The first is by Mark Perry, who I will start by saying, is one of the few econ bloggers who seems to appreciate what a huge deal North American fossil fuels are to the future of working class people. That having been said he also says
The recovery of both output and profits to above 2007 levels with 6.6 million fewer workers could explain the sluggish job growth that will probably continue for several more years. If companies can produce more output now than in 2007 with fewer workers and record profits, where’s the incentive to hire more workers?
This is the Lump of Profits Fallacy that I hear all the time and it drives me insane. What’s the incentive to hire more workers? To make ever more profit!
There is no “enough profit.” More is always better. More profit yesterday. More profit today and still more profit for breakfast tomorrow.
As I have said to associates before: If you ever find yourself thinking “maybe we have made enough money” stop. Reflect on how you feel at that exact moment. Commit that feeling to memory. Because that is how it feels to be completely and utterly wrong in every conceivable way.
The only thing that irks me as much as this, is the “search for yield” meme. When people want to claim that because interest rates were so low we had to go out and look for ways to make yield.
Really? Because normally you just let ways to earn yield pass you by?
If someone honestly told me that he threw my money away because “well we were already earning a descent return as it was” I just can’t imagine what I would do that person. I’m enraged just writing about the hypothetical possibility.
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Thursday ~ December 1st, 2011 at 4:53 pm
foosion
I share your feelings. My favorite recent example: if we don’t let banks charge large fees on X, they’ll make up for it by charging more for Y.
If they could charge more for Y, they’d be doing so already.
Thursday ~ December 1st, 2011 at 4:56 pm
Jed Clampett
“As I have said to associates before: If you ever find yourself thinking “maybe we have made enough money” stop. Reflect on how you feel at that exact moment. Commit that feeling to memory. Because that is how it feels to be completely and utterly wrong in every conceivable way.”
Histrionic
Such a broad conclusion for a such a narrow embedded definition.
Thursday ~ December 1st, 2011 at 4:59 pm
Eckhart
the only thing more annoying is when people refer to Arthur Laffer as “a widely-respected economist.” Two things wrong with that comment:
1. “widely-respected”
2. “economist”
Keep up the good work – your analysis on the European monetary system is top-notch.
Thursday ~ December 1st, 2011 at 5:07 pm
Paul McLeod
Someone tell Mark Perry that it gets even better for business: we could have the same output and profits of 1907 levels by firing 90% of the workforce!
foosion – You neglect the possibility that they’ll respond to lost profitability from fees on X by charging more for Y and accepting that the customer base will shrink as a result, thus leaving everyone worse off. That is to say, fees on X are making it profitable to serve some amount of customers that would otherwise be unprofitable. Charging more for Y will allow them to continue serving a smaller number of people who will still pay for the service at the higher price.
Thursday ~ December 1st, 2011 at 5:26 pm
foosion
Paul – you’re just saying that businesses are not behaving in a profit maximizing manner.
Thursday ~ December 1st, 2011 at 5:46 pm
Paul McLeod
No, I’m saying that they’re maximizing profits according to the revenue mix currently available to them. I’m imagining a (realistic, I think) situation in which they could have raised the price of Y before, but doing so would restrict their customer base and thus lose them enough X-revenue to make the strategy not worthwhile. But if there’s no longer any or as much X-revenue, raising the price of Y on a smaller customer base becomes the profit-maximizing option. If X- and Y-revenue are generated via different mechanisms (as is the case in the real-world bank situation we’re talking about), then this would not be a surprising result.
Thursday ~ December 1st, 2011 at 5:10 pm
XVO
I agree with your overall point but…
Sometimes there is a point where you decide you don’t want to make anymore profit. Why aren’t we all working 24 hours a day every day? That could potentially increase GDP by 300%!!!! We would all be rich but we’d all be very very unhappy (and maybe dead after not too long). In a business perhaps the logistics of growing profit are not desirable to the owners and/or employees as that would increase the workload or complexity of doing business.
At the small sofware/hardware company I’m working with now the owners have had to turn away customers in the past because they don’t want to increase their work load, they don’t want to go through the headaches of hiring more employees and they like their business small for the personal relationships sake.
Friday ~ December 2nd, 2011 at 5:43 am
Lord
What they have is not a business but a job. Many small businesses are not businesses at all but jobs. A business can operate without the direct intervention of the owners. There are only two reasons for a business not to expand, a lack of demand such that they can’t afford to hire an incremental employee, or a lack of profit. If they subtracted the wages they would have to pay someone to do their job, they would find they either lack the demand or the profit, most likely the latter. Managers don’t come cheap and without profit they probably can’t afford to hire one.
Thursday ~ December 1st, 2011 at 5:58 pm
Leigh Caldwell
I was about to disagree with the bit about “having enough money”, but let me row back a bit before I even start.
