capitalism

1. capitalism A broad economic system where competition in a free market determines the price, production and consumption of goods and services through the “invisible hand” of supply and demand

2. socialism Broad economic system in which the major enterprises are either owned or controlled by the state

3. What companies are going to flourish in the future?

4. The role of profits… and losses

5. 2010 Chile mine disaster • In August 2010, 33 miners were trapped 2,300 feet underground in a copper/gold mine in Chile • They were trapped three miles from the entrance • It was presumed they were killed in collapse • 17 days after the accident, a bore hole drilled came back with a note: "Estamosbien en el refugio, los 33" (English: "We are well in the shelter, the 33“)

7. ‘Capitalism Saved the Miners’ Wall Street Journal, October 14, 2010

9. “If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What happened over the past 25 years that meant the difference between life and death for those men? Short answer: the Center Rock drill bit.”

10. “The Center Rock drill… is in fact a piece of tough technology developed by a small company in it for the money, for profit. That's why they innovated down-the-hole hammer drilling. If they make money, they can do more innovation.”

11. “The profit=innovation dynamic was everywhere at that Chilean mine... In an open economy you will never know what is out there on the leading developmental edge of this or that industry...”

12. “The miners’ rescue is a thrilling moment for Chile... But I’m thinking of that 74-person outfit in Berlin, Pa., whose high-tech drill bit opened the earth to free them...”

17. So, what did we learn from Chapter 6?

18. Profits and Losses • Remember: P&L play equally important roles in maintaining and advancing the standards of living of the country

19. Profits and Losses • Remember: P&L play equally important roles in maintaining and advancing the standards of living of the country • Both P&L force efficiencies on companies

20. Profits and Losses • Remember: P&L play equally important roles in maintaining and advancing the standards of living of the country • Both P&L force efficiencies on companies • No accident that people in free markets have higher standards of living than those in controlled economies

21. Profits and losses • When one business in a market economy – aka capitalism – finds a way to lower costs, competitors usually have to do the same

22. Profits and losses • When one business in a market economy – aka capitalism – finds a way to lower costs, competitors usually have to do the same • Wal*Mart lowers food prices by 6-12% when it rolls into town

23. Profits and losses • When one business in a market economy – aka capitalism – finds a way to lower costs, competitors usually have to do the same • Wal*Mart lowers food prices by 6-12% when it rolls into town • How city of Sarasota responds: $5 million subsidy for Whole Foods, refuses to allow Wal*Mart to build on Ringling Avenue

24. Mystery: why aren’t prices lower in socialist nations even through profits are eliminated?

25. Profits, take 2 • Hope for profits and threat of losses force capitalists to produce at the lowest cost and sell what customers are willing to buy… i.e., an incentive to be as efficient as possible with scarce resources that have alterative uses

26. Profits, take 2 • Hope for profits and threat of losses force capitalists to produce at the lowest cost and sell what customers are willing to buy… i.e., an incentive to be as efficient as possible with scarce resources that have alterative uses • Consumers gain when companies fight to earn profits and avoid losses through lower prices and innovation

27. More about Profits • Profits are the price paid for efficiency

28. More about Profits • Profits are the price paid for efficiency • If the cost of the profits exceeded the value of the efficiency they promoted, then non-profits like governments and schools could get the same things done cheaper or better than for-profit companies

29. More about Profits • Profits are the price paid for efficiency • If the cost of the profits exceeded the value of the efficiency they promoted, then non-profits like governments and schools could get the same things done cheaper or better than for-profit companies • Fat chance… governments outsourcing of garbage, janitorial services, payrolls, security, prisons to private businesses

30. Even more about profits • While capitalism has a visible cost – profits – that does not exist under socialism, socialism has an invisible cost: inefficiency

33. Even more about profits • While capitalism has a visible cost – profits – that does not exist under socialism, socialism has an invisible cost: inefficiency • Profit is the price paid for efficiency

34. Even more about profits • While capitalism has a visible cost – profits – that does not exist under socialism, socialism has an invisible cost: inefficiency • Profit is the price paid for efficiency • History shows that capitalism has had far more people living well than socialism

35. Greedy capitalists

36. Myths about profits • “Greed” drives profits, resulting in higher prices for consumers

37. Myths about profits • “Greed” drives profits, resulting in higher prices for consumers • Fact: most fortunes have been made by companies making things cheaper for consumers… Wal*Mart, Facebook, Henry Ford, Dell, Google

38. Myths about profits • Profit margins for American business are obscene

39. Myths about profits • Profit margins for American business are obscene • Average rate of return on investments ranged from 2.2-7.8% from 1960-2005

40. Profits redux • In private business, the owner is an “unmonitored monitor” rather than having layers of authorities

41. Profits redux • In private business, the owner is an “unmonitored monitor” rather than having layers of authorities • Self-interest takes the place of external monitors and forces attention to detail… driving efficiency

42. Profit Rates • Gross profit on sales: buy something for $10 and sell it for $15

43. Profit Rates • Gross profit on sales: buy something for $10 and sell it for $15 • Net profits: profits after overhead such as employees, electricity, inventories, taxes, etc. are accounted for

46. Profit Rates • Gross profit on sales: buy something for $10 and sell it for $15 • Net profits: profits after overhead such as employees, electricity, inventories, taxes, etc. are accounted for • Profit on investment: most important measure, because it’s what causes $ to flow to various sectors

48. Costs of Production • Crucial factor in determining prices and profits

49. Costs of Production • Crucial factor in determining prices and profits • No fixed cost for producing anything

50. Costs of Production • Crucial factor in determining prices and profits • No fixed cost for producing anything • Economies of scale: up to a certain point, it’s cheaper to make more of the same thing because you spread fixed costs over larger units of output, whether cars or pizzas • “Lower costs/unit of output as numbers increase is economy of scale”