November 01, 2006

Pro-markets, Anti-profits

Pro-Markets, Anti-Profits

It's a statement so dangerously wrought with oversimplification that I've been avoiding saying it for a while now. But simplification can sometimes be as, or more, useful than oversimplification is dangerous, and nothing sums up my political economic stance better than reducing it to two positions: pro-markets, and anti-profits.

First and foremost this stance requires a split from a great mistake made by most traditional appwroaches to economics from critical marxism to laissez faire boosterism. Market activity and profits are not the same thing, but in fact too very separate forces and while they can and often do work in concert with each other, they do not always do so and certainly do not need to. If the goal of economics is to gain an understanding of how economies operate in order to improve them, and I believe that that has to be a major goal of economics, than coming to grips with this split is absolutely essential.

My stance may simplify down to "pro-markets", but it is essential that this stance not be confused with the far more common "pro-market" approach. The difference might on the screen or page be a matter of one letter, the addition or absence of an "s", but like many differences between the singular and plural this is actually a difference of nearly infinite ramifications. There are many (upon many) markets in this world, but "The Market" in the sense it is often used does not exist at all. Of course "the market" can exist in a very local sense, the way a mom might tell a kid to "go to the market and pick up a quart of milk." But "The Market" in the abstract sense that both proponents of "The 'Free' Market" and their many critics like to use it just does not exist at all. There are many markets in this world and the behavior of these markets in fact varies wildly. The baazar in Marakesh just does not function the same way the London Stock Exchange functions or the the way my local coffee shop functions. Heck, even the New York Stock Exchange functions differently than the NASDAQ market, and in fact there are even multiple markets for New York Stock Exchange stocks, each of which behaves slightly differently. The market for art at Sotheby's auction house is different than the market for art in a Chelsea gallery, which is different than the market in an Amsterdam gallery which in turn functions radically different than the nearby Dutch flower auctions.

A market is at it's core simply a place of exchange, a bounded area where people converge, either physically or via a mediating technology, in order to move exchange goods, services and information. To be pro-markets is to be in favor of the existence of markets, and to understand that each and every one of them behaves differently. Sometimes this behavior can have quite positive results, sometimes they can be rather negative and generally what reality gives us is a complex and nuanced mix of the two. Overall though markets are places of exchange and exchange itself is a healthy operation. By realizing that some markets behavior better than others we can begin the process of designing better markets, emphasizing those that work well and improving those that need work.

In order to evolve and create better markets, we need to make at least one key conceptual leap, me must break the historic tie between market functions and profit. Markets do not need profits in order to function at all. In fact it's possible to interpret profits in such a way that they are actually indications of an improperly functioning market, where the existence of profits indicates an inefficiency in market actions, a flaw that a more perfect market would correct. It's not an approach I'm about to follow, because perfect markets do not exist in the real world, and what I'm interested in is working markets, and the task of making them actually better.

Profit is perhaps one of the more unclear and misunderstood words in the english language. So much so that a large portion of the entire profession of accounting is dedicated to the art of obfuscating profits, pushing and shifting them around in ways that tend to be highly unprofitable to the public at large but rather rewarding to a select group of individuals. And just as profits can miraculously transform in the hands of a skilled CPA, the very meaning of the word has evolved in a rather confusing mash of economic theory and government action.

In classical economic theory, profit was deeply associated with the figure of the entrepreneur. Profit was how these idealized people would make their way in the world, they would purchase goods, transform or move them and then resell in a market. The difference between their expenses and the selling point, provided it was positive, was profit and this profit functioned as the entrepreneur's reward, salary and means to continue their business. It's quite a positive viewpoint of profit, and unfortunately it has little to do with the reality of how business is conducted and profits actually calculated today.

The entrepreneur as mythologized by classical economics barely exists anymore. Even those bold individuals who embrace the title today tend to wrap their enterprises in the protective skin of some form of limited liability corporation rather than proceed as sole proprietors or in traditional partnerships. Profits that pass through these organizations take on a radically different form than they do in the naive view of an entrepreneur. In fact even in a sole proprietorship or partnership profit transforms the minute that salary is introduced to the equation. For salary is after all an expense and profit is from a legal standpoint what occurs after all the expenses are paid. As soon as an entrepreneur is getting a salary, suddenly profit is no longer their just compensation for effort and risk, but in fact what is left over after they have been compensated for their time and work. Some of this profit is reinvested back into the enterprise of course, but all to often it is extracted from the system and into the hands of a limited set of individuals.

