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The Different Kinds Of Profit

The Different Kinds Of Profit

Hello and good day!

I listened to an interview with a leading economist recently. He made a comment that rubbed me the wrong way and it took me a while to figure out why.

He said that the capitalist system tends to optimize for profits and that is why you get these huge concentrations of wealth in the hands of just a few individuals.Somebody shows up on the scene and they start making something that a lot of people want, and it generates a ton of profit.

The company reinvests those profits into technology and labor and infrastructure to make more of the stuff that people seem to like. In addition, all kinds of investors start coming around wanting to contribute investment capital to projects that seem like they have a lot of room for growth.

The accumulated profits that are reinvested, plus the outside investment capital, will cause an organization to get bigger and bigger. Given that the company is selling profitable products, the company will now be able to generate even more profit because of increased production capacity.

This new increased level of profitability will lead to an even greater level of internal reinvestment and even larger offers of capital from outside investors. It all leads to a self-reinforcing cycle whereby the company keeps getting bigger and bigger until it simply can't grow anymore.

After years and decades of a company going through this process again and again, it can get really big. Many companies end up employing thousands of workers, some have hundreds of thousands of workers, and the original founders of the company sometimes end up being worth hundreds of billions of dollars.

To the extent that we analyze this part of the capitalist system, the economist appears to be correct. The system seems inevitably designed to make the rich get richer.

Before I proceed, I want to point out something about the explanation above.

It is important to note that the whole cycle got started because an entrepreneur or inventor created something that a ton of people wanted. This part of system is actually a thing of beauty. Vast accumulations of wealth are built on a very simple concept.

What is something that a lot of people will want? The only way to build a huge enterprise is to answer that question accurately and then deliver the answer to your question in the real world. If the thing is good, people will voluntarily give you their money in exchange for what you have made.

Sometimes people will literally line up down the block, begging to give you their money. And if they can't give you their money, because you run out of the thing they want, they'll be very disappointed. The voluntary nature of the capitalist system is extremely elegant. You can only get what you want by giving other people what they want.

That is very nice, and it is oftentimes forgotten. People tend to look at somebody like Jeff Bezos or Elon Musk or Bill Gates and all they see is their huge net worth.

It seems unfair that somebody could have so much, when others have so little. But many people forget that most of their net worth was given to them voluntarily by people who wanted the thing they made.

This isn't always the case. Sometimes companies get rich and start bribing politicians and they are awarded government contracts. In that case, the voluntary nature of the transaction is blurred.

Politicians might spend your tax money in a way you don't like. Or they might write laws to benefit one company over the other. In those cases, the elegance of natural reciprocation is lost.

Anyhow, here is what rubs me the wrong way about the statement of the economist. It overlooks something very big.

Most people don't have the goal of using their life to generate huge monetary profits. It isn't their life's work.

Most people are pursuing a different type of profit. Let's call it psychological profit.

Most people are trying to live in such a way that the result of their actions optimizes happiness and contentment and satisfaction. And for many people, this doesn't come from building an enterprise.

In fact, the act of building a hundred billion-dollar enterprise would probably result in extreme misery for a lot of people.

For me, that would be the case.

I'm a local chocolate shop owner who loves doing business in Peru. That is where my pleasure comes from.

If I were forced to become the CEO of a hundred billion dollar a year company, working all the time, being away from my family, being away from our shop, not being able to see our team members in the kitchen on a daily basis, not working closely with my family, not being able to give back to cacao farmers because of investor pressure, not being able to launch whatever products we want without going through a board of directors....

It would ruin the whole thing for me.

It would kill the whole point of being a business owner in the first place. But everybody is different. There are a handful of people out there with a burning desire to build massive companies, and I say more power to them.

They are living their life as they see fit and if it makes them happy and satisfied, that is their choice. As long as they don't use their wealth to infringe on the freedom of others by hijacking the political process, it is all good.

And anybody who doesn't like the way a particular company operates can stop doing business with them. It may be an inconvenience, but if you care enough, you do what you have to do.

Anyhow, here is the point I want to drive home.

When you consider psychological profit and spiritual wealth, things that cannot be measured in numbers or presented in a spreadsheet, but that are the true measure of a life well lived, you find that a free, capitalist economy is egalitarian in the extreme. It disperses this type of wealth very widely and evenly, because each person can choose to live their life as they see fit.

The trick is to not be convinced that materialism should be the measure of your worth, if that is not part of your philosophical outlook.

I am an all-time minimalist.

Good food. Good coffee. Good chocolate. Good books. Happy family. Our business is sustainable. Our team is taken care of. We're doing all we can for our cacao farm partners. Our customers are happy.

If those things are in order, I have no desire for any possessions at all. Stuff does nothing for me.

On the other hand, you might be a car person or a clothes person or take great pleasure from building a huge business or being a successful stock market investor or traveling the world or serving your God. 

Each person should do as they please.

But the danger comes when you let others impose their view of success onto you. In a free country and a free society, you get to choose.

It is your right.

And when people operate in that way, true wealth, the stuff that really leads to a happy life, is optimized for each and every person, not concentrated in the hands of just a few.

Thank you so much for giving me a moment of your time today.

I hope that you have a truly blessed day!