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The Value Of Capitalism Has Nothing To Do With Giving People An Opportunity To Get Rich

The value of capitalism lies in motivating people to produce high-quality, low-priced products. Without that, it’s worthless

The Difference Between WHAT People Get & WHY They Get It

People who buy lottery tickets think that the purpose of operating a lottery is to give people an opportunity to get rich.

They are wrong.

The purpose of operating a lottery is NOT to actually give lottery players a chance to get rich. It is to make the lottery operator rich.

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Conservatives think that the purpose of having a capitalist economy is give everyone the opportunity to make huge amounts of money.

They are wrong.

The benefit from operating a capitalist economy is its ability to motivate entrepreneurs and investors to supply consumers with large quantities of high-quality, low-priced goods and services.

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Cash prizes are merely a tool designed to give lottery players an incentive to buy lottery tickets.

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The chance to get rich is merely a tool designed to give entrepreneurs and investors the incentive to invest in, start, and operate businesses.

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Because lottery prizes are merely an incentive to get people to buy tickets, lottery prizes are designed to be no larger than required to generate the maximum net revenue for the lottery operator.

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Because operating profits are merely one of the incentives to get people to start, operate and invest in businesses, operating profits need to be no larger than necessary to motivate entrepreneurs and investors to create and operate businesses.

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The Carrot & Mule Metaphor

If you want a different metaphor, consider a mule loaded with baggage. That mule is the entrepreneur.

The bunch of carrots the mule’s owner dangles in front of the mule to get him to transport the freight is the potential wealth the entrepreneur hopes to make by operating and investing in companies.

The system of transporting freight by dangling carrots in front of a mule loaded with baggage is capitalism.

The mule’s owner doesn’t offer carrots to the mule because he wants to make the mule happy. He offers the carrots in order to motivate the mule to carry the freight.

Carrots cost money so the owner doesn’t want to give the mule any more carrots than he has to.

The people who are eventually going to take delivery of the baggage carried by the mule are the consumers.

The citizens of a capitalist country have no reason to be nice to entrepreneurs and investors, and they don’t benefit from entrepreneurs and investors making more money than is required to motivate them to start and invest in businesses.

The goal of the Owner-Mule System is to as cheaply as possible use mules to transport freight for the benefit of the owner and the owner’s customers.

The value of having a capitalist system is to as cheaply as possible motivate entrepreneurs and investors to operate and invest in companies that will give consumers large quantities of high-quality products at a low price.

To the extent that capitalism fails to do that, it is worthless.

The Value Of A Capitalist, Market Economic System Lies In The Benefits It Provides To Buyers, Not Sellers

All the benefits that people ascribe to a capitalist economy, all the positive reasons people give for wanting to live under a capitalist economic system, are that it produces

All of the above are benefits that a capitalist market system provides to the buyers of goods and services. None of them are benefits to the sellers.

None Of The Commonly Accepted Benefits Of A Capitalist, Market Economic System Are The Rewards It Provides To Sellers

No one praises the capitalist system because it gave Mylan the ability to increase the cost of an EpiPen by 600% and massively increase its profits at the expense of at-risk consumers

Nor should they.

The operating profits that capitalism generates for companies are not a benefit of or a goal of the system, but rather operating profits are merely a portion of the fuel that motivates entrepreneurs and investors to continue inventing, investing and producing.

The less of that fuel the system needs to keep it functioning the better for the people for whom capitalism is actually valuable, namely, the consumers of the goods and services that the capitalist system produces.

Why Executives Are Obsessed With Increasing Operating Profits

Executives are customarily given stock options that are usually exercisable in a year or less. That means that even a small increase in the stock price can result in a relatively huge short-term payment to the executives.

Share prices will often be moderately increased by improvements in the company’s quarter-by-quarter operating profits.

While the company’s IPO stock price is mostly based on the public’s hopes and dreams, a higher quarterly profit can nudge the share price up by a dollar or two, and if an executive has an option for a million shares, an increase of only two dollars/share means a quick, extra two-million dollars in the executive’s pocket.

It’s the executives’ obsession with these relatively small quarterly increases in the share price that drives their cost-cutting, price-increasing conduct, all of which is contrary to the interests of consumers.

3 Ways To Increase Operating Profits

A company can generate higher short-term profits by:

Selling More Units Increases Costs & Is Slow To Generate Higher Profits

You increase profits by selling more units at the same or lower profit per unit by:

All of the above cost the company additional money, but lowering prices, increasing quality, etc. are exactly what consumers and the general public want a company to do.

Additionally, in order to sell more units the company also needs to:

Selling more units will generate more warranty claims and more lawsuits.

