Where did the other dollar go, Jeff?(blog.cloudandtree.com)
blog.cloudandtree.com
Where did the other dollar go, Jeff?
https://blog.cloudandtree.com/2021/04/the-other-dollar/
242 comments
The title of the piece includes "Jeff", As in Jeff Bozos. I read your comment and would like my time back too.
It didn't occur to me that the Jeff in the title was Jeff Bezos until after I clicked. I probably wouldn't have read the article if I realized. That would have been my loss. I enjoyed the article.
It's a bad piece of writing. That offered no value. Every business uses the language Bezos used, and it also is very much up to interpretation on their view of value creation and consumption.
If me and my two friends buy paintings from each other for 1 Billion dollars in a circle, did we create 3 Billion dollars in value? No, we created 3 mediocre paintings. Bezos (and every other business, as you mentioned) plays the same game by double and triple counting and changing the definition of value to suit each case. You are right that what value means is up to debate; but Bezos here uses many different definitions at once to reach his number which isn't adhering to any particular ideology other than "Amazon good".
I think the most obvious example of this is with the workers:
>The most egregious misrepresentation of value creation in the letter is the $91 billion figure that Amazon has paid out in compensation to employees. This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor.
> And it estimates the time saved by consumers who shopped at Amazon instead of brick-and-mortar stores, and— in a particularly bold move, considering that just a few paragraphs ago it ascribed no value whatsoever to the time of its own employees— attaches a dollar value to those hours and throws that on the pile as well.
This is a shell game where amazon gets to take credit for paying its employees for their hours and also take credit for those hours as value.
I think the most obvious example of this is with the workers:
>The most egregious misrepresentation of value creation in the letter is the $91 billion figure that Amazon has paid out in compensation to employees. This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor.
> And it estimates the time saved by consumers who shopped at Amazon instead of brick-and-mortar stores, and— in a particularly bold move, considering that just a few paragraphs ago it ascribed no value whatsoever to the time of its own employees— attaches a dollar value to those hours and throws that on the pile as well.
This is a shell game where amazon gets to take credit for paying its employees for their hours and also take credit for those hours as value.
No matter how bad an article is, "I read this and feel like I'd prefer to have my time back" is sort of just a mean thing to say and doesn't contribute to the conversation.
For what it's worth, I find this feedback useful, despite the downvotes it garnered. I think it's important not to misrepresent my biases when I write, and doing that even-handedly can be difficult, so if it's not landing with people I like to know.
Yeah sorry I may have been too harsh in my initial reply, and really nothing against you in particular, but I did get through it feeling a bit angry over it. FWIW, I agree with some of your points for sure and disagree with others I just felt misled and I think that's why in part I responded so harshly.
I think this is a very smart piece. It exposes very clearly that money is not value.
You can bundle existing value from one side, add maybe an extra bit here and there and collect money for the process. But how much money you collected in the end has very little relation to how much value you added to the system. Especially since some of the shareholders did absolutely no value creation.
Jeff Benzos is a very smart person and an excellent CEO. He used to work for the Renaissance Fund as well. I really wish I could hear his honest opinion on this piece. He will most likely never read it but I hope he would and I hope he took the time to reply with honesty and no ego.
You can bundle existing value from one side, add maybe an extra bit here and there and collect money for the process. But how much money you collected in the end has very little relation to how much value you added to the system. Especially since some of the shareholders did absolutely no value creation.
Jeff Benzos is a very smart person and an excellent CEO. He used to work for the Renaissance Fund as well. I really wish I could hear his honest opinion on this piece. He will most likely never read it but I hope he would and I hope he took the time to reply with honesty and no ego.
> that money is not value.
Very much so!
Money is a tool used for accounting, while value is a system for perception. They interact, but as you say, are not the same.
Very much so!
Money is a tool used for accounting, while value is a system for perception. They interact, but as you say, are not the same.
I wish someone would change the dictionary definition of money to “record of value” rather than “store of value”. It would clear up a lot of economic misconception.
I thought it was poorly written and fails to understand some simple financial terms. When people say value is created for shareholders, they don't mean shareholders created that value; they mean that the value of the thing owned by shareholders has increased.
I own shares of a company (I am therefore a shareholder), if the value of that company increases then the value I own as a shareholder increases, hence value was created for me as the shareholder. This is such a basic principle that the author failing to understand this is kind of embarrassing.
