Profit Isn’t a Dirty Word

I only watched a few minutes of Jeremy Paxman’s interview of the tiresome Russell Brand. But I heard the bit which the Adam Smith Institute picked up, where Brand says:

‘David Cameron says profit isn’t a dirty word, well I say profit is a filthy word,’ the comedian passionately declared. ‘I think the very concept of profit should be very much reduced because wherever there is profit there is also deficit. This system currently doesn’t address these ideas.’

and criticised:

Ah, no. Entirely misunderstanding what is going on here.

Profit is simply the proof that value is being created. Leave aside for a moment who is getting that profit and consider what it actually is. We have the costs of our doing something: whatever those costs might be in labour, wages (no, not the same thing), raw materials, other inputs and for purists, the opportunity costs of doing something else with all of these things. We also have the income from having done this thing, whatever it is. All profit is is the acknowledgement that the income is higher than hte costs of having done it. Thus value has been created.

And we like people creating value: it’s really rather the point of having an economy at all, creating value. For if no value was being created then there wouldn’t be any value for us human beings to consume.

Indeed, we can go further. The opposite of profits is losses: they being an acknowledgement that value is being destroyed. What is being produced from our process is less valuable than the things we are using to do the production. There is therefore less wealth to share around: people are all poorer therefore.

Losses are the destruction of economic wealth, profits the creation of that wealth.

Now I’m not going to disagree with the Adam Smith Institute, and I’m certainly not going to agree with Russell Brand – because RB is clearly someone who thinks that if anyone makes a profit, it can only be at someone else’s expense.

What I am going to say instead is that the ASI explanation is about as clear as mud. Because it doesn’t explain what is meant by “value”. What is meant by “value”? How is “value” created? How is it measured? What are the units by which it is measured? Lengths are measured in units of feet or metres: what is value measured in?

I spend a lot of my time building physical models of things like asteroids or rock clouds, and I have to be very clear the whole time about the units I’m using. So the first thing I want to know about any numerical quantity (and if something can be “less valuable”, it implies a numerical measure) is what its units are. Until I know that, it doesn’t mean anything.

I’d like to imagine a simple tool, like a flint axe, and think about what its value might be, and how that value might be measured. Let’s suppose that a Stone Age man living in a cave in a forest needs to keep a fire burning to keep warm, cook food, and keep wolves at bay. And let’s suppose that it takes him 4 hours a day to collect windfallen twigs and branches to carry back to feed a fire at the mouth of a cave. And because he has to wait for windfalls, he has to walk further and further into the forest to find them, and it can take 6 hours or longer to collect enough and carry it back.

And then someone shows him how to make flint axes from the flints strewn around his cave, by splitting them with a deer antler hammer to produce a sharp edge. And let’s say that it takes him two days to make a flint axe. And let’s say that now that he’s got a flint axe he can do something he couldn’t do before, which is to chop branches off trees, instead of waiting for them to fall off of their own accord. And let’s also say that he now no longer has to walk long distances, but can cut branches from trees near his cave. And let’s say that the result is that instead of it taking him 6 hours a day to collect all the wood he needs, he now only needs 2 hours using his flint axe.

His flint axe is thus saving him 4 hours of work a day. And since it took him 48 hours of work to make the flint axe, it only takes 12 (48 divided by 4) days for him to break even on his little enterprise. After 12 days, he will have done just as much work with his axe as he would have done without it. So, if his axe lasts for more than 12 days without getting blunt or shattering, he’ll find that he has an easier life using a flint axe than he would if he didn’t have one.

His flint axe is a labour-saving tool. And its value is found in the amount of labour it saves over its lifetime. And so its value is measured in hours. Or, if you want to be more exact, hours times his physical workrate: kilowatt hours.

Useful tools like flint axes – or knives or scissors or saws or hammers or bicycles or cars or airplanes or ships or computers – are all labour-saving devices, and their value is measured in kilowatt hours. And the more tools like this that humans possess, the less work they need to do, and the more leisure time or free time they have.

Now, someone will probably object that not all the things that we value highly are useful tools of this sort. We also like things like beer and cigarettes and art and music and literature and movies and chess. And these things aren’t labour-saving tools. So they can’t be measured in units of kilowatt hours.

But actually, they can be. Because all the things that we enjoy for their own sake, like beer and cigarettes, need leisure time in which to enjoy them. And since useful tools make free time for us, then luxuries and amusements and pastimes use up that free time. So the value of these various amusements lies in the amount of time or energy we devote to them in our free time (if we have any). No free time means no beer, no cigarettes, no art, no music, no literature, no movies, no games of chess.

