Saturday, November 9, 2013

PROFITS vs GREED

Michael Douglas played Gordon Gekko in the movie Wall Street, where he provided the iconic line ”Greed is good.” An iconic line that somewhat oversimplifies the idea that people and businesses maximizing their outcomes will make out better than any central planner. Essentially, the willingness to enter negotiations and seek win win situations can make both sides better off.

Consumers want products and services at affordable prices. Conversely, businesses need to sell products at a price that both covers cost and fuels future growth. As a result, the win win situation occurs when the consumer willingly purchases a product at an affordable price that businesses are able and willing to sell it for. This key market force is the phenomenon that creates wealth, fosters job growth, and enables economic prosperity for free market societies.

How does one differentiate between a business earning reasonable profits and occurrences of corporate greed? Separating the two is subjective, as each person defines reasonable with various measures. Similar industries may lead to similar windfall profits, but public reactions can differ. Factors beyond the parties and actual transaction can influence whether the general public feels an outcome is a win win situation or an egregious exploitation of one party by the other.

An example of this would compare the technology industry against the pharmaceutical industry. Both industries widely viewed as having large margins and windfall profitability. But, public reactions are remarkably differently.
Whether one is an Apple loyalist or a Samsung enthusiast, either demonstrates the willingness to pay top money for perceived best in market technology. Annually, prices rise for the new models with buyers lining up to be the first in their group to possess the device. In this market, buyers understand the need for investing in R&D, maintaining high skilled workforces, and fostering innovating, justifying the elevated price. Additionally, there are readily available alternatives to smartphones for those not able or willing to invest in luxury devices.

Contrastly, the growing issue of profit margins in pharmaceutical drugs is one that plagues leading providers. Although smartphone buyers tend to read up on market trends, few understand the lengthy drug development and approval process, global market inequities that cause Americans to cover the global cost of innovation, and complex regulatory and competitive structure. But, people can survive without a smartphone, not without their prescriptions.
Pricing strategies in tech more times than not pass as reasonable, while the same strategy in pharma receives condemnation. Importance of product, availability of substitutes, market structure, and societal values all influence whether a company is perceived to be seeking profit or exemplifying greed. Since the general public does not like the perception of exploitation, many pharmaceutical companies go to great lengths to reach out to consumers experiencing hardship. Imagine an Apple commercial offering help to consumers struggling to afford an iPhone. Again, life saving drugs are more important than a smartphone.

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Society should not consider profit a dirty word and understand the natural market regulation that occurs. Windfall profits attract new entrants into the market, dispersing revenues and profits. Once growth stalls, the market will become saturated, eliminating profitability for all. Eventually, firms innovate or seek disruptions pushing boundaries to provide consumers new experiences. Beyond providing innovation, profits help wealth creation that grows society.

As market grow in chase of profits, private sector employment expands and opportunity for wage growth increases. In order to fuel operations growth, firms seek investment from individual and institutional investors, seeking to improve financial positions. In return, profits repay initial investments and attract new opportunities. The economy needs profitable markets for job creations and funding government coffers.

Essentially, the attack on corporate profits is a misguided ideology by those seeking to increase funding for government spending. Profitability in business, small and large, is a sign of a healthy economy. Time to set aside the myth that profits are greed. A healthy free market economy does more good for society than excess government intervention.