Classical economics is essentially about "individual profit", yet in this day and age while there are plenty of individuals making profits, it is almost always "organization profit" that they are making. Organization profit is not the organization's reward for good work, but in fact it's punishment, this is money that is extracted from the organization and back into private hands. It is still entirely possible to incorporate and run a business as a not-for-profit corporation, and that's an action with rather interesting ramifications. Such a business would not be eligible for federal tax exempt status in the United States, and it still could generate surplus revenues for which it would need to pay taxes, but those surplus revenues would not actually be profits. These revenues would have nowhere to go but back into the not-for-profit corporation. This is the corporate for as a (semi)closed loop system. There is still plenty of money going in and out as expenses and revenue of course, but ultimately the money flowing through the system must remain concentrated on the organizations goals and purposes. For profit corporations are not closed at all, but in fact function as the opposite, they are designed explicitly to function as money extraction machines concentrating wealth into the hands of a few individuals.

A certain type of reader might be tempted to look this view of profits as something akin to Marx's "surplus value", but nothing could be further from the truth. Marx's construction hinges upon a rather absurd and mythical idea of labor value, and ultimately views all surplus revenues as a negative. I however take the exact opposite stance, that surplus revenue is an incredibly positive thing, it is ultimately a key engine of economic growth. It is only when surplus revenue is transformed into "profit" and then extracted from the organizations that created that a real problem emerges. So while marxists like to see the economic problems of the world as being a function of "the market", I locate those problems in a very different place, in the hands of the individuals that skim off the top of market activity, and in the organizational forms that enable and encourage this behavior. This leads us to the second challenge of a pro-markets and anti-profits stance, how do we develop better organizational forms for economic activities?

The for-profit corporation in it's current form is less than 200 years old. It is only in the last century that it has truly erupted to become the dominant economic form in Western economies. There is no reason other than historical circumstance that it needs to be the dominant form now. In fact from the Korean chaebols to the Basque Mondragon Cooperatives there is plenty of evidence that other organizational forms can function on a global industrial level. In The Wealth of Networks Yochai Benkler has argued that the networked efforts of open source programers and wikipedia addicts represents a whole other economic organizational form. But ultimately I believe that's just the beginning. Organizations and markets are two forms of entities that exist on a scale larger than the individual. It makes them exceedingly hard to conceptualize, understand and transform, but they are ultimately the creations of humans and it is well within our means to improve upon them. Pro-markets and anti-profits, it is an over simplification for sure, but that is where I start.

Posted by Abe at November 1, 2006 08:51 AM


Excellent stuff here! I've been reading through various agrarian economic/philosophical sources and found the distinction between optimum and maximum to be compelling. Maybe this parallels to some extent surplus revenue vs. profits?

Well, labour value as "absurd and mythical" is only about as "absurd and mythical" as the unquestioned phrase "economic growth" as "engine of the economy." Engine? Economy? Growth? Marx still has a leg up on ya' Abe. I still have to finish commenting on your book, but you bear more than an uncanny resemblance to Marx when you think you are arguing against Marx. Marx never argued against "surplus value," insofar as for Marx's analysis in CAPITAL (1) surplus value is simply the name he gives to what you also see as a root problem -- profit. And what you value, like Marx, is something to do with a shared surplus for the labourer. This IS labour value for Marx. Now, on the other hand, Marx assumes a pure labour or object capable of existence outside of any exchange economy or commodity fetishism. This is the point where Derrida critiques this attempt to purify an object, phenomena or process from possible spectrality, fetish, commodification, exchange in general, dissemination, etc. And strangely enough you too define a certain space as "bounded," has having a boundary, clearly defined even -- this is your Market, plural or not, and in a strange inversion of Marx, it is this "mythical and absurd" space you seem to want to keep clear of all that would be distinguished from exchange without being free of it -- what Marx called labour, the thing itself, all that life is worth striving for, in other words. best, tV

LeisureArts - care to elaborate on which agrarian economic/philosophical sources? There is probably stuff there I want to read.

tobias - with all do respect I'm not going down that rabbit hole. I don't particularly agree with your interpretation of Marx and the way it maps to my work, but as soon as you start talking intensely about interpretations of Marx you are headed towards a place that has nothing to do with actions in the real world. I'm a designer first, I like to solve problems and I do that by conceiving and then testing and iterating. Marx, or at least Marx plus the various interpretations of his followers is a big trap that prevents that from happening and I'm staying as far away from that path as possible.

Abe, are you familiar with Christopher Gunn? His books Reclaiming Capital (with his wife) and Third-Sector Development: Making Up for the Market might be relevant to your research. Although Gunn's coming from a Marxist perspective, he keeps his research rooted in the real world by doing case-studies of non-profits, co-ops, credit unions, etc. and their role in economic growth. I'm reading Reclaiming Capital and it seems pretty reasonable thus far. Third-Sector Development seems to be an update of Reclaiming. You might find some useful case studies in there.

Interesting, will have to check it out, thanks Klint

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