Labor and Leverage: Leverage to grow business and leverage to share profits

     As far as I know, there is no generalization that is always true. But, for the vast majority of those in the wealthy region EXCEPT for BORN WEALTHY their wealth was only achieved via the labor and skills of many, many other people. Even the born wealthy rely on the labor and skills of others to maintain their level of wealth. Some recognize and remember this. Others seem to develop amnesia, or lose cognitive powers, as they become wealthier.

From the Start

     At the beginning of any enterprise, there are only a few involved. Perhaps only one, perhaps a dozen. But not a lot. There is an idea and a plan. Perhaps this was the breakthrough of one person, maybe it was done as the result of collaboration of the entire group. The plan, if done well, will allow for growth unless, of course, no growth is desired. Even in a no-growth situation, a constant review of status and needs is required.

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     Even at this stage, people are relied upon. A phone network, or internet structure, is needed for communication and research. That requires the efforts of many people. People will be moving from place to place and they may require potential, and actual, customers to move from place to place. The transportation networks require many people. The reality is that people are not isolated from the community and they are unable to do much that affects the community, including their own place within that community, without relying upon its resources.

     There are many legends of where and how economic successes began. Hewlett and Packard in their garage. For that matter, Jeff Bezos started in his garage. Garages seem to have been favorite incubation locations for businesses. This makes sense because, without cars within them, garages are basically extra living spaces away from the main flow of the residence. Other ones also exist. But do you know of a single beginning story that started within the midst of a forest on a hike? An idea, perhaps, but not the beginning of an enterprise.

     There are histories of people who have bootstrapped themselves. Carl, of Carl’s Jr fame, started with a hot dog cart. Patagonia was started out of a blacksmithing/climbing-gear side business. In both (and other) cases, the general model was scalable. They could test marketability by starting from a small basis and then growing. Catering businesses and Bezos’ garage bookstore are other examples. They make use of what is often called “sweat equity”.

     In other situations, it was a matter of family financing. Bill Gates came from a wealthy family as did Elon Musk.

     There are as many instances as there are companies but, in each case, as they grew they either re-invested earnings (particularly via “sweat equity”) or gathered outside investment (familial or venture capital). As they grew, others invested their own time, labor, and savings. An idea may start from the thoughts of one person but the implementation takes the resources of the community and the involvement of the labor and skills of many people.

Growth and Profits

     As is true in the beginning, it is still true at all stages of growth and development of an enterprise. It requires use of a greater number of people with their labor and skills. And, here is where paths of companies diverge with much of the required guidelines based upon the rules and regulations established.

     Let’s have an arbitrary example. A “mom and pop” business starts a business with two people. The business grows to make $350,000/year gross income. Perhaps their overhead, and cost of sales, is $200,000/year. This leaves (yes, lots of little details being left out here) $150,000/year profit for perhaps 70 hours/week from 2 people. (Starting businesses often require very long hours. My business partner and I worked an average of 75 hours/week for the first couple of years after we started out company.) Part of that profit is used for childcare, and neither of them wants to continue to work so many hours per week, so the couple decides that the father should stay home with the kids and they should hire another two people allowing the mother to reduce her hours to 45 hours/week.

     (This is an arbitrary example with arbitrary numbers but the general scenario came from a family with a Falafel quick-stop back in Colorado.) As the business continued to expand, they opened up a second location with the mother overseeing one of the businesses and the oldest son looking after the second one. They now have six employees (not including mother and son) and a gross income (for the two stores) of $800,000/year with $250,000/year difference between gross income and the overhead/cost of sales. How is this $250,000 distributed? The family needs, and deserves, some. The six workers need, and deserve, some.

     We have now come to the dilemma of how to portion capital versus labor. The mother and son deserve some of the profit for their labor. The family deserves some for their original concept and hard work to establish the business. Yet, the stores would not be as large as they are, nor produce as much money/profit as they do, without the active time, labor, and skills of the six people. They deserve some.

     The allocation of profits is determined by many things.

Determination of wages

     The distribution of profits is an art and a challenge. It depends on many, many things and it is possible that no configuration exists which appears “fair” to all of the people involved. What are the factors involved?