Currently I’m in a position where I am choosing a lower business income than I could achieve, to free up my time to work on research.
But that of course is not just giving up free money – which I would indeed not do – it is a change in my relative utility from time and wealth, compared to a few years ago.
An interesting question might be whether a similar relative change could happen more widely in the economy, and would it matter if it did (or would the remaining 5% of greedy bastards still drive the same amount of economic growth).
Thursday ~ December 1st, 2011 at 6:14 pm
Econ Skeptic
XVO – that’s right on. It’s the economist’s favorite mantra: always be profit maximizing (ABPM). Ridiculous, naive and very ivory-tower.
In real life, I only want to maximize profits FOR THE SAME GIVEN AMOUNT OF EFFORT. “I am earning a decent return already” means, always (in econspeak, not in English), that “Doing more diligence/research/work to get higher yield is not desirable based on my utility curve”. As a manager or owner, even if hiring more workers is profitable but introduces additional management complexities, I may not want to hire more workers.
The above is micro not macro – but it’s important. Treating people as if they always behave in a profit maximizing way (they don’t!) leads to bad macro and micro-economic policy. And it’s even worse to make that into a normative point: that people always SHOULD behave in profit maximizing way.
If someone honestly told me that I should put a lot more effort into maximizing financial returns on my assets, I just can’t imagine what I would do that person. I’m enraged just writing about the hypothetical possibility.
Thursday ~ December 1st, 2011 at 6:26 pm
Standard incentives « Randall F. McElroy iii
[...] great commentary from Karl Smith about the “what’s the incentive to hire more workers?” lament: What’s the [...]
Thursday ~ December 1st, 2011 at 6:46 pm
jason braswell
Maybe I’m misunderstanding, but if businesses are making the same amount of profit with fewer workers, then wouldn’t they conclude that those former workers actually added 0 profit to their operations?
So, it’s not that they don’t *want* more profit, it’s just that they don’t believe that hiring more workers will *get* them more profit, no?
Thursday ~ December 1st, 2011 at 6:47 pm
Nick Rowe
Great post Karl! I had never heard of the “Lump of Profits” fallacy. Did you just make it up? But it was immediately recognisable.
Thursday ~ December 1st, 2011 at 7:13 pm
GlibFighter
Mark Perry’s observations are typically silly and confused.
Thursday ~ December 1st, 2011 at 11:16 pm
jazzbumpa
Karl -
The “lump of labor fallacy” concept is an absolute canard. There is no basis for it in either empirical observation or economic theory. It was contrived by the British press in the 19th century as part of anti-labor union polemic.
The Sandwichman has written extensively on this zombie idea. Here is one such post.
http://ecologicalheadstand.blogspot.com/2011/11/canonical-classical-model-of-political.html
Cheers!
JzB
Friday ~ December 2nd, 2011 at 1:24 am
Sandwichman
It gets worse. It turns out it is not even originally a 19th century anti-labor union polemic but even earlier a condescending, paternalistic 18th century myth about how the rich and the poor have the same real interests and how machines always turn out to be a benefit for everyone, especially the poor (if only they didn’t carry their good fortune to the Alehouse — the sots!)
But at least the 18th century guy (Dorning Rasbotham) was a well-meaning condescending paternalist. The sleaze bag 19th century anti-union guy (Edward Carleton Tufnell) was a duplicitous defamatory propagandist and possibly the model for a Dickens character.
I’d say the economics profession has some serious ‘splainin’ to do about the origins of their fallacy myths. If economists were anthropologists they’d be worshiping Piltdown Man as the veritable Adam.
Friday ~ December 2nd, 2011 at 12:39 am
Bob Murphy
Karl wrote:
If someone honestly told me that he threw my money away because “well we were already earning a descent return as it was” I just can’t imagine what I would do that person.
What if they told you they put your money in a trash can and burned it?
Also, foosion, suppose the government taxed gasoline retailers $1 for every gallon they sold to customers. Are you saying the retail price of gasoline wouldn’t budge? If you think it would, “why aren’t they already doing so?”
Friday ~ December 2nd, 2011 at 9:37 am
Karl Smith
I would say that are at least saving $2 by having be burn their cash rather than ScottTrade + Apple, Inc
Friday ~ December 2nd, 2011 at 1:30 am
Sandwichman
“well we were already earning a descent return as it was”
I dissent! A descent return is not decent. It doesn’t make sense or cents or scents.
Sunday ~ March 25th, 2012 at 3:57 pm
The Legend of T-Bill: The Quest For Yield « squarelyrooted
[...] I were feeling less than judicious I would just let Karl Smith have the final word on this: The only thing that irks me as much as this, is the “search for yield” meme. When people want [...]