed and moving; a static point in a dynamic entity; in short an oxymoron) applies principles of interpretation, any or all of which may be scrutinised and quite fairly challenged. They are unchallengeable only to the extent that they are conventional. Worse, it follows that mistakes may be made in producing it. In addition, the economic environment in which all the assumptions made to establish the fiction, may themselves turn out to be false. This need not imply bad faith, but follows from a sudden appreciation that the industry, or even the broader economic conditions that were thought to prevail at the time the fiction was formed were actually quite different to the assumptions, and that formed the conventional wisdom.
I will add one more conundrum to this; the real problem of taxing profit. Here is the real proof that profit is both a fiction and a moving feast; even a subject to negotiation. There is no better illustration of the fictional nature of all profit than to see the profit for shareholders follow the protean nature of the transformation into taxable profit and the miracle of some of the most profitable companies in the world, producing profits to dazzle shareholders and produce undreamed of increases in market capitalisation on the back of their results, nevertheless pay negligible rates of corporate tax, or no tax at all; having failed to make any taxable profit. This peculiarity provides a good working definition of a “fiction”.
John
I apologise – this slipped through my net….
And a fascinating response
I will think on it
Richard
That is the first time that I have heard you speak. What a nice voice you have. Not the least strident as I had imagined. For the content – I shall listen again to understand it better.
Thank you
Have a look at the video Richard made for Phantom Power, on Scotland’s viability as an independent country. I was already in support of independence, but Richard’s take on it made me more determined that it happen!
His way of explaining ideas is very easy on the ear.
A very though-provoking treatise on profit Richard, and I agree you should write it down. I always think of profit as something large companies use to pay a few people at the top a few million in bonuses while denying the workers even a cost of living wage increase, so have begun to associate negative connotations to the concept of profit – except I do know it is far more nuanced than that, and you have given food for thought here.
On another topic, I think you have a fair few Scottish readers on here these days, and would like to make them aware that there is a current crowdfunder for possible litigation against the uk government in the event it refuses a section 30 order by the 17th of January – they only collect the donation if the target amount is reached, and if needed I assume. Because of the short time-scale, it would be good to let as many people know as quickly as possible in case there is interest –
https://www.crowdjustice.com/case/the-scottish-people-vs-the-uk/
Thanks
Richard,
When debating with Kevin Hague why do you never point out the obvious and finish the debate Once and for all ? Stop going round and round in circles with ” These Islands ”
The UK does the tax collection across the UK. Scotland is nothing more than a glorified county council. If you did the accounts for North Yorks County Council you would find it too has a ‘deficit’ that is filled by the block grant and whatever ‘borrowing’ HM Treasury permits.
So the LEAKAGE out of the arbitrary line of the Scottish border within the Sterling currency zone is to anywhere else in the world (including the rest of the UK) – and
The rest of the UK saves a lot of Sterling. That LEAKAGE, plus any net savings within Scotland, is what causes the Scottish government sector deficit.
Kevin never mentiones that LEAKAGE he does not even know it exists. That LEAKAGE is certainly not in GERS.
So why not simply list all of the LEAKAGES in a blog post and send it to the BBC.
Scottish public sector workers in their thousands travel to Belfast, Blackpool and Cardiff for their holidays or weekends away. They spend their income and the spending chain starts. Some even give family and friends money as a gift.
When that money is saved by whoever receives the currency in Wales, England and Northern Ireland it is part of the Scottish budget deficit. It started out as Scottish government spending then leaked across borders.
HM Treasury does not even know that the sterling started in Scotland and ended up in the rest of the UK.
🙂
That is the crux of the problem with GERS and Kevin Hagues analysis. List all of the LEAKAGES and you win. There is no reply to that.
Scottish government Spending only comes back if you have your own currency. You issue it, you tax it, you can swap it into different assets.