• Replaceability of the workers. What are the skillsets needed? Include all of the skillsets needed. For this example of the falafel stores, “soft skills” are very important. In the case of a worker for a company where only a few people encounter customers, “soft skills” may not be as mandatory (though they still may help the interior workings of the company a lot).
  

• Availability of workers with adequate skills. Is the skillset such that “anybody” could do the job? Do you have a choice from 100 people for each position that you have in your company? Or are there only a few people qualified with strong competition among similar companies for their work and skills?
  

• Cost of finding, and training, replacement workers. How much does it cost to find a person willing to fill a position with the pay/benefits alloted to the position? How many hours of training are needed to bring the new employee to an overall useful point of behavior?
  

• Rules and regulations. What do the local laws indicate is the least you can pay? A livable wage SHOULD be the minimum but not many governments (national or local) understand the helpfulness of setting a common baseline for companies within an area of business. They may allow the businesses to dictate to the governments rather than the governments acting as servants to the people.
  

• Flexibility of the amount to be charged for products. You want to pay your employees an extra $1/hour? Great, you have two wide areas of possibility (without reducing profits) — raise the price of the services or have the employees generate more sales (which can happen spontaneously with a positive corporate culture).
  

• Personal philosophies of the people who have legal charge of, and responsibility for, the business. Some people in charge have the attitude of “pay them as little as we can get away with”. Others have the attitude of “we wouldn’t make any money without them, so spread the profits as much as possible to optimize employee pay/benefits”.
  

• Existence, or non-existence, of outside finances (stockholders/investors). If people have invested in your company, they WILL expect a “return” on their money. In your calculations, you cam include this ROI as part of the overhead/cost-of-sales.
  

     You can find examples of many types of distribution of profits. One argument that is often given is that paying a living wage will decrease profits. This is almost never true unless the flexibility for charging is zero. And that flexibility could be zero only if the rules do not exist for ALL of the competing businesses. Even then, a company with happy, friendly employees who are paid living wages will do better in the market than a company with unhappy, exhausted and uninvolved employees who are paid just enough to exist but where every day is a challenge and potential disaster.

Rules and Regulations level the playing field.

     Most companies (I believe this but I cannot give proof for it) want to be a good community neighbor. They don’t want to pollute. They want to pay good wages. They want to give good benefits (or support policies that give everyone good benefits). They want the children of the community to have good educations and be great future employees.

     But they also want/need to make profits in this capitalistic society. This is even more true for publicly traded (with stockholders) companies. I don’t want to pollute, but non polluting adds to my overhead placing me at a disadvantage in competition. So, reluctantly (but not reluctantly enough to not do it), I pollute and stay competitive. IF there are (enforced) rules and regulations, then all companies are required to not pollute and an innately well-behaved company is not penalized.

     I want to pay my employees a living wage at the minimum. But, there is no living wage mandated and my competitors can pay starvation wages because there are a lot of people needing jobs. If the law says that THIS level of pay is the minimum I can pay and it allows employees to live then I can pay them that and be competitive.

     Companies who want to do the “right” thing for their employees and community SHOULD welcome fair and enforced rules and regulations. They don’t always do such.

Determination of distribution

     The owners need, and deserve, some amount (these include stockholders). The employees need, and deserve, some amount for the work and skills. The company infrastructure needs re-investment for maintenance and expansion.

     In some of the high-tech or high profit businesses with a smaller potential employee pool and greater competition for workers, they “reverse engineer” wages and benefits. They take the gross income of the company and divided by the number of workers. This gives a number that indicates the average contribution to the company of the workers’ work and skills. They decide on the profit level desired and the overhead allocated to the worker from the company needs as well as benefits associated with each worker. This leaves a number which indicates average wages.

     For example, take a company that earns one billion dollars per year ($1,000,000,000). They have 2500 employees. This means each employee contributes an average of $400,000 per person. A desired profit margin is 25%. This is now $300,000 per person. The overhead is another $100,000 per person. We are now down to $200,000 per person. Benefits, FICA, unemployment, health insurance, and other benefits reduces that amount to $125,000 per person available as the AVERAGE wage for people working at the company. These general numbers are often calculable for various companies in the same general field which verifies competitivity for workers. Benefits, overhead, and profit margin may be jiggled a bit to make their company attractive to potential employees.