There are other basic things the article gets wrong, like saying that bartering doesn't create value which is patently false. Bartering does in and of itself create value by allocating resources to those who wish to consume it. When Alice trades an apple with Bob for a potato, it's usually done because Alice has a need for a potato and doesn't have a need for the apple, and vice versa for Bob, hence the allocation of apples and potatoes goes to where it's most desired. This increases the efficiency of resource allocation which in and of itself creates value. Furthermore the bartering in and of itself causes an incentive to produce more apples and potatoes.
Honestly this is really basic stuff and not worth writing an entire article bickering over semantics.
I own shares of a company (I am therefore a shareholder), if the value of that company increases then the value I own as a shareholder increases, hence value was created for me as the shareholder. This is such a basic principle that the author failing to understand this is kind of embarrassing.
There are other basic things the article gets wrong, like saying that bartering doesn't create value which is patently false. Bartering does in and of itself create value by allocating resources to those who wish to consume it. When Alice trades an apple with Bob for a potato, it's usually done because Alice has a need for a potato and doesn't have a need for the apple, and vice versa for Bob, hence the allocation of apples and potatoes goes to where it's most desired. This increases the efficiency of resource allocation which in and of itself creates value. Furthermore the bartering in and of itself causes an incentive to produce more apples and potatoes.
Honestly this is really basic stuff and not worth writing an entire article bickering over semantics.
This is a philosophical piece, the fact that it's really basic stuff is exactly why an entire blog post (better yet, a journal article or book) should be written to bicker over those semantics. Those financial terms are loaded with meaning and the author believes that meaning to be invalid; the semantics are the entire point.
What does it mean to 'create value'? As a passive shareholder who does nothing but own shares that increase in value, have you actually created anything? How can you have created value without creating anything? If Alice values potatoes at 1.01 apples and Bob values apples at 1.01 potatoes, and they trade, maybe they've created 0.01 apples worth of value but they certainly have not created two, they started with two and ended with approximately two. If they change their mind and trade back, they've not created 0.02 apples worth of value, they've revealed that the whole thing was a waste of time. If the value of your time is $14.95 an hour, and you get an Amazon job making $15 an hour, Amazon's addition to the economy is $0.05 per hour not $15.
No, it's the farmer who starts with dirt, water, sunshine and diesel and grows the apples and potatoes who is creating value. "Efficiency of resource allocation" are a lot of big words that do little more than justify the speaker diverting a little of the revenue stream to themselves.
Money is only very loosely connected to value creation, because there are two separate factors that tie them together: The amount of value your work adds to society, and your ability to extract money from society.
The whole point is that no human, not even Jeff Bezos, can generate 200 billion dollars worth of value by working. Not by carrying a lot of boxes really fast, nor by thinking really hard, nor by working long hours; not even if he pushes even more boxes while thinking really bright ideas while saving time by peeing in a bottle instead of going to the bathroom, he's simply not that many orders of magnitude smarter or stronger or more dedicated than other humans. And yet his net worth is close enough to $200B that it makes sense to round up about $1.7 billion dollars worth of value, while other people are carrying boxes for $15 an hour and are orders of magnitude away from rounding up to a net worth of $0.1 billion dollars.
The disparity between value generated and money extracted is the core injustice that the open letter glosses over with casual semantics and that the article seeks to understand and expose by being unconventionally precise.
What does it mean to 'create value'? As a passive shareholder who does nothing but own shares that increase in value, have you actually created anything? How can you have created value without creating anything? If Alice values potatoes at 1.01 apples and Bob values apples at 1.01 potatoes, and they trade, maybe they've created 0.01 apples worth of value but they certainly have not created two, they started with two and ended with approximately two. If they change their mind and trade back, they've not created 0.02 apples worth of value, they've revealed that the whole thing was a waste of time. If the value of your time is $14.95 an hour, and you get an Amazon job making $15 an hour, Amazon's addition to the economy is $0.05 per hour not $15.
No, it's the farmer who starts with dirt, water, sunshine and diesel and grows the apples and potatoes who is creating value. "Efficiency of resource allocation" are a lot of big words that do little more than justify the speaker diverting a little of the revenue stream to themselves.
Money is only very loosely connected to value creation, because there are two separate factors that tie them together: The amount of value your work adds to society, and your ability to extract money from society.