And, actually recording any higher profits on the balance sheet from increased sales takes a substantial period of time.

For these reasons, increasing profits by selling more units is the absolutely last way any business person wants the company to make more money.

Cutting Costs & Increasing Prices Quickly Increases Profits

On the other hand, selling the same number or fewer units at a higher profit per unit doesn’t require incurring any additional costs. In fact, if you sell fewer units at a higher price you need fewer workers, less materials, less capital, smaller facilities, less equipment, lower shipping costs, lower warranty costs, fewer lawsuits and less advertising and marketing expenses.

You increase profits per unit sold by:

Increased profits from cutting costs and raising prices are reflected on the balance sheet almost immediately.

Increasing Operating Profits By Cutting Costs & Raising Prices Hurts Consumers

Unfortunately, all of these strategies that increase profits per unit are contrary to what consumers and the general public want the company to do.

The path that every executive absolutely wants to take to earn greater profits is increasing the profits per unit sold by cutting costs and raising prices and fees, and the last way that any executive wants the company to increase profits is by selling more units at the same or lower profit per unit sold.

The Conflict Between What Is Good For Executives & What Is Good For Consumers

Executives want the company to make more money by earning a higher profit per unit sold.

Consumers want the company to make more money by selling more units at the same or lower level of profit per unit sold.

The Two Ways Entrepreneurs & Investors Profit From The Capitalist System

The capitalist system makes money for entrepreneurs and investors in two materially different ways, one minor and one major:

Sale Of Stock Is The Major Way Founders Get Rich

To be clear, investors are people who invest money directly in the company, not people who buy stock from private individuals through the stock market.

People who buy shares on the public market do not contribute one dime to the company and are not investors in it. They are merely gamblers betting on how the company will do, no different from the betters who wager on which horse will win a race while none of their bets end up in the pocket of the horse’s owner.

A great deal of the wealth received by a company’s entrepreneurs and investors comes from the sale of stock at or relatively soon after the IPO, not from the distribution of operating profits as dividends over the long term.

Consumers are not materially adversely affected by investors and entrepreneurs getting rich from a material increase in the early stock price.

A Highly Profitable Sale Of The Founders’ Shares Often Bears Little Relationship To The Company’s Operating Profits

The bulk of the wealth that the capitalist system generates for entrepreneurs and investors comes from the early sale of its stock at a price that often bears little or no relationship to the company’s operating profit.

In fact, it has become common for founders and investors to become wealthy from the sale of shares of stock in companies that have done nothing but lose money for every single day of their existence. Uber, Lyft, WeWork and Doordash immediately come to mind.

Tesla was founded in 2003 and never made a single penny of profit until 2020, suffering seventeen consecutive years of operating losses, none of which prevented the original shareholders from realizing fabulous wealth from the sale of their stock.

Amazon was founded in 1994 and lost a total of over $2.8 BILLION dollars over its first four and a quarter years. Amazon recorded its first net profitable year in 2003, nine years after the company began operations. None of that prevented the founders and investors from becoming extremely wealthy.

During the periods of these dismal profits all of these companies saw their stock prices soar and their founders and early investors become very rich.

Managing Capitalism So It Continues To Provide The Maximum Benefits To Consumers

How do we manage capitalism so that it provides enough financial rewards to motivate entrepreneurs and investors to create, invest in, and operate companies while also deterring them from raising prices, adding fees, cheapening quality, and lowering wages in an endless quest for ever higher operating profits?

We do that by highly taxing profits that are in excess of a certain percentage of deductible costs.

If you limit profits to no more than a set percentage of deductible costs then increasing the profit per unit sold past that threshold won’t do the company any good because that extra profit per unit sold will just be taken away in taxes.

That cap on profit per unit sold will leave executives with only one way to increase profits — by selling more units at the same or lower profit per unit, which is what consumers want the company to do.

Limiting Profits/Unit Sold Will Not Reduce Investment

Because of the material disconnect between a company’s long-term quarter-by-quarter operating profits and its early share price, long-term limitations on a company’s operating profits will have little or no material effect on the early share price and on the rewards to entrepreneurs and investors through the sale of some or all of their stock.

Since the principal way entrepreneurs and investors get rich is from the sale of stock at or shortly after the IPO, not from long-term operating profits, a limitation on operating profits will have little effect on the incentive to entrepreneurs and investors to start, operate and invest in companies.

All Powerful Systems Need To Be Controlled

Capitalism is like fire, useful when carefully controlled and damaging when allowed to run free.

Restricting profits to a set percentage of deductible costs is one of the ways you restrain companies from acting contrary to the best interests of consumers, whose interests capitalism is designed to advance.

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