Economics Questions

Re: Profit and return in an Austrian economy

whitespiral — Sat, 10 Nov 2007 09:10:12 GMT

Leonidia,

Thank you for the prompt response. The missing link was indeed uncertainty. So then, I suppose that the Austrian explanation of profits today is exploitation of uncertainty plus exploitation of dislocations created by market intervention and regulation-is this about right?

Re: Profit and return in an Austrian economy

leonidia — Fri, 09 Nov 2007 02:12:51 GMT

whitespiral:
In an Austrian economy, where I imagine every industry to be hypercompetitive and a very high value placed on innovation, aren't we bound to see endless price wars and all profits subsidizing more research in hope of grasping more market share?

Price wars aren't bad. All profits subsidizing research? I doubt it. But, in any event, the degree of investment would be decided by the time preference of the consumers.

whitespiral:
Isn't any profit quickly eroded by the entry of a new competitor who thought he might share some of the action?

Assuming a hypothetical evenly rotating economy (an economy where there is no uncertainty), the rate of return across all industries would even out to the same level and would be the "pure rate of interest". This rate would be dependent on the time preference of consumers and nothing else. Higher timer preference. Higher rate. It would even out because if too many competitors entered one industry, greater profits in other industries would spur them to leave. To the extent that there is uncertainty in a real economy, entrepreneurs exploit this, and make greater profits if their predictions prove correct.

whitespiral:
That might seem to be great for society and not so for companies, but that in itself is a problem for society.

It's not a problem for "society" at all. Government intervention is a problem.

whitespiral:
So would we see an increasing focus on getting ROIs from capital gains rather than pure profits, as we see with many businesses today? Would it ever become acceptable to debt and equity investors alike that a company will never turn a profit and that their ROI would be made by capital gains, whether in the stock market or through private sales and purchases of shares?

The emphasis today on capital gains is a direct result of government manipulation in the money supply. Increasing the money supply causes stock prices to rise, but not as a result of real growth. With a 100% reserve gold standard the emphasis would be on profits as it should be.

whitespiral:
I guess the other question is do you think that this approach (capital gains Vs profits), which is already very prevalent today, is a healthy trend?

No. We need to get back to monetary stability, achievable only through a gold standard in my opinion.

whitespiral:
Is forgeting about profit a healthy way of evaluating investments?

Depends. In today's economy, who knows? In a true free market economy with no monetary growth, absolutely not.

whitespiral:
Is the fact that Facebook gets valued in the billions just because of its utility to Microsoft, Google etc. healthy?

Healthy to whom? I wouldn't invest in it. But if Microsoft actually pays billions for it, that's obiously what they value its utility is to them.

Profit and return in an Austrian economy

whitespiral — Thu, 08 Nov 2007 21:12:27 GMT

In an Austrian economy, where I imagine every industry to be hypercompetitive and a very high value placed on innovation, aren't we bound to see endless price wars and all profits subsidizing more research in hope of grasping more market share? Isn't any profit quickly eroded by the entry of a new competitor who thought he might share some of the action? That might seem to be great for society and not so for companies, but that in itself is a problem for society.

So would we see an increasing focus on getting ROIs from capital gains rather than pure profits, as we see with many businesses today? Would it ever become acceptable to debt and equity investors alike that a company will never turn a profit and that their ROI would be made by capital gains, whether in the stock market or through private sales and purchases of shares?

I guess the other question is do you think that this approach (capital gains Vs profits), which is already very prevalent today, is a healthy trend? Is forgeting about profit a healthy way of evaluating investments? If yes, does that hold true even a company's book value is $0? Would for example the fact that it is potentially a good match for other, bigger companies automatically give it value? Is the fact that Facebook gets valued in the billions just because of its utility to Microsoft, Google etc. healthy?

Looking forward to your views.