     Possibly the goal is to maximize profits. If so, the amount will be calculated from the “bottom up”. Minimum wage plus minimum benefits and overhead give net costs. The desired gross amount is created from net costs. If the desired gross amount is not high enough, due to market demand or competition, benefits are reduced. We saw something of this nature used within the “mom and pop” example.

     Much depends on the philosophies of the controllers of capital. That philosophy may also depend on the reliability of memory and recognition of contribution for both the employees and the community. But a large spectrum of wages, benefits, and profits is possible.

Union leverage

     The workers recognize their contribution. There isn’t always transparency, however, on other factors towards profitability of the company. While it SHOULD be the object of the company to work towards that subjective goal of fairness, final control of capital and determination of profit margin and average wages/benefits is in the hands of the controllers of capital according to the general outlines of a capitalist society. What if (hopefully not, but often so) the recognition of contribution and value of the work and skill is NOT kept at a solid conscious level?

     Unions represent the workers. They force the controllers of capital to be aware of the contributions of the workers. They struggle, in a “tug of war”, to make allocations recognize the contributions, and needs, of the workers. Strikes (which damages the workers as well as the controllers) are the largest tool available for use by the unions.

Conclusion

     The contribution of labor, skills, and community always exist at all stages. The controller of capital needs awareness, and appreciation, of this. Sometimes it is necessary for unions to form to force this awareness. Rules and regulations created by outside bodies (often government) level out the playing field between companies. Out of all of this comes a distribution of profits which is unlikely to be subjectively considered to be “fair” to all but it should be the goal.

Universal HealthCare: A Capitalist viewpoint

     People in the United States, in general, don’t know much about economics. Upon graduation from high school, they often don’t know anything about credit ratings (and how they affect people), how to create and follow a budget, the difference between simple and compound interest, and so forth. Some people occasionally launch memes or threads talking about how schools should have a mandatory course called “Life” that teaches basic economics, basic cooking, basic laundry, basic childcare, and so forth. I think that is a great idea — but that’s not the way it currently is.

     In spite of the active use, in conversations, of the words “socialism”, or “communism”, or other political/economic system — people in the United States, in general, know even less about them than they do capitalism. They just make good scare words to toss about.

Some Basic Aspects of Capitalism

     People in the United States come to know something about capitalism because they are surrounded by it every day. They learn some the first time they get a job — or pay taxes. They learn some the first time they try to rent an apartment. They learn some the first time they run out of money before the end of the month. All of these situations are the “hard way to learn” — and why the potential “Life” course makes so much sense. But, at the end of it all, people in the United States do learn about the aspects of capitalism which affect them in their day-to-day lives.

     That does NOT mean that people in the United States all know all of the aspects of capitalism. People running businesses have knowledge of additional areas than those known by ordinary consumers. CPAs and tax lawyers know more about accounting-related aspects of capitalism. But there are aspects of capitalism (which is currently tightly coupled with consumerism) that most people just don’t think about, or understand, because they only affect them “behind the scenes”. Some of those “behind the scenes” activities affect people in external ways such as “inflation” — and the lack of understanding is taken advantage of by politicians.

     But this is not an economics course — and I am not an economist. I am just someone who is curious about, and questions, just about everything I encounter in life (which can be extremely annoying to those close to me <smile>).

     One of the basics of capitalism is the concept of “profit”. A profit is created when something is sold for more than it costs to create/excavate/manipulate it. It costs me $5 to make a widget. I sell the widget for $7 and I make $2 profit. Capitalism strives to make greater and greater profits — either by selling more or by making the difference between creation cost and selling price larger. Those profits go to various entities — employees, management, benefits, pension plans, stockholders, executives (separated from management because their situation is manipulated differently by governing boards and competition at the executive level), and so forth.

     A “non-profit” company differs from a “for-profit” company in that there is, officially, no difference between incoming money and costs for all that is needed to provide the product/service. It is not actually as different from “for-profit” as one might think — in order to be non-profit, all incoming monies must be spent and that extra money may go to larger employee/management/executive salaries, perks, and bonuses or it can be spent for more services (more wells for potable water to more people?). The money which would be called profits, and potentially distributed to stockholders, is absorbed into the daily workings/expenses of the company. A non-profit company is inherently a private company with no stockholders. That is the primary difference to people who interact with such companies.

