7 ms·

> Note the word "risk" in there. 0: I took risk to mean the risk of employing someone - your definition is totally unclear (I admit I'm an engineer not an econ

> Note the word "risk" in there. 0: I took risk to mean the risk of employing someone - your definition is totally unclear (I admit I'm an engineer not an economist). Please point me to a good reference that defines your equation. 1: Risk is not profit. 2: Profit is only related to risk in some perfect (edit) economist model of markets. Or if you use a tautological definition between the risk and the profit. In the practical world, risk and profits often diverge. Businesses cannot have perfect knowledge so opportunities always exist. 3: you are also ignoring the bigger issue: why would a capitalist company pay more for an employee than they have to? An employee usually can't even know how much their work is worth - they don't have access to the financial records - (edit) a company uses that information asymmetry to their advantage. If two fungible employees bid their required salary for a job, the company will pay as little as possible and choose the cheaper person. Where does that fit into your equation? > The value produced by a particular "someone" surely varies wildly among Apple employees. Obviously. This margin is too small to write a detailed example to fit your needs! Argue the point. Edit: at least say whether you think "value produced" is revenue produced or profit produced. Kind of an important difference between the two and it isn't clear what you mean at all. When you do that, I'll try and construct a marginal employee argument edit2: I was trying to point the Apple example towards an argument based on marginal value - I should have been clearer, sorry.

WalterBright 3y ago
0. risk is the risk all businesses take when they invest. It's why low-risk bonds pay low interest, and high risk stocks (potentially) give high returns. No savvy business is going to invest in a high risk endeavor with poor expected returns. You don't need a book to tell you that. 1+2. the higher the risk a business takes, the more profit it needs to justify the risk 3. Note how I said if the business underpaid the employee, the employee can leave and get a better offer elsewhere. That's how markets work. That's what drives compensation up to fit the equation. Or the employees can quit and start a competitor. Unusually profitable businesses draw competitors like flies to honey. Every businessman is looking for a high margin business to get in to. Let's put it another way. If you started a business that made $100 per widget, and the employee that made the widget cost you $10, that would be a great business. Until your competitors caught wind of it and enticed away your employee for $20. You entice him back for $30. Until it reaches equilibrium that matches the equation.
- robocat 3y ago
  Your argument is based on a perfectly spherical economy. Edit: is that the Austrian or Chicago economics? In the real world, there are asymmetries, and that shows because in the real world we have businesses making profits in excess of their risks. If I have a business that makes $100 per widget but it depends on a secret that only I know, how does the competitor learn my secret? Where does that secret knowledge fit into your equation? And clearly your argument is flawed since most employees are not paid anywhere near the value they produce. Your examples are based on an idealistic perfect market - which we clearly don't have a perfect equilibrium. Also I added marked (edits) to previous comment before I realised you had already answered
  - WalterBright 3y ago
    The equation I gave is the equilibrium point. Market forces are always pushing things towards that equilibrium. If a business is operating far away from it, competitors will inevitably emulate it and drive it back to the equilibrium. > how does the competitor learn my secret? The more valuable the secret is, the more effort competitors will expend to learn it. The reason we have a patent system is competitors are pretty good at finding out secrets. The only trade secret I know of that has lasted a long time is Coca-Cola's formula. And yet Pepsi competes successfully with them anyway. Do you have an example of a trade secret that is enabling unusually high profit margins with poorly paid employees? > in the real world we have businesses making profits in excess of their risks A lot of risks do not seem so risky in hindsight. Like Musk's creation of Tesla and SpaceX. I bet risk will look very different to you if you're faced with risking your own money on a venture. > clearly your argument is flawed since most employees are not paid anywhere near the value they produce No evidence presented for that.
    - robocat 3y ago
      Okay we've gone off track here. I just find your "equation" makes no sense. Firstly, the types of your variables don't match. Risk and $/year can't be added together. And adding per employee variables to a per company variable (risk) is yet another typing/dimension issue. Secondly, adding "opportunity cost" is meaningless. Adding a dependency on the next best employment choice makes no sense. Also an opportunity cost only exists in a non-equilibrium market - I can't see why you argue for equilibrium while having opportunity cost. Why would an employer care what the opportunity cost was - and you can't argue that it is an equilibrium due to employees demand - because there isn't an equilibrium (see your previous wage example). Finally, if there is a marginal change in revenue, your equation says that is reflected in employee wages. Imagine a low-risk company where profits are fairly static (say close to risk-free rate of return). If revenues go up, your assumption is that employees are perfectly fungible between businesses and that employees will demand higher wages to capture the revenues (assuming transaction costs are zero so no spread). But employees don't know their value, so there is a distribution of bids. If employees are perfectly fungible then a business will buy the employee that underbids, and the business will make an "excess" profit. > No evidence presented for that. That's a diversion. Anecdotally I've experienced it many times as an employee and as a business owner. The real world has too many counter-examples of disequilibrium - and you are trying to make micro-economic arguments that depend on perfect market equilibrium.

