Postoji li ekstra profit
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Postoji li ekstra profit
Problems with a “Fair Rate of Return”
If you want to do business in Venezuela, you will have to let the government do your bookkeeping to make sure you aren’t making too much. Venezuelan president Nicolás Maduro’s decree, called the “Organic Law of Fair Prices,” sets a maximum “fair” profit at 30 percent of costs.
Besides the practical problems of implementing such a measure, the ceiling rests on a basic misconception: the idea that there is such a thing as “fair” or “excessive” profits misunderstands the function of profit — and loss — in a market economy.
To bemoan a capitalist earning high profits is like complaining about a surgeon saving too many lives.
If you want to do business in Venezuela, you will have to let the government do your bookkeeping to make sure you aren’t making too much. Venezuelan president Nicolás Maduro’s decree, called the “Organic Law of Fair Prices,” sets a maximum “fair” profit at 30 percent of costs.
Besides the practical problems of implementing such a measure, the ceiling rests on a basic misconception: the idea that there is such a thing as “fair” or “excessive” profits misunderstands the function of profit — and loss — in a market economy.
To bemoan a capitalist earning high profits is like complaining about a surgeon saving too many lives.
Trinity-
Posts : 12923
2014-04-17
Re: Postoji li ekstra profit
The Profit-and-Loss Test
The great Austrian economist Ludwig von Mises cherished the market process because he thought it was a wonderful institution for using the world’s scarce resources in the way that best serves consumers. The market prices of various resources, from labor hours to tons of iron to acres of farmland, show entrepreneurs how valuable those resources are in the most valuable activity — as judged by the spending decisions of consumers — and thus provide the right incentives to deploy them rationally.As I detail in my new book on Misesian thought, Choice: Cooperation, Enterprise, and Human Action, we can understand Mises’s perspective by imagining a silly scenario where a building contractor decides to coat apartment interiors with solid gold. Surely tenants would be willing to pay a lot more in rent if their apartment had gold-coated countertops. So why would this be a foolish move for our entrepreneur?
The answer, of course, is that even though revenues might be much higher, the use of gold would drive the monetary costs of the project higher still. The decision to start using large amounts of gold would transform the previously profitable operation into a loser.
Ultimately, value is subjective, so maybe the entrepreneur would go forward with his plan. Perhaps it’s a publicity stunt, or perhaps he wants to use some of his personal wealth to take a public stand for sound money. Nonetheless, his accountant would inform him of the monetary implications of his plan. To the extent that the builder is in construction in order to “make money,” the market prices will guide him to abandon the foolish idea of coating apartments with gold.
Trinity-
Posts : 12923
2014-04-17
Re: Postoji li ekstra profit
Gaming the System
Here’s another twist, which I just recently learned from an expert on energy markets: if the officially allowed profit margin is higher than the going rate of interest, then the owners of a publicly regulated utility can borrow to become leveraged, thus magnifying the actual rate of return their shareholders enjoy.For example, suppose the government oversight board allows the utility to earn 5 percent on its operation. But suppose the owners vote to have the utility issue bonds at 3 percent, and they raise as much outside debt as they themselves put into the company with their original investment. So if the utility is funded with, say, $50 million from initial investors and $50 million in bonds, then the regulators might think it satisfies the rule to let them earn a total of $5 million in accounting profit. (That’s a 5 percent return on the $100 million put into the company.)
But after paying 3 percent to the bondholders on their loans of $50 million (which is $1.5 million), the owners of the utility are left with $3.5 million of earnings, to be distributed on the basis of their out-of-pocket $50 million investment. That’s a 7 percent return, not the 5 percent return the public utility board thought it was bestowing.
https://www.libertarianism.org/publications/essays/theres-no-such-thing-excessive-profits?utm_content=66786108&utm_medium=social&utm_source=facebook
Trinity-
Posts : 12923
2014-04-17
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