Scenario #1
In Jan, Dave takes $10,000 Hula lessons from Hula Lessons Inc (probably ticker HULA.OB)
The company pays some expenses but the majority of what I pay them is
profit (or should be). The company socks the profit away for the rest
of the year so that at the end of the year they can say they made
another ~$10,000 in profit. The money is tied up.
The stock may go up a penny or two on the additional money but no one really benefits.
Their main goal is to take as much money out of the economy and into their
pots for score keeping. Kinda like playing Hungry Hungry Hippos
Scenario #2
In Jan, Dave takes $10,000 Hula lessons from Sanjaya.
In Feb, Sanjaya takes $10,000 Violin lessons from Dale.
In March, Dale pays Jim $10,000 to be his wing man during spring break.
In April, Jim buys $10,000 worth of duck paintings done by Karen.
In this case it is the same $10,000 that we pass between us. The net is it
looks like $40,000 on our combined W-2's at the end of the year. At the
end of the year we will all be taxed on it but for right now the money
is moving very fast through our network raising the annual earnings for
all of us.
This example is basic because the idea isn't 100%
efficient. If you notice we are all providing services not selling
actual products because the value of assets transferred makes it more
complicated.
The point is it is much more efficient to move money through people than it is companies. You can argue that the company does have some expenses because it pays some employees who then have some money to spend. But before those employees can spend the money the company must take out their profit, then any salary must go through withholding tax before the employees get any money to spend.
The other option is the company can choose to spend some of its profit. They usually do a few things:
1. They could increase the dividend they pay to investors (only helps shareholders).
2. They could start to buy some of their own stock back (very popular now, but also only helps shareholders).
3. They could chose to spend the money on things like new computers for
all employees etc. (This tends to be slow, does anyone use Vista at
work yet? I was lucky to finally get a flat screen monitor this past
fall).
Scenario #2 probably happened more often in the early
1900's as a mom and pop pizza place would buy cheese etc from the local
family owned cheese shop around the corner. Now a days you get Pizza
Hut (owned by Yum brands) buying bulk cheese from Kraft etc.
If you work out all the details in my 2 examples, the differences probably narrow but the impact of the differences in efficency is significant.
What does it mean for the future?
1. I am convinced more people will be able to work from home (population
growth and traffic congestion are good incentives to find a way).
2. People will also be less likely to need a large company to provide them
with a living since the flow of money will be more efficient if you can
work outside of their economy.
3. But I believe the majority of those who can stay home will provide some form of services / information (consulting) instead of selling products.
Right now 2% of the US population makes their living selling things on eBay. This works because you have 2% selling products
to the other 98% (or whatever % use eBay). If this becomes more popular
it won't work. How could 50% of the population convince the other 50%
to keep buying things from them on eBay. And where would people store
all the things?
6 comments:
Dude, I'm quitting my job to teach violin lessons if I can get $10,000 for it!
Your velocity of money argument is interesting... not sure if it applies to corporations keeping profits though? If a corporation makes $10,000 of profit, and choose not to spend it, wouldn't it be put into say, a savings account? The money then is available to be borrowed for funding, say, a new small business? They then use the money to buy equipment, music stands, music books, etc. and it keeps the economy moving?
I like your hungry hippo reference. It seems that the government would be able to increase their tax revenue if they could increase the velocity of money (duck painting example). Buying products locally from small companies would help keep the money from large corporations. However, as the world has been flattened by the internet, consumers can search for the best product at a price, or the lowest cost products (much more likely). The mom and pop shops cannot compete when only price is considered.
Mike
you are so smart. Rachel is a lucky girl - i like how your mind works.
Scenerio 2 made me laugh out loud. further, it makes me want to paint a duck picture. :)
I guess the main point is companies have a high profit margin while individuals and individual owned companies have a very small profit margin (ideally zero if you pay yourself 100% of all profit).
True price does not come into play since Walmart can make anything cheaper than a mom and pop shop.
I think the best argument is that public companies today have to deliver to the street, forcing them to squeeze profits out of their employees by cutting benefits and salary, while a public company could run at break even and share the wealth with the people doing the hard work for them. If a company paid out all of it's profits to employees, everyone of them would be a millionaire, which would kind of be like what taxes are supposed to do, take money from the rich (the usual public company shareholders) and move them to the poor (the actual workers) but a cash machine for the people is rare, though I do know of a company in Boston that is private and owned 100% by the employees and they "buy in" with their service time. Great model and everyone cares about the company that way.
Tom, that's not the concept of taxing - that's the concept of communism and Robin Hood.
Dave, I like the way you think. and you phrase it so entertainingly.
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