The whole point is that no human, not even Jeff Bezos, can generate 200 billion dollars worth of value by working. Not by carrying a lot of boxes really fast, nor by thinking really hard, nor by working long hours; not even if he pushes even more boxes while thinking really bright ideas while saving time by peeing in a bottle instead of going to the bathroom, he's simply not that many orders of magnitude smarter or stronger or more dedicated than other humans. And yet his net worth is close enough to $200B that it makes sense to round up about $1.7 billion dollars worth of value, while other people are carrying boxes for $15 an hour and are orders of magnitude away from rounding up to a net worth of $0.1 billion dollars.
The disparity between value generated and money extracted is the core injustice that the open letter glosses over with casual semantics and that the article seeks to understand and expose by being unconventionally precise.
It’s a bit easier to see the value of trade when there is some schlepping involved. Buying fish off the boat and selling it in the grocery store provides a useful service for the people shopping at the grocery store, since they don’t have to go to the docks. Reversing that would be nonsensical and destroy value; nobody needs more fish at the dock.
Just because it’s the same commodity doesn’t mean it’s worth the same amount at every time and place. Transportation and storage are technologies that add value by taking surpluses and moving them where they are needed more. This is still true when the cost of transport is very cheap.
Amazon is clearly doing something very useful with its warehouses and delivery. This is all about getting stuff to people whenever they want it.
How much this is really worth is unclear. You can’t take prices at face value. A monopoly could charge higher prices than other companies would charge for the same service in a competitive industry, and the difference is how much of the value goes to the company versus the buyer. But doing calculations using prices is often the best we can do.
Just because it’s the same commodity doesn’t mean it’s worth the same amount at every time and place. Transportation and storage are technologies that add value by taking surpluses and moving them where they are needed more. This is still true when the cost of transport is very cheap.
Amazon is clearly doing something very useful with its warehouses and delivery. This is all about getting stuff to people whenever they want it.
How much this is really worth is unclear. You can’t take prices at face value. A monopoly could charge higher prices than other companies would charge for the same service in a competitive industry, and the difference is how much of the value goes to the company versus the buyer. But doing calculations using prices is often the best we can do.
Shipping goods from one place where they're available to another where they're needed is definitely a way to add work and create value, I don't dispute that at all!
It's pretty obvious that fish slowly going bad on a boat is worth little, and that driving an expensive reefer truck to get it from there to a grocery store (and subsequently, for the fishmonger to process and package it) is a valuable, constructive process.
However, for something closer to the real world, if you set up a regulatory system where you're the only one with the registration needed to sell fish, then you buy 1000 kg of frozen Tilapia from fishermen at $2/kg, hire a freight company to drive it a few dozen miles from the docks to the packing plant for $300, spend $300 to have it inspected, and sell it to the packer at $4/kg, have you really added anything? You've made $1400 profit, but you've barely lifted a finger to make some phone calls. That's not 'value creation' or a unique skill in 'identifying supply and demand', you're abusing market inefficiency to rip people off and undeservingly make yourself richer. And then to pat yourself on the back at the end and say you created value equal to the fishermen's profit plus the $600 of services you bought + your own $1400 profit is just adding insult on injury.
Doing calculations using prices is easy, but we can do better than to take them at face value. Amazon is clearly doing something useful, yes, but not $301B worth of useful. They're also positioning themselves to take more money out of the connection they've established between buyer and seller than the shipping, processing, and warehousing costs.
It's pretty obvious that fish slowly going bad on a boat is worth little, and that driving an expensive reefer truck to get it from there to a grocery store (and subsequently, for the fishmonger to process and package it) is a valuable, constructive process.
However, for something closer to the real world, if you set up a regulatory system where you're the only one with the registration needed to sell fish, then you buy 1000 kg of frozen Tilapia from fishermen at $2/kg, hire a freight company to drive it a few dozen miles from the docks to the packing plant for $300, spend $300 to have it inspected, and sell it to the packer at $4/kg, have you really added anything? You've made $1400 profit, but you've barely lifted a finger to make some phone calls. That's not 'value creation' or a unique skill in 'identifying supply and demand', you're abusing market inefficiency to rip people off and undeservingly make yourself richer. And then to pat yourself on the back at the end and say you created value equal to the fishermen's profit plus the $600 of services you bought + your own $1400 profit is just adding insult on injury.
Doing calculations using prices is easy, but we can do better than to take them at face value. Amazon is clearly doing something useful, yes, but not $301B worth of useful. They're also positioning themselves to take more money out of the connection they've established between buyer and seller than the shipping, processing, and warehousing costs.
