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  • Lucas Rivero

When Profit Becomes Zero



The problem of economics has always been scarcity. There has never been enough stuff, and in response we have created systems to better allocate the stuff we do have. People have earned money in the form of profit from this because what stuff they had they would lend out and charge for. Profit then has always been a result of some form of scarcity, be it lack of options or a lack of stuff. While some rate of profit seems reasonable, what is more important is that as we have more stuff, profit should go down, and as we have less stuff profit should go up, although this has not been the case the last few decades.


“But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin.” (213) In this quote from The Wealth of Nations, Adam Smith is discussing the negative correlation between the rate of profit from capital and the prosperity of a society. For example, picture a country like Afghanistan. As companies, individuals, and all manner of wealth fled the country, everything became more expensive as there was less stuff. Everything became so expensive overnight that some families even sold their children hoping that they would get enough food. Though the actual cost to make food had not changed overnight, only the accessibility towards the Afghan people had. This means that inherently the profit of those selling the wheat skyrocketed. Imagine as well how prices work in natural disasters. Individuals from outside the disaster zone will buy food and water and bring it into the disaster zone for incredible gain. The cost to make the water bottle did not suddenly increase exponentially, but the profit certainly did.


One of the easiest ways to understand what is the expected rate of profit in a society is through bonds. Bonds are a way for governments and corporations to allocate debt to be able to acquire capital. They promise to pay you more than the money you give them, meaning some level of profit. They want some money now and are willing to give you more later if you let them borrow it. Bonds then are a good representation of the expected rate of profit. People typically would not take a bond if the expected profit of the bond was less than the expected market rate. On the other hand, people would buy up all bonds if the expected profit from a bond was higher than the expected profit in the market. In order to avoid overpaying the bond-holders, the corporations and governments issuing the bonds lower the bond’s interest to match the rate of profit. What is interesting is that within our lifetimes, bond rates are predicted to become zero and eventually negative. If this is true, that means the expected rate of profit will soon become zero, and people would no longer be able to sustain themselves through lending out money. As Smith says,“In a country… where, in every particular branch of business, there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money.” (84). If the natural rate of profit is zero, there is simply an insane amount of stuff that what was once a fundamental fact of economics, that of scarcity, and of how money has always begotten more money, would overnight suddenly change. This new reality of minimal, perhaps even no profit would lead more and more wealthy individuals to work because their money could no longer work for them. In the long run no one could earn enough money to sustain themselves from capital. Everyone would have to work.


For all of this to be true though, there must be competition for this stuff, fair bargaining, and distribution as it is created. Without this the natural rate of profit may be artificially increased to such an extent that the rate of profit would exist, even though it should not do so through scarcity. This seems to be the case of the United States for the last few decades. Despite the economy growing at about 2% since the 1980s, the average real wage, accounting for inflation, has about the same purchasing power it did 40 years ago. Despite more stuff being created by the average American, nothing has become relatively cheaper for them because all of this wealth was absorbed predominantly by the wealthiest of Americans. Though these gains did go somewhere and much of that was directly into the increasing rate of profit since then. Simply put capital has taken up a larger and larger slice of the pie as the economy has grown and the wealthiest have through it artificially increased their rate of profit. This is even more clear within the last few years, during which the rate of profit has grown more than the actual supply costs, contributing significantly to inflation and enriching the wealthiest at a direct cost to everyday Americans.


All this shows is that this recent increase of profit alongside growth is a much more frightening change of politics than a failure of economics. Profit should be shrinking because we are more productive. There is much more stuff, though there is much less competition. However the decreasing rates of bonds is still a good thing. If bonds become zero and then negative that would encourage competition. If you need to get a loan for a company, the expected profit of what a business loan is would naturally be lower as the general rate of expected profit lowers from lower bonds. If that company wanted to still charge you more than what was expected it would be difficult and others would offer you an alternative.This is encouraging because that means a firm, no matter how large, will have a hard time setting a rate above the expected profit level because people would flock to enter the market and make all the profit at a rate below that firm. If the expected rate of profit decreases as we become richer the harder it will be to artificially increase it. It is the equivalent of swimming against the current in an ever increasingly raging river.


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