top of page

Dogma Premise # 32

Non-owners benefit from owner profits because the firm is healthier and can provide better salaries and benefits, or at least continued employment.

Employees in private corporations frequently hear that they should apply their efforts toward improving profitability, because that is every corporation's goal, if not in the short-term, then in the long-term.

Senior executives and their psychological technicians in Human Resources normally use a carrot-and-stick routine to ensure employee compliance. The "stick" is that if profit goals are not met, then compensation and working conditions may be impaired. The "carrot" is that improved profitability will mean greater investment in the business, more opportunities, better working conditions, and the opportunity for greater compensation.

It sounds logical enough. And certainly in some instances inadequately profitable units are shut down, and the participants in highly successful projects are well-rewarded.

This is an important Dogma Premise because it conveys unity of purpose and a sense of common interest among all stakeholders in the enterprise, including owners, managers, employees, suppliers, and customers, which is useful in aligning all participants toward the shared goal of enriching the owners to the maximum extent possible.

This is a particularly pernicious Dogma Premise because it obscures the true relationship between the various stakeholders -- some or all of which are always exploited to enrich the owners -- and encourages people to act against their own interest by concealing the true nature of the relationships.

In reality, increased profits for owners results from paying less to suppliers or employees, and/or charging more to customers.  There are many ways to accomplish this, including price fixing, price gouging, market manipulation, and replacing high-paid employees with lower-paid recruits.

The Capitalists would have us believe that the basic dynamic is this: customers demand high quality and low prices. The enterprise in turn demands that its employees and suppliers be ever more efficient and innovative in meeting customer needs. The fruits of victory are then divided among all the parties in the form of lower prices for customers, higher wages for employees, better terms for suppliers, and increased profits for the owners.

But that isn't how it usually works, and it in fact CANNOT be how it usually works.

Instead, the game is rigged for the owners, because a basic rule of the game is that owners MUST maximize profitability, and that means at the expense of all other stakeholders.

In other words, once the enterprise has created new value by its success, the corporation does not have a duty, or even the ability, to share the fruits of success with anyone. The corporation MUST continue to pay the employees as little as possible, MUST continue to charge customers as much as possible, MUST continue to extract the best possible terms from the suppliers.

At any moment if the corporation can do better by firing its employees, replacing its suppliers, and giving customers worse products at a higher price, it MUST do so.

So there is no reason to believe that the profit incentive aligns anyone's interests. They are diametrically opposed.

In the real world, it may sometimes occur that in the course of developing a new product, the employees will gain unique skills that allow them to command a higher wage, and the suppliers will gain unique capabilities that allow them to insist on better terms, and the customers will have enough substitutes and enough information to command lower prices and higher quality than the the corporation might otherwise have provided.

This might occur, but it is not what the corporation wants, and the corporation will take serious steps to avoid this outcome. Indeed, if there is a serious risk of this outcome, the market may be abandoned as inadequately profitable.

More often expect it to play out like this: management, employees, and suppliers coordinate a successful new product. The corporation will use intellectual property protection such as patent, trademark, or copyright to block competitors and keep customer prices as high as possible. The corporation will require the employees to "transfer" their new or unique skills by training low-wage employees in India or the Phillipines to do the work going forward, and then fire the staff that built the innovation. The corporation will have spread the work among enough suppliers that none of the suppliers has any significant bargaining power, and instead the corporation uses the promise of major new contracts resulting from the original success to further drive down prices among the competing suppliers. Managers get paid a bounty for screwing everyone else in the ecosystem and are then dismissed, and the shareholders make out like bandits.

That's how it works. That's how it's supposed to work.

Is it wrong that the various participants in the economy should all be forced to work to enrich the owners of capital, even to their own detriment?  I think so, and I think there are much better alternatives that are more efficient, more effective, and more equitable.

But the only purpose of this argument is to show that it is a myth to say that:

Non-owners benefit from owner profits because the firm is healthier and can provide better salaries and benefits, or at least continued employment.

The system is not designed to accomplish that end, and it does not in fact do so.

Dogma Premise 33

All Dogma Premises

bottom of page