Well, counterfactuals are tricky. In the fish example, if you compare to nobody selling fish at all, they are adding value by creating a market where there wasn't any before, even if it's in a monopolistic way. But if your alternative is a competitive fish market, maybe no value is added, but the monopoly is charging more for it.
Charging more is capturing consumer surplus value. If it weren't still worth the money, they wouldn't pay for the fish. The higher price more accurately reflects that value of the product to the people who still buy it. (Assuming they know what they're doing.)
Whether or not charging more is good or not depends on your point of view. Buyers and sellers have different opinions. I believe "charge more" is a slogan generally repeated approvingly around here when we're talking about developer salaries?
Here's an example of capturing consumer value that's considered relatively benign, good even: you can listen to a lot of music for free these days, but then Patreon came along and convinced a lot of people that artists should be paid more. The market price in a perfectly competitive market is that music should be free, but sometimes the fans themselves disagree with that.
It doesn't seem like there is any objective truth to the matter as to how much music is worth. There are only opinions. Sometimes you can do some math, but the input is opinions, so the output is aggregate opinions.
The same seems true of other prices. Costs usually set a floor. Consumer value is higher than that, but people disagree on what's "worth it."
Charging more is capturing consumer surplus value. If it weren't still worth the money, they wouldn't pay for the fish. The higher price more accurately reflects that value of the product to the people who still buy it. (Assuming they know what they're doing.)
Whether or not charging more is good or not depends on your point of view. Buyers and sellers have different opinions. I believe "charge more" is a slogan generally repeated approvingly around here when we're talking about developer salaries?
Here's an example of capturing consumer value that's considered relatively benign, good even: you can listen to a lot of music for free these days, but then Patreon came along and convinced a lot of people that artists should be paid more. The market price in a perfectly competitive market is that music should be free, but sometimes the fans themselves disagree with that.
It doesn't seem like there is any objective truth to the matter as to how much music is worth. There are only opinions. Sometimes you can do some math, but the input is opinions, so the output is aggregate opinions.
The same seems true of other prices. Costs usually set a floor. Consumer value is higher than that, but people disagree on what's "worth it."
>if you set up a regulatory system where you're the only one with the registration needed to sell fish
This doesn't happen though. There's nothing stopping you from setting up your own fish whole selling company if you think that is lucrative. Sure there will be regulatory hurdles, but if you can make a case that you can do it for cheaper while still making a profit, you can find an investor to pay for your lawyers.
The fisherman wants to sell all their fish with a price that they know in advanced. However, the packer only wants to the fish that they know that they can sell to supermakets, and doesn't want to buy more than they have to. Without someone assuming the risk of holding a bunch of frozen fish for a long time, the fisherman wouldn't being fishing as much, which means less fish ends up with the customer, and less value being created.
This doesn't happen though. There's nothing stopping you from setting up your own fish whole selling company if you think that is lucrative. Sure there will be regulatory hurdles, but if you can make a case that you can do it for cheaper while still making a profit, you can find an investor to pay for your lawyers.
The fisherman wants to sell all their fish with a price that they know in advanced. However, the packer only wants to the fish that they know that they can sell to supermakets, and doesn't want to buy more than they have to. Without someone assuming the risk of holding a bunch of frozen fish for a long time, the fisherman wouldn't being fishing as much, which means less fish ends up with the customer, and less value being created.
> if you set up a regulatory system where you're the only one with the registration needed to sell fish
> This doesn't happen though
This happens all the time.
The point isn't that it's literally impossible to compete, the point is that there's a large barrier to competition that provides no value to anyone other than the entity that created it. Time and money was spent to intentionally make the market less inefficient, so that the newly inefficient market could be exploited thereafter.
Yes, a new entity could then decide to invest time and money to try to jump over the new hurdle, or toward tearing the hurdle down. But all those man-hours and all that money spent on lawyers could've been put toward something else that creates actual value to a wider slice of society.
> This doesn't happen though
This happens all the time.
The point isn't that it's literally impossible to compete, the point is that there's a large barrier to competition that provides no value to anyone other than the entity that created it. Time and money was spent to intentionally make the market less inefficient, so that the newly inefficient market could be exploited thereafter.
Yes, a new entity could then decide to invest time and money to try to jump over the new hurdle, or toward tearing the hurdle down. But all those man-hours and all that money spent on lawyers could've been put toward something else that creates actual value to a wider slice of society.
