Profits, Economic Growth and the Poor

(NOTE:  this is an updated version of a previous 2011 post)

Many people are uncomfortable with the concept of profit. For them there is an underlying belief or feeling that profits made by entrepreneurs and their businesses are made at the expense of the rest of society.

However, in economics, profit is defined as the excess of the total revenues of a business over its total costs. Profit is the surplus left over from the revenues after paying for the raw materials needed for production, paying the workers, paying the lenders and investors and, of course paying all of the various r due to all government entities having jurisdiction over the enterprise.

For the business there are two ways of increasing profit.

The first is to increase sales and revenue while holding costs constant. This can be done by expanding and finding new customers, improving the quality and desirability of the product to attract new customers, better marketing of the product, etc.

When businesses expand more labor is needed which creates more jobs which results in income opportunities for more people. 

The second is to keep revenue constant while reducing costs. This involves finding less expensive ways of doing things without reducing the quality of the product.

Costs can be reduced in many ways. A business can invest in more efficient equipment which enables its workers to produce more in the same amount of time with the same or less effort. This saves on labor costs because it allows a business to expand its output without hiring more, or as many more workers, as would be needed in the absence of the labor saving machinery.

Costs can be reduced by eliminating waste. In the era before digital photography when photographers had to use film when taking pictures the giant film producer and developer, Eastman Kodak, was a big consumer of silver which, in the form of silver nitrate, was used in the making of photographic film. The amount of silver used to make each roll of film was small but, when multiplied by the number of rolls of film produced each year it added up to a very large amount.

After taking pictures with the film, photographers would send the film back to Kodak to be developed and developing film made up another large portion of Kodak's business. In the developing process the silver nitrate used in making the film was literally washed down the drain as it was no longer needed once the picture had been taken. Again, the amount of silver nitrate was minute. However, when multiplied by the hundreds of thousands of rolls of film developed by Kodak each year a lot of silver was going down the drain. Because of this Kodak invested in equipment to recapture this used silver nitrate and recycled it for use on new film thereby reducing the cost of purchasing silver for film making considerably.

Another example of cost saving by recycling was described in a 2008 entry on this blog entitled Saving Money and the Environment by Recycling old Roadbeds. In this case, companies that tear up and remove the old, broken asphalt from roads that are being enlarged or replaced no longer send the truckloads of asphalt they remove to landfills, instead, they use a recycling process that extracts up to 80% of the bitumen, the basic ingredient in asphalt, from the chunks of old road and use that in the building of the new road thereby reducing the cost of building the new road.

The point of this is is that while the hard life of the poor is mitigated somewhat by government programs and private charities, the real force that alleviates poverty is the pursuit of profit by driving down the cost of production which, in turn drives down the price of goods brought by consumers both rich and poor.

It is this lowering the cost of living that has been and still is, the main force improving the lot of the poor.

Links to Related Articles:

Prices, Profits and Low Income Consumers

Going Green Is Not Cheap

Solar Energy and Economic Efficiency

Scotland is Voting on Independence Today

Today, Thursday September 18th, all Scots age 16 and older can go to the polls to decide whether or not Scotland should remain a part of the United Kingdom or become independent.

While Scotland was an independent nation during the Middle Ages, it has shared the same monarch with England since King James VI of Scotland succeeded the childless English Queen Elizabeth I in 1603.  James was the closest heir to the English throne following the death of his cousin Elizabelth who had never married and left no children to succeed her.

While the two nations shared the same monarch from 1603 onward they remained independent nations (just as Canada and other Commonwealth nations today have Queen Elizabeth II of England as their Queen but are independent of Britain).

It wasn't until 1707 that the Parliaments of both nations enacted legislation uniting the two kingdoms into  the present day United Kingdom of Scotland, England and Ireland.  The flags of the two kingdoms were combined as well with English banner containing the red cross of St. George, the patron saint of England, on a white background combined with the white cross of St. Andrew, patron saint of Scotland, on a blue background to form the Union Jack which is the flag of the United Kingdom,

Pro independence forces seem  to be mostly idealistic young people, artists and other intellectuals and nationalist politicians.   Opponents seem to be people satisfied with the current political arrangement as well as businesses and those concerned about the economy of an independent Scotland.

The current Scot government is basically socialist and the British Labor party dominates Scot politics.  Independence will be a threat to the Scot economy since the extensive welfare system in Scotland relies heavily subsides from both England and the EU.

The leaders of the independence movement feel that they can survive on oil revenues and taxes on the wealthy English owners of Scottish estates.  They are also banking on being allowed to join the EU.

