The role of profit

[innonimatu]

I stumbled upon an essay today that i thought worthy recommending and discussing. It's a long read, and worth it.

Capitalism, especially the financial flavor we're living under, has left many people dissatisfied. The trouble is, and has long been, getting people to agree on an alternative. This is an overview of past proposals that mentions several facts and several ideas that I had read about (notably, towards the end, the issue of the managerial capitalism) but have mostly been kept out of public discussion.
I do think they show that there are alternatives and, more importantly, that we are far from living in the best possible world. The real point of contention is the role of profit: an incentive to production, a form of exploitation? Can it be one without being the other?

All of this lays the groundwork for raising the critical question of profit. There are two ways to think about the function of profits under capitalism. In the Marxist conception, capitalists’ restless search for profit drives the pace and shape of economic growth, making it the ultimate “motor of the system”— but it’s judged to be an erratic and arbitrary motor that ought to be replaced by something more rational and humane. In mainstream economics, on the other hand, profits are understood simply as a benign coordinating signal, broadcasting information to firms and entrepreneurs about how to satisfy society’s needs most efficiently

Each of these versions contains some truth. Look at the mainstream account. Its logic is straightforward: a firm’s profit is the market value of the output it sells minus the market value of the inputs it buys. So the pursuit of profit leads firms to maximize their production of socially desired outputs while economizing on their use of scarce inputs. On this logic, profits are an ideal coordinating device.

But the logic only holds to the extent that that an item’s market value is actually a good measure of its social value. Does that assumption hold? Leftists know enough to scoff at that idea. The history of capitalism is a compendium of mis-valued goods. Not only do capitalists draw from a treasury of tricks and maneuvers to inflate the market value of the outputs they sell (e.g., through advertising) and drive down the value of the inputs they have to buy (e.g., by deskilling labor). But capitalism itself systematically produces prices for crucial goods that bear little rational relation to their marginal social value: just think of health insurance, natural resources, interest rates, wages.

In other words, under capitalism firms can increase their profits by efficiently producing things people want. But they can also increase them by immiserating their workers, despoiling the environment, defrauding consumers, or indebting the populace. How do you obtain one without getting the other?

The standard answer to this dilemma is what you might call the social democratic solution: let firms pursue their private profits, but have the state intervene case by case to forbid them from doing so in socially harmful ways.
...
But the social democratic solution is unstable — and this is where the Marxist conception comes in, with its stress on pursuit of profit as the motor of the capitalist system. There’s a fundamental contradiction between accepting that capitalists’ pursuit of profit will be the motor of the system, and believing you can systematically tame and repress it through policies and regulations. In the classical Marxist account, the contradiction is straightforwardly economic: policies that reduce profit rates too much will lead to underinvestment and economic crisis. But the contradiction can also be political: profit-hungry capitalists will use their social power to obstruct the necessary policies. How can you have a system driven by individuals maximizing their profit cash-flows and still expect to maintain the profit-repressing norms, rules, laws, and regulations necessary to uphold the common welfare?

The author of the essay does offer a solution. Acknowledge that management and ownership can be divorced, because they are already divorced in the big publicly traded corporations (to ridiculous levels now: google issued non-dividen, non-voting shares and unbelievably people bought those!). Socialize finance, the ownership of the big businesses, but let them be managed towards market goals.

At one level this solutions seems obvious and easy: firms already operate that way, and finance is already state-dependent (too big to fail, bailed out by the central banks when they periodically blow the debt bubbles they keep inflating). So why hasn't it been done? Why socialized losses and privatized profits in finance? Fear of the idea of state-ownership?
I recall when all banks in my country were state-owned. They competed and operated commercially as they do now, except that lending for consumption was uncommon (as it was in the 1980s elsewhere in Europe). They innovated (joined together to create one of the first nation-wide payments system and ATM networks). I recall thinking, when a government first started selling them off: why?
So there is one weakness in the answer given in this essay: it is in fact the social democratic unstable situation. A goal, not an endpoint. But if the goal improves on things, it's worth it. As the author also acknowledges, there are no endpoints to human history.

If anyone bothers reading the whole piece, what do you think? How can the problem of profit be solved while maintaining independently operating firms? Can the nationalization of finance be the best solution?

 

[Lexicus]

The author of the essay does offer a solution. Acknowledge that management and ownership can be divorced, because they are already divorced in the big publicly traded corporations (to ridiculous levels now: google issued non-dividen, non-voting shares and unbelievably people bought those!). Socialize finance, the ownership of the big businesses, but let them be managed towards market goals.

At one level this solutions seems obvious and easy: firms already operate that way, and finance is already state-dependent (too big to fail, bailed out by the central banks when they periodically blow the debt bubbles they keep inflating). So why hasn't it been done? Why socialized losses and privatized profits in finance? Fear of the idea of state-ownership?

I agree that there is no rationale for private profit coming from publicly-traded companies or the largest financial institutions (and this, by the way, includes hedge funds). But I don't think that the entire finance sector needs to be nationalized, just the largest banks. Financial systems in modern times are all, at the final analysis, state-dominated and state-maintained; much of the private financial sector is morally no different from the tax farmers of the Roman Empire.

The standard answer to this dilemma is what you might call the social democratic solution: let firms pursue their private profits, but have the state intervene case by case to forbid them from doing so in socially harmful ways.

...
But the social democratic solution is unstable — and this is where the Marxist conception comes in, with its stress on pursuit of profit as the motor of the capitalist system. There’s a fundamental contradiction between accepting that capitalists’ pursuit of profit will be the motor of the system, and believing you can systematically tame and repress it through policies and regulations. In the classical Marxist account, the contradiction is straightforwardly economic: policies that reduce profit rates too much will lead to underinvestment and economic crisis. But the contradiction can also be political: profit-hungry capitalists will use their social power to obstruct the necessary policies. How can you have a system driven by individuals maximizing their profit cash-flows and still expect to maintain the profit-repressing norms, rules, laws, and regulations necessary to uphold the common welfare?

This solution is limited. The key is that corporate governance needs to be changed from its current authoritarian/autocratic model to a more democratic model. The organization of 'the private sector' shouldn't be taken for granted by any leftist, but too many simply assume the private sector is an inherently 'capitalist' realm while the state is an inherently (or the only potentially) 'socialist' one, which is why most people on the left and on the right conflate socialism with government control of economic enterprise.

Mmong the people who accept the premise I put in italics above, there is plenty of debate on what a 'democratic model' for enterprise might look like.

If anyone bothers reading the whole piece, what do you think? How can the problem of profit be solved while maintaining independently operating firms? Can the nationalization of finance be the best solution?

"Private profit" needs to be deconstructed. The problem isn't that firms have more income than expenses over an arbitrarily-defined time period. The problem is that surplus goes to enrich a relatively tiny stratum of society. That state of affairs is what we need to find a solution for.