You have a point. That's why I mentioned economic profits, which include implicit costs, not just what goes on the balance sheet. A statement of net position obviously doesn't tell you everything you need to make business decisions, but it does tell you things you need to know to keep a business from running long term loses and thus having to close.This falsely assumes the interests of the firm are contained in a proper reading of a balance sheet
You probably have to define profits here. — Count Timothy von Icarus
Payments out to owners, either dividends if stock has been issued, or profit sharing for partnerships. — Count Timothy von Icarus
But obviously the rationale for owner control gets less and less compelling as the company gets larger and the owners less involved in operations. At a certain size, labor should have a say in profit use. — Count Timothy von Icarus
it does tell you things you need to know to keep a business from running long term loses and thus having to close. — Count Timothy von Icarus
As for Lehman Brothers, yes stockholders absolutely lost more financially in direct relation to the bankruptcy. Bondholders and other creditors get paid first in a liquidation, which if I recall did not meet all liabilities, so shareholders got wiped out. — Count Timothy von Icarus
However, in general owners lose more when a company goes belly up — Count Timothy von Icarus
Mandating the the owners of firms turn over control of their firm as soon as they higher any help would create a powerful incentive for businesses not to expand, which isn't what you want. — Count Timothy von Icarus
looking at bailouts — especially in 2009 — shows that the wealthy really have no risks— they’re fine no matter what. They’re too big to fail. — Xtrix
owners have broad portfolios — Isaac
However, in general owners lose more when a company goes belly up
— Count Timothy von Icarus
...but I see no evidence of this. I mean, generally owners are the rich and workers are the poor. — Isaac
If the owner is normally taking such a big risk, then there'd be as much incentive to cautiously share that risk as there would be to recklessly bet the house on it. — Isaac
This is just equating owners with shareholders. It's obviously not the case for small businesses, partnerships and such. — Srap Tasmaner
I think you can grant the claim that owners may lose more in absolute terms, but less as a portion of their total wealth. Why not just say that? — Srap Tasmaner
you'll compete for workers with firms just offering burden-free salary. If the rewards are potentially great enough, people may be willing to enter into this more risky sort of employment arrangement. — Srap Tasmaner
bankruptcy — Isaac
If the risk were genuinely matched to the reward they'd be, on average no better off as a group yhsn they started. — Isaac
it cannot be the case that starting a business is guaranteed by law to be risk-free, can it? — Srap Tasmaner
Try walking through the example with gambling, one rich gambler and one poor, and see how it works out. — Srap Tasmaner
But we're the blind leading the blind here. — Isaac
gambling — Isaac
My thought was simply that everything can be scaled up, the risks and rewards, but needn't be scaled up by the ratio of total wealth to total wealth. See how that works? I can bet more and win more, without risking my entire advantage relative to you, and the ratio of my wealth to yours will just keep growing. — Srap Tasmaner
Yeah, that's true. I think the 'small business' model is a bit different. It still seems that bankruptcy laws protect the small business owner from risk in the same way though. It's not like they're putting their homes up as collateral. The difference is that if the business fails they too probably lose their job. But that still gives them equal risk to their employees, but higher gains. Do bankruptcy laws work differently in the US? There seems to be a lot of presumption about personal financial risk for the small business owner, but that's just not really the case here. — Isaac
If gambling had an equal payoff:risk ratio for each group then the sum gain for each group as a proportion of their investment, would be the same. So each group would, in sum, get x% richer. But that's not what we see, because the gap between the two groups even in relative terms, is getting bigger. — Isaac
Even as the United States continues to experience its longest economic expansion since World War II, concern is growing that soaring corporate debt will make the economy susceptible to a contraction that could get out of control. The root cause of this concern is the trillions of dollars that major U.S. corporations have spent on open-market repurchases — aka “stock buybacks” — since the financial crisis a decade ago. In 2018 alone, with corporate profits bolstered by the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index did a combined $806 billion in buybacks, about $200 billion more than the previous record set in 2007. The $370 billion in repurchases which these companies did in the first half of 2019 is on pace for total annual buybacks that are second only to 2018. When companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.
