Making sense of profiteering

If businesses did not make a profit they would, in effect, be giving away their money, and would fail — putting many associated people out of work: their staff, suppliers and customers. But some firms are accused of profiteering — making unreasonably large profits.

By Frank-jurgen Richter

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Published: Sun 27 Nov 2011, 9:29 PM

Last updated: Tue 7 Apr 2015, 9:54 AM

In the western world the service industries and the oil firms spring to mind. Yet in the case of the water, telephones and electricity sectors they have a huge expenditure programme to meet — in terms of maintenance, renewal and expansion of their reach. The oil firms must explore, spending vast amounts on ventures that while likely to produce oil (or gas) may eventually have no yield. Pharmaceutical firms are likewise hampered - research on new drugs is very costly and may not develop a useful product.

No business, however, can justify a vast salary regime. Managers after all are just bosses as in your corner shop- they ought to be prudent entrepreneurs, mindful of their customers’ needs and the costs of goods to fill the shelves: the wrong goods will not sell, and too many errors will lead to a change of manager, or to the failure of the business since no profit is created to expand future business.

On July 30th 2011 there was a call to gather in Datran, Kuala Lumpur to ‘occupy’ and protest against increasing economic and social inequality. By November 4th there were said to be 2,500 “Occupy” communities spread round the globe all acting mainly peacefully and asking their governments and businesses to become more socially conscious and not to be profiteers. There is a collective judgement that a few people are undemocratic, commanding obscene salaries and having no fear of legal repercussions if they fail in their management tasks.

There is a similar unrest expressed against the laissez-faire capitalist movement run by some governments. Ministers determine what projects will be undertaken by the people’s elected Parliament ‘for the good of the people’, and they often spend a vast fortune on tasks that ultimately are failures. Failures because of many factors, but most being poor specification, meddling during the project so varying the goals and simply poor management of a project that had not been properly evaluated. The government is, like banks and some major firms, unconcerned by the downside risk of a project as no one is seen to be the manager responsible, and no one gets sacked.

The people are thus angry at all forms of unevaluated expenditure, especially in these austere times — they would prefer to dispense with much direct taxation. They wish to have low levels of direct tax (yet still support some obvious public services like the police, military, education and perhaps health service) so they would have more cash in their pockets to spend on goods carrying indirect taxation. If an individual wished to buy bread or a luxury item it is their choice, and would be taxed accordingly. But if they have little cash to spend, through being made redundant for instance, they may not even be able to buy any bread. It is said that we, as individuals, may be better decision makers than governments or managers of large firms as we evaluate risk at each operation: we are spending our limited savings. Academically we know we do not do this efficiently, but surely we will be better than governments who seem not to consider risk at all?

What can we do about this? Well, in fact, nothing much rapidly. It is said that the top 10 per cent owns 70 per cent of the world’s capital —and this is not going to change overnight. The inequality is measured by economists as the Gini Coefficient and shows the worst country as Namibia (0.847 - with 1.00 being the theoretical worst). As we said, it will take a long time to alter national stereotypes or national inclinations to saving or wealth management - which in the case of the Orient often goes back as far as the edits of Confucius. However, that is too facile an argument — as Ireland, Italy, Finland and Australia are relatively equal (all under 0.622), and they do not carry implicit Confucian values. However, Italy and Ireland, although ‘egalitarian’ nations, suffer in the European banking crisis.

So again, what do we do about this? One of the complexities of modern life is money or more precisely, the borrowing of money for projects that may not perform well leaving us in debt: which we can’t pay except by further borrowing and betting that bit harder on future winnings. The whole thing becomes untenable without lifting the levels of trust in each other, as we did in the days before much cash circulated—we bartered our way through life, trusting the others to pay in the future. It will be tough on everyone if we collectively wipe out our debts by defaulting. But somehow we must begin again; we must trust deeply, to get the cash circulating and to pay a reasonable salary at each level of society. Then the ‘bread winners’ will be able to hold up their heads and indeed buy bread once more.

Frank-Jurgen Richter is founder and chairman of Horasis that hosts the yearly Global Arab Business Meeting held in Ras Al Khaimah

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