     In the case of a charitable non-profit, it is important to know where that money goes. Sites like Charity Navigator can help donors know how much is really going to help people versus how much is being kept within the company.

A for-profit company will increase profits by:

• Increasing the number of sales

• Increasing the difference between cost to provide and price to acquire. They do this by:

  • Increasing the price to be charged for sales AND / OR

  • Decreasing the cost of the item/service to be provided

Capitalism as Applied to the Current US Healthcare System

     Now that we have a basic idea of how capitalism works, lets examine the current workings of the United States’ unique form of healthcare. As one of many for-profit companies, it will want to increase profits in the manner described above. In the US, there are multiple companies that compete to provide healthcare which reduces the number of potential customers/patients for each company. Unlike customers for other products, each customer comes with a certain amount of statistically-likely amount of services to be needed. Each company will want to attract the customers for which they will make the largest profit — charge the most and give back, in service, the least. In the near past, that could lead to the reality that NO company would want to provide service to a likely low-profit individual. The “Affordable Care Act” (ACA) addressed this in part, mandating that some form of medical care would be provided for each person who applied — if not within existing private for-profit companies then within existing government administered healthcare.

     The other aspects of for-profit healthcare still largely exist independent of the existence of the ACA. Each company will try to provide the least amount, or least expensive, form(s) of service. Each company will try to charge the most for the least service. The formulas become so complicated, and difficult for the general consumer to understand, that it is not surprising that many “throw up their hands” and just pick the healthcare option that, on the surface, seems to be most appropriate, and valuable, based on their individual circumstances.

     The advantage of this situation, within the US capitalistic society, is that stockholders can invest and expect large returns — basically a transfer of money from the pockets of the served to those who have invested in the companies.

     It has another advantage to the executives of stockholder-owned companies in the way that executives obtain their salary/perk/bonus/severance packages. For public stock-providing companies (not just healthcare), in spite of stockholders having some control (usually unused), the governing boards decide these financial aspects and they have incentives to keep it as high as possible. The primary one is “bragging rights”. Very expensive executives must be worth it, or they wouldn’t be paid such, right? That is the assumption, and governing boards use that assumption to justify increasing amounts.

     It is extremely strange if one steps back from the situation. They are “worth more” because they are paid more — and they are paid more because it gives external companies/stockholders/people the feeling that they must be worth more. Whether they truly are worth these extremely large financial packages is a matter of opinion. Their financial packages certainly raise the prices of services/products produced by the company.

Capitalism as Applied to Universal Healthcare

     We have seen that aspects of private multiple for-profit healthcare are strongly against the benefit of the customers (patients). Why is a centrally administered universal healthcare better for the customers (patients)? Note that this could still be a non-governmental non-profit company. However, the administration of the medical system by existing sections of the government is also possible — and might be easier than setting up a new non-profit. It is essentially still following the capitalist formula.

     A Universal HealthCare system doesn’t have to keep track/authorize use of healthcare. Some ID is still needed to make sure all providers get the money they deserve for providing their share of the services needed by the patient but many aspects of authorization and benefit calculation/matching becomes moot — no need of that extra overhead (which amounts to a very large amount of time, money, and frustration within the US system). Imagine a doctor saying you need something and not having a need to check through your insurance policy to see if it is covered!

     A Universal Healthcare does not have to be concerned about short-term, or long-term, profits. All decisions can be made based upon the needs of the patients. If the cost of services rise (averaged from the needs of a very large number of people) then the price to the consumers goes up — whether it is provided directly by the customers (patients) or whether it is provided through their tax money funneled through the government.

     A Universal Healthcare still has employees/service-providers/management & executives. But there is no platform for justifying huge packages for executives.

     All-in-all, staying within the capitalist political/economic system, a Universal Healthcare lowers the cost to the customer (patient). It lowers overhead, it provides a direct connection between services provided and cost, and it eliminates very large executive packages. This is true no matter what entity provides the services — a non-profit company outside of the government or a non-profit company run within the government structure.

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