Of course market inefficiencies exist, but their impact is much smaller than what critics of capitalism like to imply. Amazon and fishing operate in a market with plenty of competition. My point is that the value that a fish futures owner holds is real.
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>Amazon is clearly doing something very useful with its warehouses and delivery. This is all about getting stuff to people whenever they want it.
>How much this is really worth is unclear.
We can let the market tell us how much its worth. We can look at how much people are willing to pay for it.
How much extra is a customer willing to pay to have it shipped from amazon than go pick it up in a store?
How much cheaper is a seller willing to sell a product to have it on amazons store?
>How much this is really worth is unclear.
We can let the market tell us how much its worth. We can look at how much people are willing to pay for it.
How much extra is a customer willing to pay to have it shipped from amazon than go pick it up in a store?
How much cheaper is a seller willing to sell a product to have it on amazons store?
Different people will pay different amounts. Doing demand management like the airlines do will get closer to what people will pay.
Fortunately as consumers, we often don't have to pay as much as we'd be willing to pay, so the price is an underestimate of consumer value.
But then again, it's easy for companies to confuse the issue. How can you tell what people would be willing to pay for shipping when they are using Amazon Prime and have "free" shipping? They themselves might not know if they're getting a good deal or not.
Seeing the market reaction isn't nothing, but it doesn't tell you what would have happened if you did something different. Startup often have trouble picking a price and may never know if they did it right.
Fortunately as consumers, we often don't have to pay as much as we'd be willing to pay, so the price is an underestimate of consumer value.
But then again, it's easy for companies to confuse the issue. How can you tell what people would be willing to pay for shipping when they are using Amazon Prime and have "free" shipping? They themselves might not know if they're getting a good deal or not.
Seeing the market reaction isn't nothing, but it doesn't tell you what would have happened if you did something different. Startup often have trouble picking a price and may never know if they did it right.
> Just because it’s the same commodity doesn’t mean it’s worth the same amount at every time and place.
That’s what arbitrage is
That’s what arbitrage is
>they've not created 0.02 apples worth of value, they've revealed that the whole thing was a waste of time
If you select an example with almost identically substitutable goods, no wonder you miss the point. Lets use oranges and sausages in the example instead. Now we're trading meat for fruit. What's the value to you of not dying of scurvy or protein deficiency?
Identifying imbalances in supply and demand, and working out how to resolve them creates huge value, otherwise all trade would be pointless.
That's where investors and business owners come in. They identify an imbalance in supply and demand between the labour of employees and the needs of customers. Sure the employees could do that themselves, and that's fine. It's not as if it's illegal, good luck to them. Power to the people. But the point is somebody has to do it and it absolutely creates value.
If you select an example with almost identically substitutable goods, no wonder you miss the point. Lets use oranges and sausages in the example instead. Now we're trading meat for fruit. What's the value to you of not dying of scurvy or protein deficiency?
Identifying imbalances in supply and demand, and working out how to resolve them creates huge value, otherwise all trade would be pointless.
That's where investors and business owners come in. They identify an imbalance in supply and demand between the labour of employees and the needs of customers. Sure the employees could do that themselves, and that's fine. It's not as if it's illegal, good luck to them. Power to the people. But the point is somebody has to do it and it absolutely creates value.
>Identifying imbalances in supply and demand, and working out how to resolve them creates huge value, otherwise all trade would be pointless.
Yes sure, but to have claimed to "create" the value, it can't simply be taken from someone else. If other people were already selling apples and sausages and you move in a put them out of business then you haven't created anything, you have just captured and monetized value for your own shareholders.
Whats more, If the folks that used to sell apples, also sold bananas, but you drove them out of business, and now bananas are no longer available, value may have been lost.
Yes sure, but to have claimed to "create" the value, it can't simply be taken from someone else. If other people were already selling apples and sausages and you move in a put them out of business then you haven't created anything, you have just captured and monetized value for your own shareholders.
Whats more, If the folks that used to sell apples, also sold bananas, but you drove them out of business, and now bananas are no longer available, value may have been lost.
How have I put them out of business, what’s the mechanism. Did I sell more oranges to more people at lower prices? Then those people benefited. Fewer people will die of scurvy this year, they will be healthier and be able to work harder, and will have more money or goods to spend or exchange. Maybe they can use the surplus value to employ the old orange grower in a new trade.
Otherwise what you’re saying is increased efficiency creates no value.
Otherwise what you’re saying is increased efficiency creates no value.
