The value is in the resources of the company being liquidated. Right now, those resources are being used to produce $X per year in profit. But if we sold them all, and just put the cash in a bank we could get $Y in interest. Make sense?
If Y>X then the best thing to do is liquidate the company.
An example might help: imagine you have a steel mill, and it makes just $1000 a year. Someone from Canada comes to you and says "I'll give you 50m for the mill, I want to take all the equipment to Canada where there is a shortage of steel". He will fulfil more demand at a better price by doing that (hence he will offer 50m for a steel mill that only makes a pittance in the USA). And you can't ake the 50mil and build something people actually need (like a refinery since gas prices are really high etc).
Does that make sense?
It's about allocating resources. And stopping them being allocated to things people won't actually pay for (steel production when no one wants steel) so that they can be allocated to things people do want (more gas during a gas shortage).
Resource allocation is actually really really critical both in general and in high efficiency, capital intensive economies like ours. Doing this well is basically why capitalism beats communism in terms of growth.
Obviously profit is not everything. And we should help people made unemployed. But continuing to waste resources just makes everyone poorer. It's just quite an oblique way of doing what amounts to central planning but with no need for a single centre and doing it faster and smarter...
What you say makes sense, but it still misses the main point: Market mechanism fail because of conflicting interests. Your example describes a functioning market, the article describes only one symptom (!) of the opposite.
It's true, resource allocation is very important. But is the free market more important than for example the declining life expectancy in the US?
I don't think, you will find a solution besides regulation or education to my example problem. I think you have to realize, that the market incentives are causing it, that the free market should be exempt from certain basic needs, where better resource allocation (a free market) will only degrade in a race to the bottom, and will not (as you described) find a better optima for the required resources (because there might be none).
I will call it market mongering.
EDIT: To refine your mill example: What if the steel buyer does not do anything with the steel, except driving price up?
>It's true, resource allocation is very important. But is the free market more important than for example the declining life expectancy in the US?
The free market does not know or care. It takes the preferences of all the people and the government they elected and combines them. If people choose health they get it. If they choose the opposite they get it. That's sort of the point here.
It might be surprising that people prefer being fat and watching TV to long, educated, lives. But it does seem to be their preference.
I am all for trying to change that. But people were lazy and gluttonous long before Private equity (a tiny part of the wider system) ever reared it's head...
> If Y>X then the best thing to do is liquidate the company.
Only if you use a particular definition of "best thing."
Consider a nonprofit. It raises funds and buys meals for people who are food insecure. No money is created for its investors. It has a brand that people like and feel good about. Now imagine the board of this nonprofit decides that making $0 is not their favorite thing so they halt all of their programs and sell their brand to Kraft, who uses the brand on some of their products to capitalize on the popular brand without giving any food to the poor.
Kraft's stock goes up because they are selling more stuff.
Is the world really more valuable now?
Or an even simpler example. Consider a pharma company that sells some lifesaving medication. They charge $X for it. They do some math and determine that if they charge $10X for it, that half of their customers will no longer be able to afford the product and half will continue purchasing it to stay alive. Their revenue increases by 5X. Stacks on stacks for their investors.
Is the world really more valuable now? This company has more money but only half as many people are protected from their life threatening disease.
> Consider a nonprofit. It raises funds and buys meals for people who are food insecure. No money is created for its investors.
Non-profits create high-status jobs and spend massive amounts of money on marketing so they are not incredibly neutral in terms of "no value created for investors".
Yeah, but this fell apart when the FOMC killed price discovery for 15 odd years. 'Profit' is not helpful to society, the goods and services it reflects is.
When you tilt the pinball table so companies that make nothing and promise the future are valuable (theranos, wework, TSLA for a long time, anything Kathy Wood buys) while under-valuing companies that make and do stuff now, you wind up hollowing out the use of resources on real things people need and spending it on stuff like NFTs.
How many billions has google spent on projects that never saw the light of day? How many hospitals and bridge repairs could we have had for that money?
Benchmark rate intervention is hailed as saving the economy from crises, but all it did was prop up the paper-value of people's retirement funds while suffocating businesses that actually make and do useful stuff.
I don't necessarily disagree with a lot of what you say. I think it just fails to see the wider system.
For instance when you said "profit is not helpful to society" you were correct. But profit is the reward people get for doing things useful to society. It's the signal that the things they are doing ARE useful. And profit pays to continue and expand those actions.
A more general theme is your distinction between "real" things and the alternative. You're not wrong an NFT is a total waste of time in my opinion. But if people actually want NFTs more than steel, that is ok. Give them NFTs. And many many people DO want those things. (There is something ironic that we have ended up here as the ussr concentrated on metrics like steel production while people grew more and more discontented because they wanted vacuous things like jeans and washing machines, not steel...).
