Err, no, this ain\’t the definition of capitalism

This crux is this: a private company has to satisfy its shareholders every year by increasing profits. If British Gas had failed to raise prices, it is unlikely it would have been able to post that 3pc boost. It simply wouldn\’t have done to make the same profit as last year, as it might have been interpreted as an end to growth. The reaction on the market would have been disastrous, should the company have posted declining profits. That\’s the way capitalism works. We can\’t have it both ways.


There\’s
absolutely nothing at all in the design, theory or practice of capitalism that demands ever rising profits.

Sure, it\’s nice, but it\’s simply not an essential feature of the system. It doesn\’t require perpetual rowth, it doesn\’t require ever rising profits in general or ay any one company.

Capitalism is simply an economic system whereby ownership of productive assets is vested in those with the capital. And that\’s about it really.

What might get people confused is that capitalism (and more so, free markets) leads to rising profits as the capitalists seek them and invest for them, this bringing on the higher and perpetual growth. But this is an outcome of the system, not an essential feature necessary to make the system work.

13 thoughts on “Err, no, this ain\’t the definition of capitalism”

  1. The author of the piece might care to look at Amazon’s share price and its history of (lack of) profit.

    Capitalism not only doesn’t require ever rising profits, it also rewards by tens of billions of dollars companies that are yet to make a profit.

  2. Oddly the piece does not mention that British Gas is regulated. I think even our host accepts that utilities need some regulation.

  3. Jesus. A 3% rise in profits. What’s inflation running at? Oh, around 2.7-2.9%.

    The journalists have completely missed how this is utility bashing is just a diversionary tactic from failure of government with regards to power.

  4. Seriously this is a piece of total crap. It is on a par with the crap spouted in the Guardian in Tim’s next piece.

    The reason that profits rise is that we need to incentivise the development of new sources of gas. If we held prices and forced companies to lose money, eventually they would not provide the goods and services we want. This is called Bolivarian Economics a la Venezuela.

  5. @ Tim Arnold

    Not only that, due to the weather the usage was 13% up. That must mean that their gross margin (at least, the spread between what they paid for the gas and what they charged) was down.. despite the price rise.

  6. Offshore Observer

    thinking back to the microeconomics bits of my econ study, the way that markets work (and capitalisim is about markets) is that super normal profits are unlikely to last in a properly competitive market. High profits attract new entrants, greater competition and lower prices and then lower profits. In a perfect market economic profit is nil (although of course each company makes a profit but super normal profits disappear over time.

    So in a capitalist system super normal profits disappear over time (assuming no barriers to entry and a properly competitive market place).

    Eternally rising profits is more indicative of oligopoly or monopoly which might be what is happening here.

  7. geneticallymodified

    Tim,

    New to the site. Maybe I haven’t looked hard enough on your site yet, but I’m not sure what article or person you are quoting in your piece so would be great if you could link to them please to help with context.

    Anyway, the author you quote essentially is saying ‘this is how capitalism is working today, and I think that’s a bad thing’ and the best you can come up with is ‘capitalism doesn’t have to work like that, but people might get confused because this is “an outcome of the system, not an essential feature”!

    People who are paying ever higher fuel costs for ever diminishing wages, don’t care whether the system was designed to kick them in the nuts, or kicks them in the nuts by accident, it just kicks them in the nuts, so maybe it needs to be changed, to stop it from doing that!

    Have I missed the point here, but I think you are really splitting hairs on this one?

    Tim ads: “essentially is saying ‘this is how capitalism is working today, and I think that’s a bad thing'”

    No, he is saying that capitalism “must” work this way. Therefore to state that it need not is sufficient.

    As to how it might work better, read more locally.

  8. geneticallymodified

    @ ken – we don’t *need* to develop new sources of gas ad infinitum, that an outcome of an energy market that has been designed to give more favour to fossil fuels than.

    The point of captialisms ‘creative destruction’ is that yes, some companies do find that their prices can’t go up and they eventually go out of business, because that’s one of the ways consumers signal that they no longer want to buy a product or service.

    So no – gas prices don’t have to rise, it’s in our countries power to create successful new markets for alternative sources of power. Did you know for example, that with the right market structure and investment, Germany have grown their solar power industry by the equivalent of 24 nuclear power plants, between just 2000 – 2011. That’s gone up to 32 power plants this year.

    And all you hear in the UK is that our only hope is to start building 10 new nuclear power plants now, cos there is no renewables option which can capacity fast enough.

  9. geneticallymodified

    Doh!! – I see now the link is at the start of your text, and that is not just a stylised green font you use 😉

  10. Adducing Germany’s experience with renewables in support of a move away from traditional sources of power generation is certainly a bold move. I think the general opinion is that it is the sort of cautionary tale economists will be frightening each other with round camp-fires a century from now.

  11. And profit can be increased by reducing costs… aka efficiency: maximum out for minimum in.

    It is my experience that those who are anti-profit, anti-capitalism have no clue how business, capitalism and free markets work.

    They just have a socialist worm inside their heads eating their brains.

  12. @geneticallymodified

    Capitalism’s point is not ‘creative destruction’, the free market does that and capitalism and the free market are not interchangeable terms: they are different things.

    But if you accept the concept of free market, your statement, ”… it’s in our countries power to create successful new markets for alternative sources of power.” contradicts this.

    The free market is under nobody’s power, that is why it is called free.

    What you imply is centrally planned alternative sources of power, which is what is being attempted and why if it continues the lights will go out, and why energy costs to the consumer have risen and why your friend ‘capitalism’ has absented itself due to uncertain risk of what will happen to the capital as a result of the political muddling and meddling in the central planning department.

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