[vimota]

I thought the same, and had to ask some friends to provide another point of view:

If a company like amazon generates very little corporate profit, is that unproductive growth? Aggregate corporate profits are not the only stat that matters when discussing economic growth/value.

[grecy]

> If a company like amazon generates very little corporate profit, is that unproductive growth?

Of course not. There would be more employees, more taxes paid, more buildings being built, more assets, etc. thus more money going into the economy.

I've always dreamed that companies should run with zero profit (like the outdoor store co-ops like REI or MEC in Canada). They could price their products so they don't make any "extra" money each year after all expenses and salaries, etc.

I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.

[TeMPOraL]

> They could price their products so they don't make any "extra" money each year

Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.

> I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.

That would be a nicer world to live, true. Unfortunately, we've created a system in which the primary reason for a company to exist is to make profits - and then we pit companies against each other to minimize profits made. The end result is a lot of creativity unleashed in the process of innovating, cheating and defrauding your way into not being a commodity.

[grecy]

> 't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.

Evidently no. Companies are making hundreds of millions in profit every ear, they're paying their CEOs tens of millions as a "bonus".

They're they're making a lot, LOT more than just "barely above production costs"

[krapp]

We don't actually have a free market, though. Free markets don't exist in the real world, only the "perfectly spherical cow in a frictionless vacuum" world of economic models.

[TeMPOraL]

There is no competitive pressure within a company. CEO pay is usually an insignificant fraction of a company's revenue; there's enough inefficiencies both within the system and within the market to allow this to exist, even if the actual product of a company is a commodity.

The other part of my comment also mentioned that companies do everything they can to avoid being commoditized: that's another source of inefficiency/surplus revenue. The market is in flux; commoditizing takes time.

[bawana]

"CEO pay is usually an insignificant fraction of a company's revenue" What is insignificant? For example, the CEO of Aetna walked away with 500million. That's money that should have gone to insured, injured and sick people. What risk did he take that exceeded the risks of the children we sent to Afghanistan and Iraq?

[TeMPOraL]

Well, according to [0], Aetna's revenue in Q3 2018 was $15.5 billion - so, extrapolating, their yearly revenue was something on the order of 60 billion dollars, of which that 500 million you mention is just 0.8%. Also, some of that $500M is in stock, not cash.

--

https://www.modernhealthcare.com/article/20181030/NEWS/18103...

[Jommi]

I really dislike seeing comments like this on HN, just utter lack of foresight into just the basics of economics or even just commenting. What "companies" are you talking about? What does CEO pay have to do with the subject at hand?

[grecy]

I'm genuinely asking questions about why the economy and setup is the way it is, and why can't we change it to something better.

Everything can be improved, and we should strive to improve everything. I'm very aware of companies that operate very well without making a profit. They add a lot of value to society, the employees get paid and they're even expanding (MEC in Canada). But no profit. Nobody who doesn't work there gets richer. So why don't Apple work that way. Why doesn't Comcast work that way.

CEO pay represents a huge surplus of money (profit) that wasn't needed. The products and services offered by the company could have just been discounted that much, or the employees could all have been paid more, not just one person.

[Jommi]

Please search Google salaries on papers regarding executive compensation. The pay they are receiving is usually economically sound and integral for the whole system working.

It's very hard defend the argument "CEO pay represents a huge surplus".

How much value does that CEO being by his skills/decisions? Why would he be hired with the salary he receives (that he does not get to decide) if he didn't create more value than what he costs? It's just like any other employee, except a more competitive space and where decisions have larger profit effects.

[kingludite]

The postal service kinda works like that. It can make some profit in some countries but not much. In the US Amazon accounts for 40% of the parcels. Putting things into boxes and shooting some web is impressive but getting the boxes from A to B also takes some doing.

[gowld]

Dreaming that other people would gift money to other people (including you) is not a sound economics theory.

You are against join stock companies, but not interest bearing loans/bonds or arbitrarily high salaries for managers? Why?

[H8crilA]

This is what the government is. It's a large non-profit, in fact the largest player in the economy, that's always zipped to produce no profits. There isn't even any structure to distribute the profits (there are no "shares" of the government or anything of this sort).