That is not the fault of the profit motive or the market or capitalism. That's people wanting the "wrong" things. That won't change under any other system...
PE & profitability is tricky because of its short-term nature. PE in tech often comes in as post-VC money to gut everything, including r&d, as part of reselling/bundling/etc as a more efficient thing at the expense of a growing & innovating thing, and often worse for jobs in the primary host country. When I hear about a PE buyout, my thought is generally not, "oh great, this makes me want to finally work at X, they're serious about growing again!" but "oh no..".
As easy early-stage growth tapers, which is typical, the more r&d is needed to figure that out. The company likely still has that in their DNA. But... that also makes it easy to flip the books on margin & profitability by firing all those seasoned product, dev, r&d, etc people, which can easily be 20-40% of the company. Likewise, replace much of the remaining expensive staff with folks not from the home company country. Founders cashing out and PE & replacement CEOs taking over changes a lot.
I'm not sure that kind of profitability is all that great from a taxpayer and economics perspective. Replacing cultures of excess and immature management does sound like value... but that is a fig leaf over what is going on in reality. There are similar questions about VC pump-and-dumps also not being good for society, despite similar reasoning. It's a hard topic - I couldn't find it, but Matt Stoller's newsletter on modern anti-monopoly economics & legislation news touches on these areas periodically.
> An example might help: imagine you have a steel mill, and it makes just $1000 a year. Someone from Canada comes to you and says "I'll give you 50m for the mill, I want to take all the equipment to Canada where there is a shortage of steel". He will fulfil more demand at a better price by doing that (hence he will offer 50m for a steel mill that only makes a pittance in the USA). And you can't ake the 50mil and build something people actually need (like a refinery since gas prices are really high etc).
Except maybe there's a need for steel where the $1,000 plant is, too, and now they have to buy it more expensively from the moved plant. (Maybe it was a co-op.) The assumption that breaking even always means no demand is incorrect.
No, actually. The fact people won't pay for X is exactly how you know that people don't want X. So a prolonged, less than cost of production, price for something DOES mean you should stop making it. That's sort of the whole point of prices...
This sometimes forces us to confront hard truths (people want perfume and hamburgers and NFTs, not ever larger amounts of steel). But that's actually the big strength of capitalism: people get what they want not what people think they SHOULD want...
> won't pay for X is exactly how you know that people don't want X
this is not true in many cases -- a commodification of ordinary (and valuable) things drives a price down, with motivated agents seeking "bargains" or plunder. Secondly, kindness is mistaken for weakness. Abundance with a gift economy and manners is replaced with rent seeking with punishment for offenders, and constant constraints imposed to increase price.
The market is not making the most public goods, it is making the most effective jails and most addictive products as a natural result of profit maximization and command-and-control exchanges.
> The fact people won't pay for X is exactly how you know that people don't want X.
"makes just $1000 a year" just means people are paying roughly the cost of production, unless you meant it to be revenue instead of profit.
There are plenty of things people won't pay for that they still want/need. I couldn't pay for a heart transplant without insurance, even if I'd die without.
> Please tell me what and where his added value is. And please no fear mongering about the rich getting poorer.
Daraprim is a very old drug used by about 2k people in the US! So the narratives by the media that gives one the feeling he kills millions is wrong.
97% in the US have health insurance + you get depending on the state your living in an extra charge by the IRS if you don't have one. Martin Shkreli gave the drug away for free if a person could proof that they could not afford it.
People are still dying because of daraprim every few years. But as I said it is a very old drug and has not improved since its inception in the 50s.
The price hike had not the goal that he and his investors could get rich quick (which would be there right as free human beings). The research of a drug and especially the clinical trails can cost several hundred millions of dollars, thus a price hike was necessary to discover a new and better form of daraprim.
There is a reason that rare disease drug sometimes cost a few 100k when only a handful of people need it.
Pharma is a long term game. He can sell daraprim for much more in the future than the $750 of the current version. In the long run he and his investors profit enormously but also the patients that need it since it is more safe.
When you develop a live saving drug, that only 2k people use, you have the right to charge whatever price you desire. People need to see that pharma is a business like any else and is not excluded from free-market and capitalistic principles.
Ìn addition, once you had your daraprim course you are fully healed - you "loose" the customer. Therefore a high price is needed even more to offset the cost and to profit.
Pharma companies put private resources into effort (capital, infrastructure, expertise etc.) for developing a rare disease drugs. Nobody has the right to demand anything from them nor condemn them.
> If they make a profit then they're actually adding value.
Martin Skrelli. [0]
Please tell me what and where his added value is. And please no fear mongering about the rich getting poorer.
[0] https://en.m.wikipedia.org/wiki/Martin_Shkreli