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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Wednesday, October 05, 2016

The Social Value of Profits and Wealth

In recent weeks, the Sunday Gospel readings in the Episcopal Church have spoken about issues of business profits and wealth.  Our orientation as a business economist means we take these commentaries seriously, and we might have a different spin on them than theologians and clergy do.

On September 18, the 18th Sunday after Pentecost, we had a passage from Luke 16 about a dishonest manager.  This person was being fired by the rich man who employed him because he had cheated in running the business, so the profits he generated were clearly in excess of what they should be.  The conclusion to the appointed scripture is the familiar, “No slave can serve two masters; for a slave will either hate the one and love the other, or be devoted to one and despise the other.  You cannot serve God and wealth.”

The next week, on September 25, we heard the well-known story, also from Luke 16, of Lazarus, the poor man, who rested on the doorstep of Dives, a very rich person.  Dives evidently refused even to share the scraps from his dinner table with poor Lazarus.  The accompanying lesson from the Epistle is from 1 Timothy 6, which includes the familiar, “the love of money is the root of all kinds of evil.”

Profits and wealth.  It’s easy to use the Biblical readings we’ve just mentioned to disparage those worldly concepts.  At the same time, profits and wealth can be beneficial, and in fact, they can contribute vigorously to the well-being of not just the profit-earners and wealth-holders, but to the life-condition of many other people with whom successful business leaders are associated.

This brief article will just scratch the surface, but we feel like we have to try.  The social value of profits and wealth seems to us to depend on two important factors, how the profits and wealth were earned, and what uses are made of them.

Profits: from Sound Business Operations or from Price-Gouging?
The problem presented in the first Gospel lesson above is that the manager earned profits through cheating.  The news recently has been full of stories about profits earned by Mylan, Inc., through substantial price increases on the Epi-Pen.  According to the Wall Street Journal, Mylan has raised the price 17 times in the nine years they have marketed the allergy reaction first-aid shot injector, totaling more than 500% to a retail cost more than $600.  We can’t say exactly that cheating was involved here, but it certainly seems strange to need such large
increases for a product that is not new.  Indeed, the main medical ingredient, epinephrine, is a generic chemical that has been around for years.

As we note, another criterion for judging the appropriateness of profits is how they are used by the company.  If they are just used to inflate the paychecks of top management well beyond some industry standard, then one might argue that they are excessive.  Indeed, in this case, Mylan executives receive the second highest compensation of comparable managers in drug companies.  But Mylan is not the second largest drug company; to the contrary, it ranked 11th in the U.S. in 2015 by revenue and 16th by market valuation.

Our commentary here is hardly meant to single out Mylan, but this case has emerged as a very timely and visible example of what seems to be price gouging implemented toward less-than-noble goals.

By contrast, we can argue in favor of profits if they result from genuinely efficient business operations, and if they are used toward positive ends.

We might assess a business’s operating efficiency by measuring profits against output or revenue and comparing that ratio to the ratio for a whole industry.  We’d want to raise questions if the company’s result is significantly higher than the whole industry as well as if it is weaker.  Another measure might be output per worker.  In both cases, we’d be looking for competitive pricing and competitive performance results.

Profits Contribute to Growth in Jobs and Business Investment
Profits can make important contributions to business operations in successive periods.  Very simple comparisons of Commerce Department national income data show that for the total of nonfinancial corporations, profits in a given year are highly correlated with employment and with investment in new facilities and equipment the next year. 

Thus, profit growth is a suggestion that our business might be open to expansion.  We can afford to hire more workers and they, of course, would need more operating facilities.  Or, without hiring additional workers, we might still want to invest in improved models of the equipment we use.  The company’s profits are the first source of financing for expansion and investment in capital goods.  Even if funds are raised from banks or investors, those financers want to know that a company has good credit quality and is prospering, so its profits provide an important backdrop for the external funding sources.

In the cases where we’re assessing profits against the performance of overall markets and demand for our products, it would thus be strange to issue advice calling for profits to be reduced.  That recommendation would be reserved instead for special cases when the profits are seen to come from excessive pricing, improper reporting or other anti-market actions.  Like the Epi-Pen situation.

Ministry to Business Managers & Wealth Holders
A book on this whole topic is called Anointed for Business, in which the writer, Ed Silvoso, argues that, just as clergy have a calling to their ministry, business leaders have a calling to their work.  If they see it as a genuine calling to a kind of ministry, perhaps they would be more inclined to do their work with consideration for all the parties involved: their shareholders, yes, and also their customers, their employees and even their competitors.

And what about the CEO or the lead shareholder or anyone who has done well investing in a business and/or stocks?  Should they be required to sacrifice the gains they have made through their contributions to society?  Indeed, if their business is successful in the long-term or their stock portfolio has grown consistently, is their resulting wealth sinful?  This is a huge question, of course, and takes books and books, not just a couple of paragraphs in a blog post.  But our take on it comes from two angles.  First, In Mr. Silvoso’s book, one of the chapters is titled, “God Loves Bill Gates, Too”.  Absolutely.  And God probably loved Bill Gates before he founded the Gates Foundation, as God gave Gates the gifts to develop the Microsoft systems and form the company.  Gates, of course, has carried the principles of corporate structure and operation into his charity; in operating the Foundation, he and Mrs. Gates have focused on the results of their charitable work, not just performing it.  Thus, they try to do their charitable work efficiently so as to get the greatest possible benefit from the resources devoted to it.  This approach has changed the perspective of many of the world’s charities, to the benefit mainly of those for whom that work is done.  This is clearly a good use of wealth and hardly argues for diminishing it.

Second, the other point we would make about wealth comes right out Jesus’ own work.  On September 28 in the assigned Daily Office readings, we had the story of Jesus’ calling of Levi, a tax collector, to be one of His disciples (Luke 5: 27-32).  Levi did leave his desk to follow Jesus and then invited Jesus to his home, where he gave a banquet that included his tax-collector friends.  The Pharisees and scribes saw Jesus eating with tax collectors and asked him what on earth he was doing with those awful people.  Jesus replied that He in fact needed to be with those who are sinners;  they are the ones who need Him, not those who are already righteous and trustworthy.  So if indeed, we are concerned about business leaders and how they lead and how honest they are, then let us minister to them and work with them.  Let us enlist them and show them about using their resources for the common good.

All told, the points about money, income and wealth are concerned with honest, careful and prudent operations and using positive financial results to favorable ends.  The money and the wealth are not evil themselves, but it’s whether we use them constructively that matters.

We consulted several recent issues of The Wall Street Journal for data on Mylan, Inc., as well as websites showing various rankings of pharmaceutical companies.

Ed Silvoso.  Anointed for Business.  Ventura, CA: Regal Books.  2002.

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