So the value of a chess set, for example, is all the hours that can be devoted to playing chess, minus the cost of making the chess set. And since chess sets are usually pretty cheap to make (I’ve made a few myself), and seldom wear out, a chess set may be as valuable in disposing of free time as a flint axe is in making free time.

Anyway, without going any further, we now have some physical units – time or energy – with which to measure value. And we can start to think straight. And we can go on to say that the value – in hours or kilowatt hours – of something like a flint axe is also the profit that is made out of it. And we can explore what happens when somebody makes flint axes and sells them to other people at some price or other. And we can show that it’s possible for someone to make a profit making and selling flint axes, and for the buyers of those axes to make a profit too. So when you sell goods at a profit, you’re not stealing from anyone (unless your prices are too high, or your axes are badly made). If we didn’t make profits, we wouldn’t have leisure or any of the things we enjoy doing in our leisure time, and life would consist of unending toil, and – more likely – death.

This all Idle Theory, and in several essays I discuss value and profit and prices in the terms just set out. I think it’s a much simpler and more rational way of thinking about this sort of stuff.

But that’s just me.

About Frank Davis

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25 Responses to Profit Isn’t a Dirty Word

  1. Junican says:

    You could also put the definition of ‘profit’ quite simply thus:
    “Profit arises when an activity produces more goods in an equal or shorter period of time”.
    Is that definition not as perfect as can reasonably be expected in a simple way?

    The horror that we have seen in recent years has been ‘experts’ wasting the profit that we all create on regulations designed to reduce the profit that we all create.

    Crazy.

  2. legiron says:

    Russel Brand makes huge amounts of profit by doing nothing of any value at all. If it was possible to shoot someone slowly, then it should be done to him.

  3. Bill says:

    Is a profit a gain created when something is sold at a price beyond the cost of creation?
    Is a profit an increase in value because a market moves?
    Is a profit an increase in value when a market is manipulated?
    Is a profit a gain in time when someone finds out how do something more effectively than before?
    Is a profit an increase in value or time when someone eliminates a task they used to do?

    Is a profit an increase in leisure time created when someone forces someone else to do something they think they have to do but don’t want to do?
    Is a profit a gain when someone gets paid X pounds to do a job and their employer charges someone else y pounds to get the job done?

    Would life really be unending toil and then death without the profit motive?
    Is a satisfying life an impossibility without profit?

    Perhaps it’s simply the measure of profit which is bogus not the concept or the definition.
    Something to ponder throughout the day. Beats gathering in a special building to compare clothes on a Sunday (with apologies to George Carlin)

  4. Bill says:

    Just re read the post and saw this
    “‘David Cameron says profit isn’t a dirty word”
    which renders the whole argument pointless.
    Apologies for clogging the thread.

    Is there really any difference between Cameron and Brand?

    • nisakiman says:

      Is there really any difference between Cameron and Brand?

      Not much. They are both clueless, not very funny comedians who have yet to get a grip on the real world.

      • Bill says:

        “get a grip on the real world.”

        What is the real world and who decides it’s real?
        Not trying to be a ‘smart arse’ about this but to Cameron and Brand they are both living and acting in their version of a real world so what is the real world these two slebs should be living in?

        • nisakiman says:

          Yes, of course it’s subjective.

          I guess by ‘the real world’, I mean the world most of us live in, where we have to deal daily with the nitty-gritty of survival. Where we have to concern ourselves (among other things) with the actualities of paying bills, keeping a roof over our heads and putting food on the table.

          Cameron and Brand don’t need to consider those things – they are taken care of. As a result, their feet aren’t anchored to the ground in quite the same way ours are. They can afford to drift into the realms of abstract political philanthropy (as they see it) and ignore the fact that most people have priorities that differ from their own. As Angela Harbutt pointed out in her article in The Free Society:

          “… parents and children’s concerns are not about smoking, nor indeed alcohol. And not even drugs.”

          and goes on to quote from a ‘Guardian’ article on a recent poll:

          “Parents’ greatest fears when their child starts secondary school are that they will be bullied or will not do well, rather than whether they will smoke, drink or use drugs. “

          “Given the concern about young people and addictive substances, only very small numbers of parents and children mentioned them. Among parents, 4% said trying drugs was their top concern, 2% cited smoking and a mere 1% said it was their child drinking alcohol as their top concern that worried them most.”

          And yet we are subjected to heavy-handed legislation and hugely expensive propaganda campaigns dealing with these very things that are of no consequence to most people – the people living in what I would call ‘the real world’.