However, there are some clouds on the horizon.

First, while ownership of the North Sea oil fields would  fall to Scotland once it is independent, vast new oil and gas reserves in North America (Canada and the U.S.) threaten to drive oil prices down as well as replace oil with less expensive natural gas.

Second, as for the wealthy English landowners, wealthy people don't mind spending money but they like to get something in return.  Simply paying more taxes is not appealing and they may abandon the properties (or donate them to a charitable preservation trust) thereby avoiding the taxes.

Finally, with separatist movements in other EU nations, such as Catalonia in Spain, EU members may not be open to allowing a separatist Scotland into the EU for fear of encouraging separatist movements in their nations.

We will know in a few hours whether or not voters in Scotland vote to separate.  If they do, they may find themselves in for a rough ride economically.

September 11th Remembered

Thirteen years ago on September 11, 2001 terrorists hijacked four airliners.  Unlike previous airline hijackings in which the hijackers sought ransom money or escape to another country, these four planes were hijacked to use as flying bombs.

Like most Americans alive then, I remember that day.

It began normally. Like other mornings I got up early and checked my email.

Signing into Yahoo I noticed a small headline about a plane having crashed into one of the towers of the World Trade Center in New York.  I remembered as a youth having seen an old movie on TV about a plane flying into the Empire State Building on a foggy night.  My father commented that this had really happened and, seeing the Yahoo headline, I assumed that the pilot of a small plane had been in a fog or had flown off course and had crashed into the WTC.  If the Empire State building had withstood  a small plane flying into it then so could the the larger WTC, so I proceeded to my email and thought no more about it.

After breakfast I got my two sons into the car and we headed off to school and work.  As usual, one of them immediately turned on the car radio expecting their favorite FM rock station but instead got a news commentator from the AM talk station I listened to when they weren't in the car.  They pushed the AM/FM button but the same man kept talking.  Pushing the button again and same reporter was still talking.  In frustration my older son changed to another FM rock station and the same fellow was still speaking.  

I suddenly remembered that all three stations were owned by the same broadcaster and that something was going on.  It took a couple of minutes before the reporter finished the details he was discussing and gave an update on the towers having been hit by an airplane for those who had just turned in.

This is when I learned that it wasn’t a small plane going off course and flying into the World Trade Center but a commercial airliner full of highly flammable jet fuel that had been taken over by hijackers and deliberately flown into the World Trade Center.

After dropping my boys off at their respective schools, I drove to work where everyone on the office was talking about the attack.  While the community college I worked for remained open all day, most of us spent as much time on listening to updates from radios and the Internet as we did working.  The school officials did eventually announce that all evening classes would be cancelled and the college would shut down completely when the work day ended at 5 pm.

It was my youngest son’s 14th birthday and I had promised to buy some pizza and take it to the school cafeteria for him and his friends for lunch.  

I called my pizza order in to a small pizza parlor down the street and left early for lunch.  When I arrive at the pizza parlor the young lady at the pizza parlor looked shaken and told me that she had recently moved to Tucson from New York City and was worried about friends and relatives back in New York.  That is when I remembered that I had two cousins whom I hadn’t seen in years as well as my Mother’s cousin all whom lived in the New York City area.  

While none of my relatives lived in Manhattan, my two cousins did work there while my Mother’s cousin had retired and lived out in Queens.  

I managed to get my pizzas and get them over to my son and his friends, but due to heavy traffic, I was somewhat late and don’t know how much of it  they actually got to eat.

I had to wait to get home to make calls about my family.  All the lines to New York City were tied up but I was able to get ahold of my two cousin’s sister in Connecticut.  She had received an email from my cousin Tom’s wife saying that he had made it home safely.  He worked on Wall Street either in one of the other towers or a neighboring building and had been able to see the fire from his office.

His building evacuated and he spent the rest of the day walking around the traffic jams and ultimately making his way home to Brooklyn on foot.  With most public transit shut down and some bridge closures it took him hours to finally make it home.

It turned out that the company that my other cousin worked for had decided to escape the high rents in Manhattan and had moved most of their staff to an office building across the river in New Jersey a couple of years before. This cousin  had seen the towers burning but was safely away from the target area.

I wasn’t able to reach my Mother’s cousin either but did receive a call from my sister in Western New York who informed me that he and his family were safe in their home that was a safe distance from lower Manhattan.

One of my sisters had been attending some sort of trade gathering in Toronto at the time of the attack and, with the border closed and all non-military aircraft in the U.S. grounded, she ended up spending a few extra days in Toronto.

