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"A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value" No profit means no val

by abannin 10y ago

"A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value" No profit means no value creation, the company is doing nothing. Profit isn't inefficiency, it is the incentive to remove inefficiency.

vkou 10y ago
This is nonsense. I can make a lot of profit by mugging people - does that mean I've created value? Likewise, I can volunteer my labour to build houses for the homeless, clean up a park... Since I wasn't remunerated for it, does that mean I didn't create any value?
- abannin 10y ago
  Thanks for the response, vkou. Since the article was discussing a specific industry and company, and the OP responded by the incentives of companies, I figured it was safe to assume that the discussion did not involve coercion or charitable actions as they are very different actions with different reward structures. Within a marketplace for commodities, an actor is rewarded with profits for providing goods or services. Mugging would be coercion, and doesn't seem to fit within the context. Charitable actions can obviously create and transfer value, but it also seems outside the scope of a discussion of commoditization of goods.
jedharris 10y ago
Would you also say that less profit is less value creation? I think that is almost self-refuting. What about for-profit companies that convert some of their software over to open source? Does that stop generating value when it goes free? And what about Comcast? They "earn" great profits, and they aren't dependent on state granted monopoly, regulated as a common carrier etc. But they'd create a lot more value as a utility with much lower profits.
- abannin 10y ago
  Great questions! Let's see if I can rephrase this: A company that is unable to generate a profit long-term has proven incapable of creating value for all stakeholders. So a company may be able to sell a product with a margin, but if that margin is not enough to compensate labor, landlords, supply chain, shareholders, etc; the the net value creation is negative. So a company that is not generating a profit is not creating value, but one cannot measure the amount of value created by just measuring profit. Open Source: I think that the incentives and economics of open source get pretty complex. There are multiple reasons for a company to open source their code, but I think it's pretty safe to say that companies are not in the habit of open sourcing valuable trade secrets. Two ways a company can realize more value by open sourcing are 1) utilize "unpaid" labor (contributors are not paid by the company, but presumably are compensated through some other means) and 2) recruitment and PR boost (by open sourcing projects, the company has improved reputation giving it leverage in hiring and other practices). So, to answer your question, open sourcing code restructures the value calculation. Presumably, an open source project that provides no value is an orphaned project. Comcast is a beneficiary of monopoly provisions. In order to incentivize the creation of infrastructure, telecoms were granted monopolies. For example, I can only purchase Comcast cable, not TimeWarner or any other provider. I suspect that your point is correct as regulating ISPs like utilities could decrease rent-seeking actions by the ISP. In this scenario, lower margins would generate more value (shareholders realize lower value but consumers realize greater value in the form of decreased prices). Rent seeking, like coercion, is a sign of a market failure. Thanks for the response!
SiVal 10y ago
No profit means no value creation, the company is doing nothing. This part isn't true. If you take inputs and combine them into something the market values more than the uncombined inputs, the process of combining them creates value, regardless of what price tag you put on the end product. The question then is who gets the value you created. If there is very little competition among producers, you might be able to charge a price well above your cost and keep most of the value for yourself in the form of profit (the buyers will still get some of it or they won't buy). If there is brutal competition, you might have to sell at cost just to avoid losing money from fixed costs (ex: property tax) that would have to be paid even if you sold nothing. If you combine the inputs into something the consumer values more than those inputs but charge the consumer the cost of the inputs, you DO create value by combining the inputs and ALL of the value you create goes to the consumer. Profit isn't inefficiency, it is the incentive to remove inefficiency. This part IS true. Profit is an (if not "the") incentive to remove inefficiency, though profit is not an inevitable consequence of removing inefficiency. If your competitors also remove the inefficiency, the extra value may not stay with the producers in the form of profit but go to the buyers.
- abannin 10y ago
  Great points, thanks for bringing clarity to a rushed comment. You're very right that increased competition could lead to losses. However, this is a short term destabilization with a maximum duration of capital reserves. It is the net profit of the firm that determines it's long term viability.

