Remember: profits are a direct measure of the inefficiency of a given market.
In a functioning market, the existence of profits either drives businesses to reduce their own profits by competing on price (problem: cartels) or else drives new businesses to emerge in order to seize some of those profits (problem: barriers to entry).
To have record-breaking profits means that are markets are record-breakingly inefficient, and an inefficient market is useless (or possibly worse than useless).
Thank you for articulating this. This is not just about monetary policy, but structural failures and regulatory capture that are creating unprecedented opportunities for rent-seeking.
Personally I also believe that the pandemic only accelerated this, as smaller players were disproportionately disadvantaged in many key markets where economies of scale dominate.
Record profits can also be a supply/demand mis-match. If production for a given good/service is low, companies can charge higher prices until demand is level with their supply level. That gap is profits as you say. How else do you balance who gets to buy/use a given good/service without prices (otherwise it's a lottery effectively).
Large profits does show an opportunity in a market for another player to come in and produce the same goods/services at a better price. If they are unable to produce it, we should be look into what's causing competition from appearing. Is it a natural resource? Is it regulator capture? Is it labor shortage?
There is going to be some cause for the mismatch, the question is, what is that cause?
Profit is an aggregate that adds the remuneration of capital (closely related to savings), risk-taking, technological development, initiative (close to efficiency), all kinds of corruption and coercion, and a lot of other things.
We have no viable way to run through a market and classify "well this company is profitable because it's innovative; this other one is profitable because a law requires that everybody buys something it makes", so we can only speculate on what is important at each time.
All that because I'm not sure I agree. I see all kinds of rent seeking and artificial barriers linked to the current environment, and those are not exactly measures of inefficiency, they are something else.
The point is that if the market is inefficient, profits rise to encourage new entrants into the market to bring it back closer to efficiency. Get rid of the profit rising mechanism and you're stuck with a broken market that nobody wants to enter and fix.
I don't really know anything about cars, but you can look up the farmer thing, there's generally been a trend of farmers exiting the market (due to other factors), but this has considerably slowed down/reversed in the last few years.
Chinese car manufacturers have become quite popular with their extremely cheap EV offerings. They're just banned in the US. Egg prices are back to normal after tripling last year.
I think what people operating from vauely "austrian premeses" miss is: the pandemic.
We have no model of how a pandemic is going to "correlate" economic markets typically under competition.
I think it's highly likely that "supra-economic" shocks of the kind we've experienced have handed a strange unexpected market power that the usual (free market) suspects have yet to parse.
The obvious answer here is probably that shutting down large chunks of the economy like that directly impacts its efficiency and ability to supply people with stuff, and there's probably no way of fully preventing that impact. There were a bunch of rapid demand shifts to different, non-shut-down sectors like home improvement and DIY followed by a huge spike in demand as people caught up on spending, there's not the capacity to satisfy any of that, and it makes no sense for anyone to build that capacity because by the time it was ready the demand likely wouldn't be there any more. (Look at all the big tech businesses that employed a bunch of people and then discovered the lockdown boom in demand didn't last, for example - and it's a lot more easier for them to scale up than a semiconductor fab or a car manufacturer or airlines or fossil fuel production or the entire wood harvesting and processing chain.)
The MBAification of the world. Everyone is running too lean to wether a disruption, in debt, you can rely on zero interest loans, the governments will bail you out if you are important or a big enough donor.
One of my favorite economics professors called the second one 'OBSCENE PROFITS!'. His vocal delivery of those two words in front of the class was always highly animated and packed full of energy.
It is intuitive that, as soon as enterprising individuals catch wind of high profits being made somewhere, there will be an inrush of competitors looking to seize their share, which then continues until until some type of equilibrium is reached.
The fundamental breakdown in this type of efficient market mechanism is that it requires a reasonably level playing field: referees and rules. Complex systems without adequate regulation may result in local optima one or a few participants, who achieve regulatory capture, externalize costs, or achieve monopoly, oligopoly, or similar advantage to the disadvantage of all others. Regulation is required to achieve the global optimum for the wider group (i.e. society).
Cancer is an a example of a biological system exhibiting high growth with broken mechanisms of regulation. Similar outcomes can be observed when there is a disruption to a predator population, leading to an explosion of prey species, resulting in an ecosystem that is overrun and exhausted until balance returns.
> To have record-breaking profits means that are markets are record-breakingly inefficient
You took that a step too far and started mixing up what inefficiency means. Apple, for instance, has record breaking profits. In general, profits increase year over year such that every year is a record breaker.
And the EU is an extremely heavily regulated market, with almost no real innovation, just check how many startup unicorns there are vs any other part of the world.
How does a startup unicorn have anything to do with innovation? All a startup unicorn proves its ability to convince early investors they will make a big exit eventually.
I don't disagree or agree, but it often seems like the economy is 1% actual innovation and 99% phony innovation. For instance, most business apps are all the same app under the hood (e.g. a CRUD app) with the only difference being the type of data being stored. A lot of technology is fundamentally "done" but keeps receiving cosmetic changes presumably so the employees can justify their paycheck and business folks have something to market. None of these are "innovations" despite being marketed as such.
Bad take. If the market "functions" according to your definition, then what is the incentive to innovate? (besides shits and giggles, which is not sustainable).
No markets are efficient. While it's probably a bad idea to worship at the altar of profit: A profit of zero for most productive pursuits is not ideal.
Innovation gives you a valuable competitive advantage - that doesn’t mean it lasts forever - that’s why companies have to constantly develop to stay competitive.
Or, they gain enough power to create a failed market, in which it is practically impossible for new entrants to compete and eliminate the incumbent’s rent-seeking. This is what we so often see now, particular in markets with strong economies of scale.
An “efficient market” does not mean it is at its optimal efficiency all the time, but that there is an efficient equilibrium it is capable of tending towards.
> An “efficient market” does not mean it is at its optimal efficiency all the time, but that there is an efficient equilibrium it is capable of tending towards
This is a word salad of nonsense. Please familiarize yourself with the definitions of market efficiency and market equilibrium. Its premise may even be flawed: I also recommend looking up resources which show evidence that concept of market equilibria is itself nonsensical.
> Please familiarize yourself with the definitions of market efficiency and market equilibrium.
Yes I did that once during my economics degree. It’s a bastard science and can be debated no end, but those debates are a lot more valuable when the participants actually explain any of their conjectures.
But I sense you are more in it for the argument than to help either of us learn.
I guess you've forgotten then. I'm not here to help you learn, I'm here to help other readers of these threads avoid trying to parse that word salad sophistry
Innovation create a temporary inefficiency that the innovator can take advantage of. Once the market stabilizes there are no more profits to be had. So this theoretically would always drive innovation.
Nobody has ever claimed that markets are efficient, so that's a strawman. The supply and demand model states that markets tend toward efficiency. When there is inefficiency, then someone can exploit it for their benefit while bringing the market closer to efficiency.
In a functioning market, the existence of profits either drives businesses to reduce their own profits by competing on price (problem: cartels) or else drives new businesses to emerge in order to seize some of those profits (problem: barriers to entry).
To have record-breaking profits means that are markets are record-breakingly inefficient, and an inefficient market is useless (or possibly worse than useless).