I was fortunate that everyone I knew had come through safely.  And, living in Arizona, I was far from the the disaster area.

However, I was impacted slightly a couple of years later.  Shortly after the terror attack I met and fell in love with a woman from Russia.  Having been divorced and a single parent for over a decade I was ready for a new love.  

Things went fine for us except that new laws and regulations and the consolidation of border security and immigration in the new Department of Homeland Security resulted in some obstacles and delays in our coming together.  It took longer than usual to process the paperwork to bring my new fiancee and her two children to the U.S.

Once here, I discovered that the Department of Homeland Security was so busy changing signs and headings on stationery that brought the processing of green cards to a crawl.  It thus took close to six months for my wife to get a green card allowing her to work.  

This was the economic impact of 9/11 on my household finances.  Upon her arrival my household doubled in size from my two sons and me to now include my wife, my two sons, her son and daughter and me - moving from supporting a household of three to one of six puts a big dent in a family’s finances.  

But we tightened our belts and made it through.  Her green card finally arrived on a Saturday and by the following Wednesday she had found a job and started working.

Textbooks and Rising College Costs

With summer over, it is back to school for the thousands of students enrolled in the nation’s colleges and universities.

For most students and/or their parents, a college education is an expensive undertaking.  In addition to tuition and room and board, books and supplies will consume a large portion of a student’s education budget.

Despite steadily rising book costs, textbook publishers have found themselves squeezed for revenue.  A major source of revenue loss can be attributed to the burgeoning used textbook market.

The used textbook market has always existed but, prior to the rise of the world wide web and sites like eBay, it was not too big of a  threat as the market for used textbooks was limited to students in the next semester’s or year’s courses.  Since many localities had only one college or university options to buy or sell used textbooks was limited.

Despite the limited re-sale market, publishers were able to narrow the market further by regularly coming out with new editions of books.  Generally this just involved a few changes (such as reversing the order of chapters, adding or replacing some content, etc), and then convincing professors to adapt the new addition for their next semester’s courses.

However, with the rise of auction and resale sites like eBay, Amazon, Half.com, etc. the market suddenly became global and textbook publishers found themselves competing for business against students selling used copies of the same textbooks the publishers were selling new.

It wasn’t just individual students logging on to sites where they could sell their used textbooks at the end of the term.  Other entrepreneurs, including entrepreneurial students, began purchasing used books directly from students and then re-selling them online at a higher price.  Some even went so far as to negotiate with the local college bookstore to purchase unsold new books that were not going to be used the next term.  This saved the bookstore the cost of shipping the books back to the publisher.  

Publishers struck back by going digital themselves.  This took the form of developing digital content, including robust content and tests (thus saving professors from having to hand out, monitor and correct tests) designed to aid in the teaching and learning.  This content required the student to purchase an access code that allowed them to enter the online site.  The pass code was good for the semester and initially only available with the purchase of a book and pass code package.

The addition of online content available via a pass code not only produced an additional revenue stream from the sale of pass codes, but, packaging the code with the textbook forced students to purchase their books new (since pass codes cannot be re-used, students could not re-sell them).  This was a blow to the used book market as students had to purchase new books in order to get the pass code for the online access which many professors required as a part of the course.

The threat of new laws or regulations on the textbook industry has resulted in many publishers offering the option of purchasing the textbook and access code separately.  This allows students to purchase the access code alone and then purchase a used textbook or, in some cases, rent a textbook.  

Purchasing the access code separately from the book offers the potential for savings.  However, it pays to shop around.  The college bookstore may sell the access code separately and also offer both new and used copies of the textbook as well as various bundling options.

However, the publisher may also sell access codes directly from their websites and prices might differ from those at bookstores.  Also, used copies of the textbook may be less expensive from an online seller than from the bookstore.  Ebooks are also an option that are usually less expensive than print books and there are some eBook and access code packages which could result in a savings.

Finally, many college bookstores offer a textbook rental option that may be a less expensive alternative to purchasing a used textbook.  Amazon.com also offers textbook rental options and this may be more of a savings than the bookstore offers.

College is expensive and textbooks are a big part of this expense.  However, investing some time checking all options can result in a significant savings in this area.  

Finally, in making your decisions on how to go about keeping your textbook costs down keep in mind that purchasing a new or used print edition gives you the possibility of getting some of your money back at the end of the term by selling the textbook.  This, of course, cannot be done with rental books or with most eBooks.