The investment in the knowledge base that makes a company competitive goes far beyond R&D expenditures. In fact, in 2018, only 43% of companies in the S&P 500 Index recorded any R&D expenses, with just 38 companies accounting for 75% of the R&D spending of all 500 companies. Whether or not a firm spends on R&D, all companies have to invest broadly and deeply in the productive capabilities of their employees in order to remain competitive in global markets.
Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.
Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%.
Why have U.S. companies done these massive buybacks? With the majority of their compensation coming from stock options and stock awards, senior corporate executives have used open-market repurchases to manipulate their companies’ stock prices to their own benefit and that of others who are in the business of timing the buying and selling of publicly listed shares. Buybacks enrich these opportunistic share sellers — investment bankers and hedge-fund managers as well as senior corporate executives — at the expense of employees, as well as continuing shareholders.
In your example above, it's not the bankruptcy laws offering the limitations on liabilities, but it's the corporate structure that creates the business as a separate entity and that shields the investors. — Hanover
the risk to the owner remains substantially higher than then the employee because the owner had a capital investment in the corporation the employee did not. That the owners risk is limited to his initial investment amount doesn't mean he has minimal risk. Often owners invest their life savings into their businesses. — Hanover
Why would I increase access to money (or play time) for those who can't play the game very well? — Hanover
Say I'm worth x and you're worth 1000x. I wager x/10 and win earning say 5/4 my wager, so my wealth becomes 9x/8. You wager 10x and win, earning 50x/4, so your wealth is now 1012.5x. The ratio of your wealth is to mine is now 900:1, instead of 1000:1. So my hunch about how this would work is *wrong*. By wagering 10 times as much in absolute terms, but one tenth in relative terms, you allowed me to close the ratio gap. On the other hand, you used to have only 999 more dollars than I; now you have 1011.375 more. I've closed the ratio gap, but am further behind absolutely. Interesting. What happens when we go again? — Srap Tasmaner
I also suspect that high rollers needn't limit how much they risk, as I surmised here. — Srap Tasmaner
(2) The product generates profit (price - cost). — Xtrix
What Is Profit?
Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question.
Any profits earned funnel back to business owners, who choose to either pocket the cash, distribute it to shareholders as dividends, or reinvest it back into the business.
Do you get tired of being embarrassingly silly? — Xtrix
So the narrative I'm pushing back against is the idea that owners deserve the profits because the risk they take is higher. To satisfy this narrative the facts need to be a) relatively universal - we can't justify the majority by the circumstances of a minority, and b) proportionate - we're relating profit to risk, not just any reward, but the full profits of the company. I still contest both. — Isaac
For the former - There's no class of down-and-out former business owner. A survey of homeless with the question "how did you get here" won't reveal a significant category of "I used to own a bank but it failed and I lost my initial investment". — Isaac
For the latter - The bank's not going to lend with the mortgaged portion of a house as collateral, so whatever the owner's personal stake, it's part of their free capital, not their tied-up capital, so the risk in putting it up is manifestly different to the risk involved in an employee committing their labour to a company (in the hopes that it's successful enough to continue employing them). An employee's labour is an investment that's tied-up, they need the return on that investment to live. An owner's capital investment is capital that's not tied-up (we know this because the bank wouldn't allow it if it was) so their investment is less of a risk. Then there's the fact that the owner can hedge their risk, they can split their free capital between many investments. The worker cannot split their labour between many investments, so again the manifest risk of their investment is higher. — Isaac
Firstly, a business has to survive only a few years for the returns to cover the owner's original investment, so they quickly come out even. It has to continually thrive just for the employee to continue to come out even. Their investment of labour is only ever rewarded with an even cover of how much that labour is worth.
