Profit, unlike Gain, is a Measure of Theft from the System

The idea that profit-driven capitalism is the only system capable of delivering sustained improvement in living standards is a deeply cherished belief of many Americans, despite considerable evidence to the contrary. Some of you might even argue that the dissolution of the Soviet Union is definitive evidence of that ‘there is not other way’. Of course, doing so would require us to ignore that state communism did take Russia from a chaotic 19th century society to a superpower within 30 years, inspite of the massive damages inflicted by Stalin’s paranoia and WW2.

We would also have to ignore that the massive and unprecedented increase in the standard of living in the USA from the mid-1930s to mid-1980s was largely financed by direct and indirect government spending. Imagine an American middle-class without the New Deal, WW2-related spending, GI Bill, Space Race and all other Cold War related spending. But this is not a post about which flavor of capitalism is better than which flavor of state communism. Instead I will try to show how one of the fundamental proxy measures of success in capitalism (and state communism) eventually up destroying them.

I am certainly not the first to point out that monetary profit is fundamentally a measure of theft from other people or groups. However unlike many others, I am more interested in its downstream and knockon effects than the morality and mindset of those who benefit from it. There is also the interesting issue of why capitalism seems to “work” as long as it is kept under control, but becomes destructive to almost everybody once it is unregulated. In my opinion, all of this comes down to difference between profit and gain.

Some of you will counter by saying that “but aren’t profit and gain two words for the same thing”. Well.. not quite and let me explain. We use the word profit to denote a situation where one party benefits at the expense of another party. It is fundamentally impossible for all the parties involved in a profitable transaction to gain from it and is therefore a zero-sum interaction. Now contrast that an interaction where some parties gain more than others but pretty much everybody gets a pretty good and fair deal. Still confused? Let us look at some examples.

Consider the case of a generic multinational corporation which has managed to increase its reported profit by off-shoring its manufacturing base to a low-income country. So who are the winners and losers in this type of scenario? The biggest winners in this scenario are almost always the top-level management, large stockholders and those involved in the financial (and other) intermediation necessary to make it happen. Minor winners include the poorly paid workers in the low-income countries now working at a slightly better paying job and the consumers who benefit from a slightly cheaper product. So who are the big losers in this transaction? Well.. everybody else- starting from the unemployed workers to local business who depended on those workers and the local governments who depended on tax revenue from those workers, business and the corporation.

Now consider the case of a company, business or an institution developing a new way to fulfill some human need or desire. How many people were negatively affected by the development of computer technology? What about antibiotic drugs? What about better automobiles or airplanes? What about effective vaccines for diseases like polio? In each of the above examples, pretty much everybody benefited (or gained) far more than they lost. Moreover each of these products increased the size of the economy without a significant increase in income inequality. That is the important, and crucial difference, between profit and gain. You might also notice that my description of gain is pretty close to most peoples mental image of functional capitalism.

So why is gain-based capitalism in full retreat and why has its profit-based form taken over?

It comes down to concentration of power in the hands of a few large players or oligopolization. Capitalism, or indeed any other system, works best when there are many and almost equally capable competing players in the system. That is also why capitalism seems to function pretty well when a new area opens up for business. But sooner or later you will end up with a handful of major players who will dominate the new area.

But why would narrowing the list of players favor profit over gain. Well.. once again there are many interrelated reasons but they all arise from one characteristic common to all large human organisations- who runs them. The higher levels of large and established organisations are almost always dominated by sociopaths who have learned to climb the pyramid by stepping on others. These climbers often have no understanding of what it takes to make the enterprises they are leading function properly, nor are they interested in making them function properly.

The mindset of these sociopaths is dominated by two interlinked desires. Firstly, they want to subjugate and impoverish everyone else. Secondly, they want to do so while basking in material comfort. They have no interest, desire or even the mental ability to be anything else. These billionaires, “business leaders”, CEOs, board members, banksters, head honchos etc are functionally identical to parasites or viruses in that they both lack a purpose for existence and an internal ability to restrain themselves. They survive and thrive by exploiting the structure of the system and eluding systemic attempts to destroy them. But why are they so interested in generating more profit and suppressing gain? The answer to that question lies in what happens to monetary profit once it is generated.