If you use somebody else’s then it leaks into a different banking system. Greece spending ends up under the control of the Bundesbank. Similarly Scottish spending ends up under the control of the Bank of England, which is owned and directed by the UK government. As long as that arrangement stays in place, Scotland is owned and directed by the UK government – like any other county council.
So nobody can compare a county council with a monopoly issuer of that currency.
If Scottish public sector workers went to Dublin, New York and Sydney on holiday and had to exchange the currency into the local currency. Then that is a totally different ball game.
Finish this debate about GERS and the Scottish budget deficit already and stop going round in circles. By listing all of the LEAKAGES the debate is over. Come at it from the right angle.
That is the key issue with fixed exchange rates. You end up with control of the money under some other entity which you have to follow the directions of.
If Scotland became independent then what happens depends upon whether it floats its own currency or not. That is the only way to ensure that Scottish money doesn’t leak anywhere. What the size of the government deficit is will still depend upon how many people want to net save in that currency. Only now the new Scottish central bank will control it.
I get your poi8nt – but it would not much alter the debate with Hague
So… Am I right in thinking that in order for there to be “profit” in a venture, there has to be a corresponding debt somewhere else in the economy? If 97% of new money is created as bank loans, then in order for the economy to grow and allow the creation of “profit”, then private debt has to increase?
If those “profits” end up off-shore then new money (debt) needs to be created to replace the money that has “left” the economy?
Not necessarily: there could be transfers within the private sector alone i.e., profit and loss
OK. But is that just robbing Peter to pay Paul? For profits to be maintained, then new private sector debt needs to be created to keep the show on the road? All comes back to the need for the magic ingredient, growth or the whole thing collapses?
There is no problem with growth IF it is about doing more for each other with less carbon
The state would have to do exactly the same if it did more as well
Here is your chance Richard. He is attacking you again today.
https://chokkablog.blogspot.com
LEAKAGES from the budget deficit as net private sector savings leak across borders within the UK. Thus tax revenues that have leaked when these net savings are spent.
List these leakages and win the debate.
I don’t think your concept of leakages helps – but please feel free to list them
As for Hague, a long time ago a very wise US lawyer advised me not to fight with those he described as ‘pigs’. You end up, he said, covered in shit and the pig enjoys it
Hague is like Tim Worstall, a person who the world sees for what he is, and so ignores. I do the same
Re argument with intransigent opponents, the pig sty analogy is one of my favourites.
I recently came across another little gem which maintains ‘it is difficult to win an argument with a clever person, but nigh impossible with an idiot’.
‘Idiot’ is a curious word modern usage. On Facebook and other social media forums it tends to mean ‘person who fundamentally disagrees with me and is impervious to proffered evidence’. ‘Science’ is not much help because, as is well documented, scientific process is affected by the process of observation and results are often selected to ‘prove’ a case. Social media is currently awash with selected bits of denialist ‘scientific’ evidence. Much of this, I suspect is doubly selective, and I am trying to find one of the individuals who operates online with this sort of propaganda material what exactly it is they think they are doing this FOR. And why the vehemence. (?) I do not understand the nature of the threat they feel that motivates them to become volunteer propagandists for one of the wealthiest interest lobbies that ever existed. (I’d guess only the Church of Rome ever came close)
Within the twin, and in some respects related, fields of Economics and Unionism much of the difficulty is down to belief – faith thinking. This is always resistant to rational argument by its very nature.
I have discovered, like you, that argument with this mindset is frustrating and a waste of my time. It is the mindset so fixed that it created the concept of the ‘martyr’ who is prepared to die for faith rather than recant.
Yes Andy Crow. Your faith observation works for Leavers in Brexit too. Of course I could not possibly be guilty of such faith for my rational remainer stance!
The John Adams posting above is not me. John perhaps would would be good enough to post an additional identifier to remove the ambiguity. Many thanks.
A moderator’s nightmare
I have changed the description of the other John Adams, who I am sure is not mimicking or trolling you but who has created confusion, inadvertently