Secondly, when a business is failing the first thing that happens is that it lays off staff. That may be enough to turn it around, or for the owner to recover their costs. For the employee, however, their investment in labour has proven to be a loss early on. — Isaac
if I want for there to be plenty of eggs for all our citizens, it does not follow that the best way to assure that is to pay the egg collectors the same as the chicken owners just because they both assume the same risk. — Hanover
You also overlook the ethical value of property ownership, or perhaps you don't, but you just don't think it has any value. I would argue that it does, which means that a large part of the reason I reap larger rewards for the profits gained in my business is precisely because it's mine. That is, they are my eggs because they are my chickens. — Hanover
I also don't follow why greater risk must (as a matter of ethical imperative) precede reward in order for it to be justified. The fact that I have been able to reduce my risk by being prudent and cautious and by implementing all sorts of hazard controls shouldn't result in my having to share more of my profits with others. To suggest otherwise would incentivize recklessness. — Hanover
Since I would suspect most prior business owners had those qualities to some degree, the reason they are not in the soup line is because they were able to go out and get a job. But that they lost their life savings but were able to find a new job doesn't mean they didn't suffer negative consequences. — Hanover
If you don't like your job or find a better one, you quit and take the new one. That's not the same as having the strings attached to a financial obligation, which is what I take risk to be. — Hanover
I think if you stepped into the typical corner restaurant and saw how they were struggling to keep things afloat, I don't know you'd terribly want to be the owner and might find being a server a better gig. — Hanover
incentivizing them is what we want to do, which means offering them the opportunity to make larger profits and the possibility of making nothing or even losing money. — Hanover
No employee goes into a job with the understanding they may owe their employer at the end of the shift, yet that is exactly what an employer signs up knowing could well happen and he could be indebted to the employee, among others. — Hanover
This, I think, is the key point. There's nothing to own except by the fiat of government. There's no such thing as 'a business' it's a legal fiction. The question we're addressing here is 'ought there be?' I think that question precedes any question about whose property the entity then is, once reified.
As a business owner, what you own is a piece of paper saying the profits are yours. So to make a property argument that one is entitled to those profits is circular. — Isaac
The overwhelming majority of the work force are desperate for a job and would be devastated if they lost the one they had. Few are lucky enough to be shopping around for jobs. — Isaac
The overwhelming majority of corporation owners are extremely wealthy and hold their investments as part of well-hedged portfolio with little to no personal collateral tied to it. Yes, you can pick extreme examples to the contrary, but these cannot really be used to justify a status quo that benefits a very different cohort. — Isaac
Maybe, but again, in terms of share of the employment pool these are fringe cases, so in terms of just treatment of workers, they're hardly a fair target. Furthermore, as I said to Srap, if there's so much risk and so little gain, then sharing that exposure should be welcomed. — Isaac
I agree with the first half, but I don't see why high stakes gambling is the only incentive we could offer. What about low risk low reward options? — Isaac
How's that a loss to the owner? You're basically saying that when there's a mismatch between work done and pay due, its the worker who walks away with nothing (being owed money doesn't put food on the table). I'm sure the owner will be weeping into their leather upholstery at the shame of owing money, but seeing as it'll be the corporation which owes it, their lobster is not so much at risk that evening. — Isaac
The business isn't an abstraction anymore than any term is a conglomerate of various parts. I get that the business isn't simply desks, computers, people, software and the like, but that it's a bunch of stuff holistically, but it's actually a physical thing as much as a university is, a government is, or even an apple is. You can point to the stem, the peel, the seed, whatever, but where is the apple? It's the whole thing. — Hanover
just as I don't have to pay your debts because I am a different person than you, I (personally) don't have to pay the debts of the corporation unless I personally guaranteed it. Just like if I have no money at all, it will do you no good to sue me because I can't pay what I don't have, but if I do have assets, you will be able to collect. What that means is that my million dollar corporation stiffs you, you sue it, and you can garnish its accounts and seize its assets just as if it were a person. — Hanover
The unemployment rate is 3.7%, which is effectively zero when you discount those who don't want to work and those who are temporarily between jobs. Businesses are closing because of lack of workers. I'm not sure what economy you're looking at. — Hanover
