WEALTH PRINCIPLES

 

In everyday speak, we refer to any profit in negative numbers as a loss. However, this is often overlooked by the idealist. Emotion outpaces their reason. And so it can be enlightening to occasionally reference the concept of negative profit in an oblique manner. While it is certainly true that oligopoly prices and oligopsony costs—the things which idealists vaguely have in mind when debating—are known to have a pernicious and polarizing effect upon society, not all profits arise from these categories. 

We can disrupt the assumption that a profit of any amount is always unfair with a simple inquiry. “How much profit does a business owner generate with a revenue of $10,000,000 and a worker cost of $11,000,000?”

And to delve into this notion of fair or unfair profit a bit further it will help us to borrow a few basics from corporate finance. In this field we call the entirety of a business’s revenue a gross revenue. And all costs summed together are referred to as total expenses. After total expenses are subtracted from gross revenue, we are left with what corporate finance calls a net profit. Or put more simply:

 

Gross Revenue – Total Expenses = Net Profit

 

For example: Gross Revenue $100,000 – Total Expenses $90,000 = Net Profit $10,000. 

If we divide that net profit by the gross revenue and then multiply that number by 100, we are given a business’s net profit margin. Or put more simply:

 

(Net Profit / Gross Revenue) x 100 = Net Profit Margin

 

A net profit margin is written as a percentage. So using the last example: (Net Profit $10,000 / Gross Revenue $100,000) x 100 = 10% Net Profit Margin.

In general, corporate finance considers a 5% net profit margin to be low. A 10% net profit margin is average. A 15% net profit margin is above average. And finally, a 20% net profit margin and above is considered high. 

With these percentages it is critical to not overlook the gross revenue. A 20% net profit margin on $200,000 gross revenue per year is very different from a 20% net profit margin on $2,000,000,000 gross revenue per year. That’s $40,000 vs $400,000,000. Likewise, a 1% net profit margin on $10,000,000,000 gross revenue is very different than a 1% net profit margin on $10,000,000 gross revenue. That’s $100,000,000 vs $100,000. The layman should look at both numbers—gross revenue and net profit margin—as a very general starting point to reveal if a business’s profit over a given amount of time leans toward his notion of fair or reasonable.

​

But it would be unreasonable to claim that profits of all sorts are always unfair. This would be absurd. To paraphrase the economist Thomas Sowell, no other mechanism exists to allocate resources as efficiently as prices and profits. Bureaucracy certainly could not. It would take thousands if not millions of bureaucrats to pick and choose where each and every resource goes. This is not practical. But prices and profits can achieve this feat with ease in a competitive market. And to add to this point, any tax money paid as a salary to such bureaucrats would derive its value from the very same principles of supply and demand that would eliminate the need for their job in the first place.

Positive and negative profits are the ocean breezes of society’s sailboat, often allocating resources where needed most with the least amount of effort. They are its guide. But even so, a society should still fortify its citizens against the gale winds of oligopoly and oligopsony profits. 

While governments can impose laws to divide and disburse these forces, the official bureaucracies entrusted to accomplish this task—referred to as antitrust offices—are also subject to indirect, behind-the-scenes influence by the oligopolies and oligopsonies themselves. This is called industry capture. A typical scheme is to lobby for the appointment of a bureaucrat who it is tacitly understood will drag his feet and look the other way whenever major violations of the law occur or who will prosecute only small-time offenders to feign legitimacy. But the more probable scenario is just a plain old mix of poorly thought-out legislation and an incompetent antitrust authority. A decrease in tax revenue is an unlikely punishment for ineptitude and failure. Nor is an increase a likely award for competent enforcement. Government is sluggish by design. And guaranteed tax revenue tends to thwart incentive. 

That is not to say that antitrust offices are completely useless. But they should be regarded as the slow roving army tanks of competition—topped by even slower aiming cannons. We need foot soldiers, too. Therefore, the break-up of oligopoly and oligopsony power is accomplished better, cheaper, and faster with a societal wide effort by numerous mentors and leaders of all the various fields of business. 

One way or another power concentrated in too few hands is always in the end separated. If it is not the oligopoly and oligopsony that fractures, then it is the surrounding society. Peace and prosperity naturally flow from competitive markets. The result in widespread wealth not only empowers the vulnerable, the ill, and the downtrodden but also ensures civic and national security. Therefore, to study its patterns of revenue—and those obscure yet powerful psychological effects that sellers and buyers have upon them—is to understand the ebb and flow of a society’s power.

​

​

​