WalterBright 3y ago

0. risk is the risk all businesses take when they invest. It's why low-risk bonds pay low interest, and high risk stocks (potentially) give high returns. No savvy business is going to invest in a high risk endeavor with poor expected returns. You don't need a book to tell you that. 1+2. the higher the risk a business takes, the more profit it needs to justify the risk 3. Note how I said if the business underpaid the employee, the employee can leave and get a better offer elsewhere. That's how markets work. That's what drives compensation up to fit the equation. Or the employees can quit and start a competitor. Unusually profitable businesses draw competitors like flies to honey. Every businessman is looking for a high margin business to get in to. Let's put it another way. If you started a business that made $100 per widget, and the employee that made the widget cost you $10, that would be a great business. Until your competitors caught wind of it and enticed away your employee for $20. You entice him back for $30. Until it reaches equilibrium that matches the equation.

robocat 3y ago
Your argument is based on a perfectly spherical economy. Edit: is that the Austrian or Chicago economics? In the real world, there are asymmetries, and that shows because in the real world we have businesses making profits in excess of their risks. If I have a business that makes $100 per widget but it depends on a secret that only I know, how does the competitor learn my secret? Where does that secret knowledge fit into your equation? And clearly your argument is flawed since most employees are not paid anywhere near the value they produce. Your examples are based on an idealistic perfect market - which we clearly don't have a perfect equilibrium. Also I added marked (edits) to previous comment before I realised you had already answered
- WalterBright 3y ago
  The equation I gave is the equilibrium point. Market forces are always pushing things towards that equilibrium. If a business is operating far away from it, competitors will inevitably emulate it and drive it back to the equilibrium. > how does the competitor learn my secret? The more valuable the secret is, the more effort competitors will expend to learn it. The reason we have a patent system is competitors are pretty good at finding out secrets. The only trade secret I know of that has lasted a long time is Coca-Cola's formula. And yet Pepsi competes successfully with them anyway. Do you have an example of a trade secret that is enabling unusually high profit margins with poorly paid employees? > in the real world we have businesses making profits in excess of their risks A lot of risks do not seem so risky in hindsight. Like Musk's creation of Tesla and SpaceX. I bet risk will look very different to you if you're faced with risking your own money on a venture. > clearly your argument is flawed since most employees are not paid anywhere near the value they produce No evidence presented for that.
  - robocat 3y ago
    Okay we've gone off track here. I just find your "equation" makes no sense. Firstly, the types of your variables don't match. Risk and $/year can't be added together. And adding per employee variables to a per company variable (risk) is yet another typing/dimension issue. Secondly, adding "opportunity cost" is meaningless. Adding a dependency on the next best employment choice makes no sense. Also an opportunity cost only exists in a non-equilibrium market - I can't see why you argue for equilibrium while having opportunity cost. Why would an employer care what the opportunity cost was - and you can't argue that it is an equilibrium due to employees demand - because there isn't an equilibrium (see your previous wage example). Finally, if there is a marginal change in revenue, your equation says that is reflected in employee wages. Imagine a low-risk company where profits are fairly static (say close to risk-free rate of return). If revenues go up, your assumption is that employees are perfectly fungible between businesses and that employees will demand higher wages to capture the revenues (assuming transaction costs are zero so no spread). But employees don't know their value, so there is a distribution of bids. If employees are perfectly fungible then a business will buy the employee that underbids, and the business will make an "excess" profit. > No evidence presented for that. That's a diversion. Anecdotally I've experienced it many times as an employee and as a business owner. The real world has too many counter-examples of disequilibrium - and you are trying to make micro-economic arguments that depend on perfect market equilibrium.