The whole point of profits and investing is to hook up the "skin in the game" of investors to viability of project. That's the definition of capitalism.

[_dp9d]

> That's the definition of capitalism

It's interesting though that there are certainly extremely successful companies like MEC in Canada and REI in the US who don't follow this model.

Their customers are extremely happy. Their staff get paid. The y create excellent value for customers. BUT they don't make a profit. Nobody can get rich from owning a slice of it.

Why couldn't more companies be like that?

[H8crilA]

Amazon is truly exceptional, do not make a rule out of it. Bezos is kinda like Buffett, in their own league of master capital allocators. For example, Amazon got a lot of financial leverage on the "float" between credit card payments and sending the money to merchants. Again, kind of similar to Berkshire which is leveraged on the insurance "float".

Also, heavy CAPEX or any other form of internal reinvestment does not mean there should be no profits. Look at Google, Facebook, Apple, Microsoft - all those companies were bootsrapped mostly through internal cash flow. All of those companies were profitable when IPOing (just look at historic S-1s).

[ksdale]

Heavy CAPEX doesn't require no profits, but it can easily result in that.

[H8crilA]

If, over the long term, CAPEX spendings do not produce profits, it means that the purchased assets did not produce enough payoff to compensate for their depreciation charges. You could argue with the accounting depreciation rules (i.e. how much needs to be written off per year, i.e. you think the asset is longer lived than the accounting rules say), but the general idea stands - it is a sign of bad capital allocation.

[ksdale]

If the profits from the CAPEX just get plowed into more CAPEX, though, you could end up looking like you don't have profits for decades, and it isn't necessarily a problem as long as you're growing.

Edit: What I'm saying is that profit is a lagging indicator of CAPEX, and your lack of profit now could be the result of bad CAPEX 5 years ago, or good CAPEX 5 years ago, plus aggressive new CAPEX now.

[H8crilA]

I think you don't know what "profits" are, i.e. don't know accounting.

CAPEX is written down via depreciation charges over many years. I.e. if you buy something for $1M, and it has an accounting life of 10 years, you book $100k losses per year.

What you're thinking about is called "cash flow", not "profits".

[ksdale]

Is this not basically what Amazon did? Massive capital expenditures with cascading depreciation that wiped out profits while increasing cash flow until they got to a certain size and decreased CAPEX and recognized profits?

[otoburb]

>>If, over the long term, CAPEX spendings do not produce profits, it means that the purchased assets did not produce enough payoff to compensate for their depreciation charges.

Even if CAPEX generates profits, if the returns were lower than your capital cost then company would have been better off not investing and returning that instead to shareholders.

[H8crilA]

Yes, that's the 101 of being a capital allocator, like a CEO or a CFO. Only invest into anything if the returns exceed your cost of capital.

Presentation on this very topic: https://youtu.be/c20_S-QgvsA?t=730

[gowld]

Shareholders would be better off, not company better off. Wage earners in the company got paid.

[alexpetralia]

It is not "unproductive" from the perspective of the economy, but it is "unproductive" (i.e. low-returning) from the perspective of shareholders. We would not expect to see share prices rising if corporate profits in aggregate are not rising (unless there is some financial engineering going on).

[jcfrei]

We would expect it under certain circumstances. One explanation could be falling interest rates. Lower rates on bonds incentivize investors to take on more risk (moving more money into equities) in order to still meet their return targets.

[H8crilA]

Or more directly into valuations: govt bond yields are a component of equity discount rates (discount rate = risk free rate + equity risk premium). Of course low bond yields should also mean a slow economy, and thus lower future cash flows. After all the risk free rate is approximately the nominal GDP growth. So I'm not sure how far should this argument go ...

[sokoloff]

Another is share buybacks (which I think are entirely fine).

Same amount of profits (DCF + discounted terminal value) spread over fewer shares implies a higher share price.

[gowld]

Not fine if the execs get paid bonuses measured in a certain number future shares.

[jcfrei]

I guess this would count as financial engineering though.

[alexpetralia]

This is a good point. I agree.