I can go online right now, go to the Secretary of State website, and create for me a corporation or an LLC in a matter of minutes. That will not suddenly propel me to great wealth. According to one site, the average small business owner earns between $30,000 and $146,000 per year, with a median of $64,650. When someone tells me they're self employed, that doesn't cause me to think they must be wealthy. — Hanover
If the owner works 100 hours in a week and doesn't sell his product, he earns nothing. That's not a theoretical construct. That occurs all the time. The owner get the profits, and profits are defined as what is left over after expenses. An employee is an expense. What this means is that the owner is paid last with the remainder. That remainder may be zero, it may be debt, it may be riches, and it may be anything in between — Hanover
I think it's valuable to explore the logic of risk and reward, owner and employer, and you've raised some interesting questions, but your analysis is throughout colored by an image of the likes of the board of directors of Exxon Mobil, on the one hand, and the guys and gals working on the oil rig, on the other. — Srap Tasmaner
Google small business employment statistics and you'll find there are many other stories to tell. Something like half of employed Americans work for a company with more than 500 employees, and something like 45% work for a company with fewer than 20, and the bulk of the latter are self-financed businesses. — Srap Tasmaner
Yes, I'm far more concerned about the disparity between the Exxon CEO and his workers then the local restaurant owner and his staff. That my bag. It doesn't on it's own make the narrative any less viable. — Isaac
Only in a minority of cases are the owners taking a comparable risk to the workers. The majority of cases they're not, so the justification based on the increased burden of risk is not sound. — Isaac
there's a reason "conservative" politicians justify corporate giveaways in the name of the corner store, because that business structure is not suspect. — Srap Tasmaner
If we focus on that fundamental structure, we're sort of playing on the conservative's turf. I'm suggesting this is not where the trouble is, but in the financialization of business and in other rent-seeking (rather than just profit-taking) behavior. — Srap Tasmaner
I also think there's an empirical case that business formation, with institutions to support it, raises the standard of living of a community. Look at the success of micro-lending programs, for example. So I need room to consider the corner store blameless, rather than exploitative just because it includes an owner and a few employees. — Srap Tasmaner
Because it's a non-suspect, honest, down-to-earth arrangement which can be used to justify the gross immorality of corporate profiteering. — Isaac
I think that possibly the rot at the heart of the whole thing is this risk/reward model of business in the first place. If communities really do need the corner store is it a sensible strategy to encourage someone to gamble on one at 20:1 odds with the incentive being a high payout. Maybe we ought to just build the corner store ourselves as a community? — Isaac
Yes, I see what you're saying. I'm going to sneak in another leftist dig here though and say that this is why the corner shop is used. Its why Hanover reached straight for the restaurant owner. Because it's a non-suspect, honest, down-to-earth arrangement which can be used to justify the gross immorality of corporate profiteering. — Isaac
... So when it's debt is all "Oh, the corporation is a separate person and the owner's didn't ought to be any more liable than your or I", when it's profits is all "Oh there's definitely a real thing the owners own, it's all the assets, the buildings, the activities..."
Basically, the owners own the profits, but relieve themselves of the debts. — Isaac
I'm open to arguments that there is something else underwriting the disparity, but the starting point has to be admitting that there is such a disparity and putting the obvious label on it.
Reading the first half or so of Why Nations Fail (before I got bored) convinced me that the data is not really ambiguous here. My son's conclusion was that we ought to treat capitalism like nuclear power — yeah it works, and maybe nothing else works nearly as well so it's our best option, but it's super dangerous and we should carefully contain it. — Srap Tasmaner
If we eliminated the corporate structure, while it would greatly impact the way business operates, solutions would be devised to accomplish the same goal. Loan documents could be created to allow investors to take a share in your personally owned business and indemnity agreements could be devised either through insurance policies or investors to accept liability if it should arise.
Limiting liability isn't something that is only accomplished by corporate structure and investment opportunities can be created without corporate structure. You can as much invest in my lemonade stand and have an agreed upon return structure as you can buy corporate stocks, and I can protect my personal assets should I sell poison lemonade by buying an insurance policy or paying someone to post a bond. — Hanover
That seems a reasonable response to their nonsense claim against you, right? — Hanover
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