Where does profit come from?
A peek at The Radical Business Owner's Guide to Profit
It might surprise you to know that there is not one agreed upon theory for how companies generate profit. Like most things, explanations for profit creation are colored by political orientation.
Neoclassical economists largely explain profit via a theory of marginalism— profits are generated by the marketplace, where worth is determined by supply and demand. This explanation relies heavily on the concept of “marginal utility”, which sets out an antagonistic relationship between the consumer attempting to maximize the benefit (“utility”) they get from purchasing a thing, and the corporation aiming to maximize their profits through selling that thing.
Imagine arriving at an ungodly hour to an airport: you get through security and dodge and weave towards the nearest coffee line. You might not even notice that the price for your latte is $2 more than at your local shop. Or, you notice, and pay up anyway: the more you want something, the fewer your options, the more you are willing to pay for it. Whereas in your day to day, you may drink multiple cups of coffee brewed at home, and treat a $6 latte as a special occasion thing— with access to multiple options, you choose the closer, cheaper way to satisfy your desire for morning caffeine.
In response, the company selling the expensive airport latte is calculating based on “marginal cost”. They know that many flights leave early, passengers will desire coffee (and nowadays, cannot bring it from home), so they set up a coffee shop to meet that demand. They’re likely looking at passenger numbers, flights per day, seasonal influxes, to try to game out how much it would cost to produce just enough expensive lattes to meet demand. They buy more muffins from their pastry supplier on the third Wednesday of November than a random Tuesday in January. If they overshoot their assumption of the number of bleary-eyed travelers desperate for overpriced espresso, they will earn less profit.
Within the orthodox view of economics, consumers drive markets. We, desire things: a coffee maker for our home. A new sweater. A bottle of wine to share with friends. A new car. Glitter eye shadow in electrified blue. The market and companies are merely responding to and providing goods to meet those desires.
To make profits, most corporations would say, but that’s just a rule, a necessary condition to stay in the game. What is the point of the game? To grow, to increase market share, to bring the world (customers, suppliers, regulators) more and more under the control of the corporation, so that its operations becomes ever more shielded from uncertainty. John Kenneth Galbraith recognized that corporate goal — to engulf everything — long ago. It’s the goal of a cancer too.” — Donella Matthews
I think most of us, even abstractly, understand that this is not really how the economy works. As much as I can’t stand the proliferation of ads on Instagram, I still found myself recently clicking on an image of an eye, electric blue eye shadow swiped across the lid. I had not been desiring eye shadow— I’ve worn it maybe thrice in the last 5 years— and yet, this image pulled me in, triggering a small itch that had me wondering if I needed this color in my life1. In truth, most everything we consume has been sold to us in one way or another, rather than the consumer leading the way via their individual desires, instead companies spend billions ensuring that we desire the thing they have to sell.
Marx and Engles themselves scorned marginal utility as an overly complicated way to state that value is determined by supply and demand.
And they also disagreed!
Marx’s (quite revolutionary, and to many dangerous) view was that labor became something that held productive value to capital, and was the primary mechanism for creating profit under Capitalism.
Surplus value is the difference between what an employee is paid and the value generated from that labor. According to Marx, it is the surplus value created by labor that enriches Capitalists.
Employees are paid for their time, not the “fruits of their labor”. Amazon warehouse workers with strict quotas for how many boxes to pack and ship in an hour are a shining example of this phenomenon in action: the warehouse worker doesn’t make more or less money depending on how many boxes are packed. But Amazon sure as hell makes more money from a faster employee than a slower one, and has all sorts of mechanisms to ensure that employees sprint through their shifts.
It makes sense, if the primary motivation of the corporation is profit, that Amazon will employ all sorts of coercive techniques to ensure speedier workers. And for sure, the owner/shareholders grow richer because of the work of their employees.
Labor became a commodity under capitalism by alienating workers from the fruits of their labor, sometimes through violent means. In pre-Independence India, the British destroyed looms in villages across the country, so that villagers would need to work for wages to buy British imported cloth once they could not weave their own. Destroying these looms in one act both created a new labor force, as well as a new consumer base: Capital needs people to produce labor power and also needs people to work for income to pay consumption.
Fast forward to today— in very simplified terms these neoclassical ideas are still very much present in amongst economists. Tweaking interest rates makes sense as a tool for changing the state of an economy if you believe an economy runs on supply and demand.
Making Capital more expensive should pump the brakes on growth, leading rational companies to lower their prices in order to stoke demand, right? And if low interest rates help companies amass profit, wouldn’t that lead to higher wages, increased benefits?
As we know, that’s not quite what’s happened.
“Labor, measured as effort expended over time yields different compensation outcomes depending on who is doing the labor. The disparity in wealth between poor and rich is not a quantitative difference in effort, but a difference in social circumstance. “ Tunde Wey
What does all this matter to a small business owner just trying to make it? Like, you’re not a billionaire launching yourself into space or the deepest depth of the oceans because it’s boring to own too many super yachts.
But dominance has a way of installing its operating system into the air we breathe whether we agree with it or not.
Understanding the larger systems at play as you move along and make your day-to-day decisions. You’re going to find yourself operating within them whether you know it or not.
We need to think about the labor theory of value, because we’re going to be engaging with how it works any time we pay people (including ourselves!) within our business. I’m not saying we, you and I, intend to do the Capitalist limbo: how low can we shrink those wages?!?
But we are going to be engaged in a systems dance of how much can we pay people (including ourselves) and sustain our business.
And, in my experience Marx was correct: most of the business owners I work with, when we look at whether they are profitable or not, we look at people costs. It’s rarely office supplies and software subscriptions that have anything to do with a profitable business.
So how do we value our people, avoid exploiting them, and yet still engage with this necessary substance of profit?
In Other News…
In the latest Whiskey Friday’s episode, John schooled me on why Wanderwell and I need some space. I was a bit gobsmacked by the stories he had to share, I want every owner of a legal entity to listen to this one.
The World’s End School, the experimental school founded by Sarah Ryhanen, who I interviewed some months back, is currently fundraising for their first year as a nonprofit. I donated, and perhaps you’d also like to support this wild experiment in radical world building?
I am pretty sure the algorithm know that I have an erotic sort of attraction to Yves Klein Blue in all forms, same as it knows about my love of videos of Newfoundland puppies.