Monetary profit, unlike gain, is almost never reinvested back into the system. In other words, all money made as profit exits the functional economy and impoverishes everybody else.

Only sovereign governments can replenish this supply of money. It is therefore not surprising that billionaires and other rich people spend lots of their time making sure that the government does not replenish this supply or that they get most of that replenishment. It is not about more money for them, as much as it is about less money for everybody else. Of course, it certainly helps that they have a whole bunch of morons to do their dirty work.

What do you think? Comments?

  1. March 24, 2014 at 5:15 pm

    What is needed is not communism, but eugenics based National Socialism.

  2. Webe
    March 25, 2014 at 7:18 am

    Quite right. People who preach about how it would be better getting the rest of society to be rich than redistributing wealth have not thought ver long about what good it would be if everyone were rich. Who would there be to serve you at the store or drag you luggage to your hotel room? The point of being wealthy is to commandeer other people, and that works just as well if you are far wealther than they are or if they are much poorer.
    What is peculiarly odd about American capitalist fervour (the term itself was coined by Marx) is that they extol democracy (for the voting system), but when it comes to the concrete social relationships that shape your day, it turns out they don’t think everybody should have an equal say, but all the power is aggregated in very few hands and people spend their working lives in hierarchically organized corporations which obssess over how the chain of command works.
    The distinction you make between profit and gain is what informed the whole tradition of classical economics (including Adam Smith) who distinguished price and value, and who were largely crusading against economic rent (siphoning off of income via monopolistic or other coercive pricing practices to capture income without adding value: the classic case is rent for land or water that already exists and has no cost of production). Marx recapitulates that whole tradition in a very clear way. Despite being labelled the enemy, Marx was one of the first economists to concentrate on empirical data: the history of how things actually worked in previous societies instead of dogmatic theories about how things ought to be related.
    It seems obvious that a society will be more productive and prosperous if the wealth needed to produce things is equitably distributed among the population than if the means of production are concentrated in a few hands: what on earth would the motive of such ownership be? Concentration of ownership is inherently coercive and is the opposite of producing benefits for the whole population with the means at hand.

  3. Anon
    March 26, 2014 at 2:03 pm

    ” We use the word profit to denote a situation where one party benefits at the expense of another party. It is fundamentally impossible for all the parties involved in a profitable transaction to gain from it and is therefore a zero-sum interaction. Now contrast that an interaction where some parties gain more than others but pretty much everybody gets a pretty good and fair deal. Still confused? Let us look at some examples.”

    Pretty much This.

    Unfortunately many economists consider situations in which a number of people get fucked over to be perfectly acceptable, as long as they satisfy the conditions for “Kaldor Hicks efficiency”.

    Speaking of economists, many of them are beginning to realize that their theories and models are complete nonsense. For instance here’s Joseph Stiglitz discussing some of the problems with modern economic theory:

    Here’s another economist

  4. March 30, 2014 at 6:16 pm

    You should check out The Capitalist’s Dilemma – Clayton Christensen: http://youtu.be/_ukREOADEKM . It goes into some of the areas covered in this post

  5. meofios
    April 20, 2014 at 6:00 am

    Then how do you explain Japanese zombie companies or Chinese SOE which are profitless but are used by elites to steal from the system?

  6. meofios
    April 21, 2014 at 4:35 am

    http://brontecapital.blogspot.com.au/2012/06/macroeconomics-of-chinese-kleptocracy.html

    “The SOEs are the center of the Chinese kleptocracy. If you manage your way up the Communist Party of China and you play your politics really well may wind up senior in some State Owned Enterprise. This is your opportunity to loot on a scale unprecedented in human history.”

    “A normal business – especially a State Owned dinosaur run by bureaucrats – would collapse under this scale of looting. But here is the key: the Chinese SOEs are financed at negative real rates.”

    “But ultimately the Chinese establishment like inflation – it is what enables their thievery to be financed.”

  7. meofios
    April 21, 2014 at 6:43 pm

    You can see the parallel in the US, after more than 5 years of ZIRP, US corporate profit has reached all time high even as GDP growth rate hovers near recession level.

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