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unblock Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Apr-06-11 09:42 AM
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on the increasingly tenuous relationship between revenue and expenses
in modern economic theory, viable capitalist enterprises earn a reasonable profit (an 8% annual return the standard number tossed about) on economically worthwhile pursuits.

pursuits that are not economically worthwhile fail, and pursuits that earn outsized profits eventually attract enough competition to drive down profits. in the long run, anyway.

simply put, the idea is that if you put $100 into producing something, market forces should drive you to sell it for right about $108. charge too little and you'll feel it's not worth your trouble to produce it in the first place; charge too much and customers will go elsewhere.

but note that in the short run, this is not the way it works. individual businesses DO NOT look at their investment or their expenses and say, well, given the money i put in, i'll price my wares so as to earn an 8% profit. hardly. a small business keenly aware of ever present competition might do this; see above -- outsized profits drive customers to cheaper competitors -- but only if and because that small business is aware of competition.

in the absence of sufficient competition, companies behave like monopolies or near-monopolies. what they charge has virtually nothing to do with their investment or their expenses. the only constraint on prices is that excessive prices drive customers away -- not to competitors, because there are none; but simply out of the market entirely. at some point customers just choose to do without the product. the ability of customers to say no is what keeps prices from going sky high. this is not as effective as competition, but at a higher price level, it does stabilize prices.

but is a "normal" and "reasonable" 8% return where we're at?

are oil companies, posting record profits, making only an 8% return?

are health insurers making only an 8% return?

are hedge funds making only an 8% return (i'm not talking about the return their customers make -- that's the hedge funds product -- but the return the owners/managers of the fund make)

so many companies, even in these challenging times, are making outsized profits, made all the more appealing by government largess, which lowers the risk. the banks earned outsized profits for years courting great risks, and the government absorbed much of that risk. which meant they earned profits while actually taking rather little risk. the only real risk they took was that the profits would eventually return to a comparatively more "normal" level. but it was certainly good while it lasted from their point of view.

outsized profits that are swiftly contained through new competitors are a sign that capitalism is working the way it's supposed to. the customer may be exposed to excessive prices for a short time, but quickly competition returns prices to something customers are again happy with.

sustained outsized profits are a clear indication that something is fundamentally wrong with our economy, and it's not working the way capitalism is supposed to. and this is at base a huge problem with our economy. too many industries have too little effective competition, so prices are not contained properly.

health care and health insurance is one of the bigger problems, because customers, to a large extent, CAN'T simply say no, and often aren't in a position to shop competitively. much medical care is needed urgently and often locally, and there's not always time to shop around. much health insurance is chosen not by the policyholder, but by the policyholder's employer, so the only way to take advantage of competition is to switch jobs. this is a giant hurdle, especially when most insurance companies have remarkably similar prices, policies, and practices.

until something is done to restore genuine competition in all industries, the corporate powers that be will simply continue to find new ways of extracting wealth from the middle class until we're bled dry. how can anyone possible get ahead if you have to pay and arm and a leg to fix a broken arm or leg? how can you prosper if a good chunk of your pay goes to gas just getting to and from your job? how can you survive if even food costs more and more, just because the wealthy feel like hoarding it?

there are fundamental, structural defects in our economy.

and no one is talking about them. hey, let's cut medicare, that'll help.


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