That distinction matters because it changes how we think about profit. A genuine business needs sufficient income to survive, invest and continue its activities. But that does not mean maximising profit is its purpose. Profit can be a means of sustaining a business rather than the reason why the business exists.
That then raises a much bigger question. If human work creates value, why does conventional accounting treat labour as a cost while treating the residual profit as belonging to capital?
Actual economics – you know, the sort of stuff Mirrlees got his Nobel for – agrees that labour is a cost of doing something. On the grounds that it is a cost of doing something. But so also is that normal return to capital a cost of doing something. That normal return being what is required to attract enough capital to surivive, invest and so on.
In excess of the normal return is called economic profit, or even excess profit. Which is why Mirrlees says don’t tax normal profit, do tax economic profit.
It’s also a commonplace that economic profit is the vale added by doing this thing, this here, rather than all the other things that can be done in the economy. It’s a signal more than anything else….this is a valuble thing to be doing, look at the gap between the cost of doing it and the value created…….
“If human work creates value …”
Except for the Civil Service etc.
Or Murphy’s own. I wonder how much value he’s destroyed for other people, in the course of his grifting for tax-free grant income?
Not all human work creates value. Maintenance work (including medicine) maintains value rather than creating it, and is a cost. Why else is so much effort put into designing machines that require less and less maintenance? Why do people put such effort into remaining healthy, and therefore not requiring costly treatment?
And then there is human work that absolutely destroys value.
The only truism is that nothing happens in an economy, positive or negative, without a human doing it.
maintenance work maintains value rather than creating it
Well it does, sort of.
It needs spare parts for instance, lubricants, tools and so on.
On the other hand it might destroy value, because keeping an old machine going, means that a new one is not built and sold.
A replacement for a worn-out thing is not necessarily new value for the owner. And those spare parts for the maintenance are a cost for the machine’s owner, who would far rather the machine didn’t need maintenance at all.
That the maintenance requirements generate value elsewhere in the economy is irrelevant, because if no machine ever needed maintenance, economic activity directed at maintenance would be redeployed elsewhere to create new, additional value.
This is especially true of medicine. My daughter had a costly training and earns a good salary doctoring to people who would not need her at all were they not unhealthy.
Should we treat the maintenance cost as just part of the cost of the asset, spread over its useful life? That’s probably not a bad way of thinking about it, because then we can do trade-offs, such as an initially more expensive version not needing so much ongoing maintenance.
“On the other hand it might destroy value, because keeping an old machine going, means that a new one is not built and sold.”
In my line of trade people keep the old machines going because the new ones are a) stupid expensive and b) far worse quality than the old ones. The latter being a combination of State dictat (emissions legislation etc) and manufacturing companies who think buying cheap Chinese components made of cheese is a good idea. It quite common for a tractor costing £200k to be immobilised because the manufacturer has used cheap wiring components, O rings or sensors that could have been replaced with quality ones for literally a few pounds more. Whoever let accountants run companies should be strung up by the balls.
Bean counters are great people to have available when there are beans that need to be counted. But you should never, ever let them take a business decision, because they will always choose the cheapest option.
It’s not just tractors, the new Skoda I had in 2009 used a small plastic stick protruding through the dash to set the clock. The first time I tried to adjust for daylight saving time, it broke. Took it back to the dealer: “Known problem, we’ll replace the dash assembly under warranty”. £800 + labour because someone specified a cheap plastic part to save a few pence.
I get where you are coming from, but the work itself is valuable, because you as a car owner, getting the oil changed get value from someone keeping the car on the road. You pay someone £300 and get thousands of pounds of benefit from your car being useable.
“Why else is so much effort put into designing machines that require less and less maintenance?”
Of course, maintenance is a cost, but it’s still more valuable than your car not going. But ideally, you get rid of the maintenance cost.
You can also get things like the cost of production down with technology to the point where it simply isn’t worth maintaining. You can buy cheap smartphones that barely cost more than getting the screen fixed.
You reinforce my point, WB. Yeah, I pay £300 and get thousands in benefit from my car being useable, but were it maintenance-free I’d still get that benefit without having to pay £300 for maintenance. Labour is a cost.
And for an annual £300 I get a car I barely have to touch, unlike my father who spent most weekends underneath the jalopy with spanners and oily rags.
That’s why modern airliner engines can do up to 50,000 hours on-wing. It’s up to half the airframe’s life. Before modern turbofans, jet engines would barely do a tenth of that before requiring major overhaul, and pistons wouldn’t do a hundredth. Result: much greater aircraft utilisation, more destinations, more frequent services, lower fares.
Not all work creates value, and maintenance only maintains it. This is ignored because ISTM that nearly all public sector and much white-collar work is to do with maintenance. Rather inconvenient to acknowledge that.
Do you think that if “Professor” Potato is given enough time, and publishes enough meandering posts, he will eventually achieve the insight that would allow a generous exam board to give him a GCSE in Economics?
I’d rather put my faith in lots of monkeys.
I know our exams have been dumbed down, but not quite that much yet.
The purpose of profit in ‘Invisible Hand’ terms is to expand businesses and practices that produce more than they consume (make a profit), and to shrink businesses and practices that consume more than they produce (make a loss), thus optimally allocating resources to where they’ll do the most good.
If you start selectively siphoning out the profit from profitable businesses, you stop them growing as fast, and thus allocate resources suboptimally.
Because it does belong to capital. That’s what capitalism is all about.
He might want to change the system, but accounting is meant to reflect the system we actually have at any time, not the one a fat bloke in Ely would like us to have.
And nobody’s banned from setting up an economic unit that operates on other principles.
If labour wants the all the profits (and the losses) it can always form a co-operative………
Someone much cleverer than I will be able to explain the difference between (i) sustaining a business and (ii) acting in such a way as to ensure that that business continues to exist.
I thought the answer was glaringly obvious – because labor doesn’t want to be responsible for losses.
When I worked at what was to become Orange the owners, Hutchison Telecom, were investing millions to build the network. peak capital was in the order of £100m (1995 prices) and break even was planned 5 years after launch.
As an employee I didn’t have to contribute to all those annual losses and as I left just after launch I wasn’t going to see any of the profits. Why should someone who joined once the business was profitable then get to share those spoils?
Hutchison took all the risks, they should take all the spoils.
An employee needs sufficient income to survive but that does not mean maximizing income is an employees purpose. Income can be a means of sustaining an employee, rather than the reason the employee works.
Why is it bad when company owners work for the most they can get but bad when employees do this?
The worst part is that this has already been hashed out before Murphy was born. He’s re-inventing the wheel and its square.