        • Bill says:

          nisakiman
          Thanks for the reply. It is appreciated. Not sure what the hell the Guardian quote and that statement from the lady has to do with anything but there it is.
          I guess you want Brand and Cameron to exist in your real world more than you want to be in their real world whose differences is measured in the financial ability to pay the demands. Fair enough I get it.

  5. nisakiman says:

    Not sure if anyone has posted this yet (if so, I haven’t noticed it), but I just came upon this link on handymanphil’s blog.

    Bulgarian Parliament Committee Moves to Lift Smoking Ban

    How about that?

    • beobrigitte says:

      Great news for the Bulgarians!!!!
      But then, tobacco control will be already on the way to Bulgaria to have a quiet word…

      That reminds me, was the junior MP Soubry sacked for rushing off to give a vote that the parliament didn’t get a chance on viewing and discussing? We haven’t heard anything; surely this WAS CAUSE for more than one headline and deserved a lengthy spat of condemnation from the BBC, didn’t it?

  6. smokingscot says:

    “I think the very concept of profit should be very much reduced because wherever there is profit there is also deficit. This system currently doesn’t address these ideas.”

    Odd statement to make, though I do believe that several individuals have said something similar. Chairman Mao Zedong, Joseph Stalin, Kim Il Sung and Kim Jong Il are just a few who come to mind.

    So “this system doesn’t address these ideas” because they’re terribly unpopular, don’t work at all well and had to be maintained by force. And that does cost an awful lot of money. And that has to come from somewhere. Taxes. And taxes come from… err… profits?

    Kim Jong-un of course sort of continues the facade, while profiting rather well from it.

    http://www.telegraph.co.uk/news/worldnews/asia/northkorea/10392838/Dennis-Rodman-describes-7-star-party-lifestyle-of-Kim-Jong-un.html

    • beobrigitte says:

      Thirteen years earlier the US EPA had published a report showing a weak link between ETS and developing lung cancer. But, of course, smoking is a powerful risk factor for lung cancer, whereas any relation between smoking and breast cancer is subtle at best.

      Of course smoking is a powerful risk factor for lung cancer??? This needs some explanation!
      Risk factor? We are being fed that it is the ONLY cause of lung cancer by tobacco control. Never mind HPV or chromium or the air we breathe.

      The relation between breast cancer and smoking is NON-EXISTENT. Just admit it!

  7. beobrigitte says:

    ‘David Cameron says profit isn’t a dirty word, well I say profit is a filthy word,’ the comedian passionately declared.

    How much profit has Russell Grant made from absolute bullsh*t, boring the nation and beyond into sleep over the last few years?

    ‘I think the very concept of profit should be very much reduced because wherever there is profit there is also deficit.

    That’s the ONLY hilariously funny thing Grant ever said!!! Perhaps he is beginning to understand the concept of comedy!

    This system currently doesn’t address these ideas.’
    Thank God for that!

    So when you sell goods at a profit, you’re not stealing from anyone (unless your prices are too high, or your axes are badly made).
    I’d like to add to the end of this sentence: “or you are not paying the employees a due wage”.

    These days we do not make only one or two “flint axes”; we mass produce them and require a number of people to do this. Regardless of how many “flint axes” are being sold, the people making them need to be paid. The profit at the end of this goes to “the boss”. So, profit making is a risky business unless you declare yourself a “non-profit making” organisation.
    That way you can also claim tax exemption and, better even, get money from the government, thus the tax payers, who end up with an insecure income, a lot of work, little time for themselves and nothing to show for it, other than a mental collapse (long term sickness = greater cost for government) or heart attack at the age of 30!

    The greatest profit (in my opinion) lies in balance rather than driving the work drones to collapse. A steady, good working pace is much more productive than this frantic yuppie pace some idiots, like Bloomberg in New York, are proud of. It creates too many (also mental) fluctuations and if you try to produce something in order to make profit, it is bloody hard to judge/extrapolate what is going to happen next! A very insecure picture for a long-term thinking person!
    Let’s face it; WE ALL want to profit and make profit; it makes the world go round. However, we also might wish to avoid imbalance; it usually tips the scale!

    • nisakiman says:

      How much profit has Russell Grant made from absolute bullsh*t, boring the nation and beyond into sleep over the last few years?

      Well you have the right of it there Brigitte, however I believe Russell Grant was the rather portly gay astrologer beloved of the nation’s ‘Mail’ readers, whereas Russel Brand is the so-called ‘comedian’. ;)

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