Once upon a time, when there was a lot less disparity between the rich and the poor in the US, an idea was proposed to justify giving more tax breaks to the rich. This idea was called the "trickle down" theory. Note that this blog concentrates on income inequality -- wealth inequality has parallel workings.
At heart, the trickle down theory was an economic pyramid and is the basis of the concept of regulated capitalism. However, the main word in that sentence is regulated. The idea is that the people with the most money generate more money which is distributed (in lesser amounts per person) to a larger set of people, who then generate more money which is distributed (in lesser amounts than the people of the second level) to an even larger set of people. At the bottom of the pyramid are the people who are unemployed or are working for whatever they can get paid and not die.
The original pyramid for the "trickle down" idea worked rather like this (note that these numbers are all just examples):
1 person earns $1,000,000/year
3 people each earn $500,000/year
6 people each earn $300,000/year
10 people each earn $200,000/year
25 people each earn $100,000/year
55 people each earn $40,000/year
This forms a pool of 100 people. In total, they earn $11,000,000/year. The top earner gets 25 times as much as the lowest paid earner. and the top 20 people (20%) make 57% of the total money (leaving 43% to the lower 80 people (80%). The top earner gets about 9% of the total.
However, in order for this distribution to hold, it is necessary to have laws and regulations that keep redistributing money to the rest of the people according to their wealth. In the 1980s, it became politically popular in the US to think that if the rich were allowed to accumulate more money then there would be more money to distribute -- or "trickle down" -- to the rest of the population. That started a process of steadily increasing tax loopholes and favored treatments, lower (if paid) tax rates, substantially lower wages (based on pre-inflation 1985 dollars), and concentration of wealth which led to a new structure such as the following (once again, these are made up numbers -- the real ones are different but not better):
1 person earns $5,000,000/year
3 people each earn $300,000/year
6 people each earn $200,000/year
10 people each earn $125,000/year
25 people each earn $60,000/year
55 people each earn $22,000/year
Once again, this is a pool of 100 people and, together, they earn $11,000,000/year.
However, this time the top accumulator (no longer calling them an earner) gets 227 times as much as the lowest paid earner. The top 20 people (20%) have increased their total to 76% of the $11,000,000 but look carefully (this type of statistical use is often in political advertisements) -- the 19% below the top 1% are actually earning LESS than they used to. The top accumulator now controls 45% of the total money pool.
This is a situation where the top accumulators redistribute the earnings of the lower rich, middle class, and working poor to give to themselves. I call this distribution the "splash over" economic theory -- or a vivid, real, example of unregulated capitalism. You fill up the top and some of the excess splashes over to the bottom.
This was the situation in the "Gilded Age" in the 1800s. It was shifted, for individuals, with reforms such as the creation of income tax toward the turn of the century -- and it was shifted, for businesses, with "New Deal" reforms that came out of recovery from the Great Depression.
And, at the root of it all, the voters carry the responsibility.
Saturday, September 6, 2014
Sunday, August 31, 2014
The economics of supersizing
I have to be careful when I talk about economics as it is such an all-pervasive subject that it is easy for me to lose focus. I consider it to be "applied sociology" -- or a measured way of evaluating how people interact and value each other within society.
Once upon a time, during a telephone interview with Google, I talked with them about how I thought Google was in a fantastic position to create an interlinked database of products, employment, and salaries. As only one example, such a database, and associated tools, could be of enormous help in figuring out how to migrate from a fossil fuel economy to a renewable fuel economy while minimizing the effects on the economy and individual workers. (Later, with 35 years of software architecture, programming, and managerial experience, Google called me in to interview for a marketing position -- they definitely have a sense of humor.)
See how easy it is for me to lose focus!
In the area of focus for this blog, supersizing involves a combination of total profits and perceived value. Perceived value is a subjective matter -- it depends on the individual and their history. In the US, it is considered to be of greater value to get more food for less money per amount -- in spite of the fact that the greater amount is unneeded and ends up being waisted (misspelling intentional). In most European countries, quantity does not enter into the equation for value as much as quality. In some other countries, it is a sufficient struggle to just get enough to eat.
When a product is sold, it is sold at a specific price. This price can be determined in one of two general ways. These are basically "cost plus" or "demand pricing". With "cost plus", the price is determined by a specific amount added to the cost of producing the item (including all overhead such as building costs, utility costs, storage, labor, and inventory loss). So, if a thingamabob costs $1 to make, store, sell, and so forth and the company wants to make 20% profit on selling thingamabobs, the price will be set at $1.20. With "demand pricing", the price is set to the highest amount that will lead to the greatest total profit. This is a bit more complicated.
"Net profit" is the difference between all the costs associated with making and selling something and the amount for which it is sold. In the "cost plus" example, there is a net profit of $0.20 or 16 2/3% (20 divided by 120). In "demand pricing", net profit is determined in a similar fashion except that the goal is to maximize the total profit.
In order to maximize total profit, the goal is sell the MOST possible at a specific net profit such that the total amount is the greatest. For example, selling 1000 of something that has a net profit of $0.20 will give a total profit of $200. Selling 500 of something that has a net profit of $0.50 will give a total profit of $250. So, even though you are selling less, you end up with a greater amount of total profit. But, if you get especially greedy and start selling something a a net profit of $1 and only sell 100, you will end up with only $100 profit.
The practice of pricing for "demand pricing" is an art and involves marketing (convincing you it is something you want), branding (letting you recognize the product and make positive associations that increases its perceived value), and competition.