by abannin 10y ago

vkou 10y ago

This is nonsense. I can make a lot of profit by mugging people - does that mean I've created value? Likewise, I can volunteer my labour to build houses for the homeless, clean up a park... Since I wasn't remunerated for it, does that mean I didn't create any value?

abannin 10y ago
Thanks for the response, vkou. Since the article was discussing a specific industry and company, and the OP responded by the incentives of companies, I figured it was safe to assume that the discussion did not involve coercion or charitable actions as they are very different actions with different reward structures. Within a marketplace for commodities, an actor is rewarded with profits for providing goods or services. Mugging would be coercion, and doesn't seem to fit within the context. Charitable actions can obviously create and transfer value, but it also seems outside the scope of a discussion of commoditization of goods.

jedharris 10y ago

Would you also say that less profit is less value creation? I think that is almost self-refuting. What about for-profit companies that convert some of their software over to open source? Does that stop generating value when it goes free? And what about Comcast? They "earn" great profits, and they aren't dependent on state granted monopoly, regulated as a common carrier etc. But they'd create a lot more value as a utility with much lower profits.

abannin 10y ago
Great questions! Let's see if I can rephrase this: A company that is unable to generate a profit long-term has proven incapable of creating value for all stakeholders. So a company may be able to sell a product with a margin, but if that margin is not enough to compensate labor, landlords, supply chain, shareholders, etc; the the net value creation is negative. So a company that is not generating a profit is not creating value, but one cannot measure the amount of value created by just measuring profit. Open Source: I think that the incentives and economics of open source get pretty complex. There are multiple reasons for a company to open source their code, but I think it's pretty safe to say that companies are not in the habit of open sourcing valuable trade secrets. Two ways a company can realize more value by open sourcing are 1) utilize "unpaid" labor (contributors are not paid by the company, but presumably are compensated through some other means) and 2) recruitment and PR boost (by open sourcing projects, the company has improved reputation giving it leverage in hiring and other practices). So, to answer your question, open sourcing code restructures the value calculation. Presumably, an open source project that provides no value is an orphaned project. Comcast is a beneficiary of monopoly provisions. In order to incentivize the creation of infrastructure, telecoms were granted monopolies. For example, I can only purchase Comcast cable, not TimeWarner or any other provider. I suspect that your point is correct as regulating ISPs like utilities could decrease rent-seeking actions by the ISP. In this scenario, lower margins would generate more value (shareholders realize lower value but consumers realize greater value in the form of decreased prices). Rent seeking, like coercion, is a sign of a market failure. Thanks for the response!

SiVal 10y ago

No profit means no value creation, the company is doing nothing. This part isn't true. If you take inputs and combine them into something the market values more than the uncombined inputs, the process of combining them creates value, regardless of what price tag you put on the end product. The question then is who gets the value you created. If there is very little competition among producers, you might be able to charge a price well above your cost and keep most of the value for yourself in the form of profit (the buyers will still get some of it or they won't buy). If there is brutal competition, you might have to sell at cost just to avoid losing money from fixed costs (ex: property tax) that would have to be paid even if you sold nothing. If you combine the inputs into something the consumer values more than those inputs but charge the consumer the cost of the inputs, you DO create value by combining the inputs and ALL of the value you create goes to the consumer. Profit isn't inefficiency, it is the incentive to remove inefficiency. This part IS true. Profit is an (if not "the") incentive to remove inefficiency, though profit is not an inevitable consequence of removing inefficiency. If your competitors also remove the inefficiency, the extra value may not stay with the producers in the form of profit but go to the buyers.

abannin 10y ago
Great points, thanks for bringing clarity to a rushed comment. You're very right that increased competition could lead to losses. However, this is a short term destabilization with a maximum duration of capital reserves. It is the net profit of the firm that determines it's long term viability.