The profit overdrive problem under capitalism

Profit, it seems, is the ulterior driver in capitalism. Without profit, there is no incentive to actively and persistently participate in the economy, or so the economists claim.  The more profit a business makes, the more successful it is.  The more profitable a company is, the more valuable and the more sought after it will be and the more compensation its executives will receive.  Profitability is the raison d’être of a public-listed company and the definitive measuring stick for comparing company performance.

If profit is just a reasonable reward for decent or good deeds and behavior associated with providing goods and services, we do not think anyone will have any objection to that and there will be no controversy.  However, when profit is conflated to become the persistent extraction and greedy pursuit of maximum monetary gains by all means for the self-interests of the concerned business entity and the self-enrichment of the associated executives and stockholders, it is unacceptable and detrimental to the integrity of the economic system.  So, profit is not the enemy.  Excessive profit is.  How do we draw the line between profit and profiteering?

Conceptually, in microeconomics, it postulates that the right price can be reached when demand meets supply in a free and competitive market and everybody is happy.  Unfortunately, the market is not always completely free and competitive, so there is always room for exploitation and manipulation.  The irony is that there will be no economic profit in the long term if it were that case, since extra competitors will enter the market to wipe out the profit.

Such exploitation and manipulation, resulting from the structural flaws in the market or even in the economic theory, have been tolerated or overlooked, except egregious ones, since there seems to be more economic gains than harm on the surface.  Besides, the government can be counted on to be the last resort to fix the flaws, fill in the gaps and mop up the mess.

Except that such systemic market defects are being abused and it becomes abundantly clear that a certain class of people are taking advantage of such deficiency to enrich themselves.  In the old days, the same kind of self-serving people might be the landowners or the feudal lords who oppressed the peasants by controlling all the farmland and thus their livelihoods.  The capital owners are the gentry of the modern day.  This is how the scenario plays out in recent history.

In the capitalist economy, the capital owners put up their financial resources for investing in or lending to entrepreneurs who create businesses, which hire labor and pay them salaries that create a money stream for people to buy goods and services of those businesses.  It is a feedback loop: the more businesses, the more help needed, the more hiring, the more salaries paid out, the more money to spend, the more profit to make for businesses, and the more money sloshing around to expand existing businesses or create new businesses.

Whenever and wherever there is a for-profit business model, money has to be and will be made to be delivered and directed to a selected few.  Typically, the capital owners are on the top of the food chain and most of them are predatory, constantly on the lookout for profit.  As soon as they spot a profitable business, they zero in as investors, demand to be rewarded with their investments, soak up as much money as they can and eventually leave with their gains to prey on another target.  They claim that it is their right for their return on investment (ROI).  We call them the ‘profit vultures.’

Such profit seeking for profit’s sake kind of investment concept is counterproductive to the conventional idea of devoting money plus time, effort, and energy to a particular undertaking with the expectation of a worthwhile result in the long run.  What is supposed to be a positive, healthy and mutually beneficial relationship becomes impersonal, selfish and exploitative.  Whatever is deemed as worthwhile over time becomes solely as monetary profit.  The time, effort, or energy aspects of planting seeds, breeding, nurturing, growing and harvesting in the end are completely lost in the evolution of investment, culminating in the creation of the stock market.

In the early history of investment, the purchasers of stocks, bonds and other securities were literally described as speculators.  According to some purists, they still are.  Being labeled as investors now give them certain legitimacy but the stock market is still like a big casino and speculation is rampant.  Anyone with money can buy shares of the companies listed on the stock market and sell them at any time as long as the market is open for business.  It requires minimum amount of time, effort, or energy.  As a matter of fact, the whole process can be computerized and preprogrammed, to maximize the chance of profiteering.

There is little regard to a company’s potentials other than the ROI.  Long term investment for capital expenditures like hardware, machinery, equipment, etc. or for employee wellness, training and empowerment, meant to increase productivity, may make a company profitable but take a longer time to bear fruit.  Those are hard ROI money.  Why go the hard way when there is an easy way?

Easy ROI money involves short term manipulation of various financial instruments, assets and processes, through flipping, high frequency trading, stripping companies of valuable assets to cash out by mergers and acquisitions, price fixing, loan sharking, gambling (or hedging for the financially literate), tax cheating, insider trading, cooking the books, etc.  Some may be legal and some may not and a lot of such practices are likely in the grey area, but it does not stop some investors and their financial partners from taking advantage of them.

Such financial maneuverings with the explosion of new and complex but mostly non-productive financial products created with the help of the mathematics and computer talents and wizards have enriched hedge fund managers, investment bankers, big bank CEOs, mergers and acquisitions specialists, financial instruments traders, financial advisers, portfolio managers, financial services analysts, etc.  There is even a new term, ‘financialization,’ created just to describe such phenomenon.  According to Oxfam’s annual study of inequality released in January 2016, the financial sector is a prime source of rising inequality; one in five billionaires comes from that industry.  Income inequality has become an insidious and infectious disease that rears its ugly in unexpected territories these days.

How do countries founded on democracy like the U.S. and Europe, allow such misdeeds to happen and continue?  Self-interest and greed have driven the profit overdrive to the extreme and to the mainstream, to the point where it is powerful enough to override the moral norm and sometimes the legal limit, from bending the rules and cheating to outright breaking the law.  Unless they are apprehended, the avaricious ‘profit vultures’ are presumed innocent until proven guilty.

Capital owners have always been the originators of businesses and the promise of profit has always been the motivation and reward of starting new businesses.  It seems to work until recent history, but the profit mandate is increasingly giving people license to feed their insatiate appetite for greed endlessly.  Now, such profit overdrive has become so addictive and contagious that it has the potential to disrupt and upend the capitalist economic system.

How do we fix it?  Is there a way to tame the profit overdrive?  Can the profit mandate be decoupled from capitalism?  Should we eliminate the profit mandate altogether?  If yes, what can we replace it with? Is there a way to make capitalism benevolent and even altruistic?

Let us imagine what if…