If you have a product that is desired by people and you are the only one who makes the product then you can demand the greatest amount. If you have a product that is made by many different companies and there is little perceived difference of value, then you enter what is called "commodity pricing" which usually has small net profits per item and requires mass production and sales to be profitable.
So, we come down to the area of supersizing (finally, you say). Supersizing (in the US) does two things -- it increases the perceived value and it increases the net profit (it MAY also increase total sales because of the increase in perceived value ). Let's say that you sell a tidbit that has $0.50 costs associated with what goes into it (raw, or pre-processed, food ingredients), $0.30 labor, $0.50 overhead (such as building, heating, lighting, franchise fees, etc.), and $0.30 for sales (marketing, "free" toys, posters, advertising, etc.). You then sell the tidbit for $2, giving a net profit of $0.40/item (or 20%).
If you can convert that sale into buying something bigger -- let's say twice as big. then the only thing that you have increased is the costs of what goes into it. [There is, admittedly, a little more overhead concerning storage of more stuff but that is often balanced with a reduction in cost of buying raw materials.] So, rather than $0.50 of stuff going into it, there is $1 associated with the costs. You then sell the item for $3 and you make a net profit of $0.90/item (or 30%). If you make it three times as large and sell it for $4, you would make a net profit of $1.40/item (or 35%). This is how supersizing translates into FAT profits (OK, I admit it, I like puns).
In summary, as long as people see greater value in buying more food for less per amount, it will be difficult to persuade companies to not supersize as this is an easy way for them to achieve greater profits. The only route is to change mindset to demand greater quality rather than greater quantity.
Once upon a time, during a telephone interview with Google, I talked with them about how I thought Google was in a fantastic position to create an interlinked database of products, employment, and salaries. As only one example, such a database, and associated tools, could be of enormous help in figuring out how to migrate from a fossil fuel economy to a renewable fuel economy while minimizing the effects on the economy and individual workers. (Later, with 35 years of software architecture, programming, and managerial experience, Google called me in to interview for a marketing position
See how easy it is for me to lose focus!
In the area of focus for this blog, supersizing involves a combination of total profits and perceived value. Perceived value is a subjective matter -- it depends on the individual and their history. In the US, it is considered to be of greater value to get more food for less money per amount -- in spite of the fact that the greater amount is unneeded and ends up being waisted (misspelling intentional). In most European countries, quantity does not enter into the equation for value as much as quality. In some other countries, it is a sufficient struggle to just get enough to eat.
When a product is sold, it is sold at a specific price. This price can be determined in one of two general ways. These are basically "cost plus" or "demand pricing". With "cost plus", the price is determined by a specific amount added to the cost of producing the item (including all overhead such as building costs, utility costs, storage, labor, and inventory loss). So, if a thingamabob costs $1 to make, store, sell, and so forth and the company wants to make 20% profit on selling thingamabobs, the price will be set at $1.20. With "demand pricing", the price is set to the highest amount that will lead to the greatest total profit. This is a bit more complicated.
"Net profit" is the difference between all the costs associated with making and selling something and the amount for which it is sold. In the "cost plus" example, there is a net profit of $0.20 or 16 2/3% (20 divided by 120). In "demand pricing", net profit is determined in a similar fashion except that the goal is to maximize the total profit.
In order to maximize total profit, the goal is sell the MOST possible at a specific net profit such that the total amount is the greatest. For example, selling 1000 of something that has a net profit of $0.20 will give a total profit of $200. Selling 500 of something that has a net profit of $0.50 will give a total profit of $250. So, even though you are selling less, you end up with a greater amount of total profit. But, if you get especially greedy and start selling something a a net profit of $1 and only sell 100, you will end up with only $100 profit.
The practice of pricing for "demand pricing" is an art and involves marketing (convincing you it is something you want), branding (letting you recognize the product and make positive associations that increases its perceived value), and competition.
If you have a product that is desired by people and you are the only one who makes the product then you can demand the greatest amount. If you have a product that is made by many different companies and there is little perceived difference of value, then you enter what is called "commodity pricing" which usually has small net profits per item and requires mass production and sales to be profitable.
So, we come down to the area of supersizing (finally, you say). Supersizing (in the US) does two things -- it increases the perceived value and it increases the net profit (it MAY also increase total sales because of the increase in perceived value ). Let's say that you sell a tidbit that has $0.50 costs associated with what goes into it (raw, or pre-processed, food ingredients), $0.30 labor, $0.50 overhead (such as building, heating, lighting, franchise fees, etc.), and $0.30 for sales (marketing, "free" toys, posters, advertising, etc.). You then sell the tidbit for $2, giving a net profit of $0.40/item (or 20%).
If you can convert that sale into buying something bigger -- let's say twice as big. then the only thing that you have increased is the costs of what goes into it. [There is, admittedly, a little more overhead concerning storage of more stuff but that is often balanced with a reduction in cost of buying raw materials.] So, rather than $0.50 of stuff going into it, there is $1 associated with the costs. You then sell the item for $3 and you make a net profit of $0.90/item (or 30%). If you make it three times as large and sell it for $4, you would make a net profit of $1.40/item (or 35%). This is how supersizing translates into FAT profits (OK, I admit it, I like puns).
In summary, as long as people see greater value in buying more food for less per amount, it will be difficult to persuade companies to not supersize as this is an easy way for them to achieve greater profits. The only route is to change mindset to demand greater quality rather than greater quantity.
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