Oh sure, increased efficiency is absolutely value, and I'm totally fine with somebody claiming the difference between what was before, and what they do as "created" value.
But I would also argue, that these efficiency gains are tiny. That most businesses spend 90% of their labor effort fighting for control of existing value, not creating new value.
When A robot automates somebodies job away, a shareholders business is run more efficiently and shareholder value increases. But the robots value to society is not realized until the unemployed person goes on to do something else of value. Sometimes they will, but not always. These displaced people could be either a benefit or a burden to society. The value of robot labor is ambiguous.
When Google and Apple make tools for us to work more efficient I can see a clear path to value creation. (Even if very small)
When Amazon sells us more cheap junk from China that we didn't need anyhow, the value creation is a lot less clear.
I guess we are starting to get into the realm where my definition of value is not the same as everybody else. Apologies if I'm rambling, It's an interesting topic and I enjoy thinking about it as I write.
But I would also argue, that these efficiency gains are tiny. That most businesses spend 90% of their labor effort fighting for control of existing value, not creating new value.
When A robot automates somebodies job away, a shareholders business is run more efficiently and shareholder value increases. But the robots value to society is not realized until the unemployed person goes on to do something else of value. Sometimes they will, but not always. These displaced people could be either a benefit or a burden to society. The value of robot labor is ambiguous.
When Google and Apple make tools for us to work more efficient I can see a clear path to value creation. (Even if very small)
When Amazon sells us more cheap junk from China that we didn't need anyhow, the value creation is a lot less clear.
I guess we are starting to get into the realm where my definition of value is not the same as everybody else. Apologies if I'm rambling, It's an interesting topic and I enjoy thinking about it as I write.
The question of what matters to a society and why certainly is interesting. The value of value sinks for example like art or Bitcoin.
I’m a lot less worried about automaton than I used to be. There’s just zero evidence that it actually leads to any systemic unemployment in practice. Absorbing China into the labour market has been hard on low end wages, but that effect seems to over already. Increasing capacity and efficiency grows the pie for everybody and humans are very adaptable. When there’s under utilised labour, as long as the economy as a whole is healthy somebody will find a way to take commercial advantage of it and all of a sudden you’ve got full employment again. Sure there can be pain, I remember 3m unemployment here in the UK in the early 80s but we’re already back up to near full employment.
I’m a lot less worried about automaton than I used to be. There’s just zero evidence that it actually leads to any systemic unemployment in practice. Absorbing China into the labour market has been hard on low end wages, but that effect seems to over already. Increasing capacity and efficiency grows the pie for everybody and humans are very adaptable. When there’s under utilised labour, as long as the economy as a whole is healthy somebody will find a way to take commercial advantage of it and all of a sudden you’ve got full employment again. Sure there can be pain, I remember 3m unemployment here in the UK in the early 80s but we’re already back up to near full employment.
It seems obvious to me that a world where robots do all the work, and people spend all their time enjoying themselves, is better than a world where everybody has to work to survive.
I think it will be a huge step forward in human culture when we finally accept that that not everybody has to work, and the productivity of society at large will make everything so cheap that money is really not important.
The only question is how we get from here to there. That's not clear at all.
Can the government simply take from the rich and distribute it evenly to everybody? Can the government even distribute money without inflation eating the value of everything, leaving people feeling miserable and poor. Should the government provide food, shelter, medicine, infrastructure directly? Does the government need to own the means of production?
I think it will be a huge step forward in human culture when we finally accept that that not everybody has to work, and the productivity of society at large will make everything so cheap that money is really not important.
The only question is how we get from here to there. That's not clear at all.
Can the government simply take from the rich and distribute it evenly to everybody? Can the government even distribute money without inflation eating the value of everything, leaving people feeling miserable and poor. Should the government provide food, shelter, medicine, infrastructure directly? Does the government need to own the means of production?
Sometimes I get concerned by how unabashedly people put forward frankly socialist talking points in public discourse these days. But then I see how incredibly common sense refutations by people like yourself are, and feel a little less worried.
Well, I don’t think socialists are completely wrong about everything. It’s just that particularly in economics the basic theory they’re working from is deeply flawed. On the other hand while market forces are incredibly powerful, they’re not an end in themselves. Both capitalism and socialism taken to ideological extremes can be incredibly dangerous and harmful, but the ideas in both have plenty to offer.
The money made by holding Amazon is value created, not value extracted. In 2000, Bezos, early employees, and investors could have decided to cash out by issuing dividends or buying back their own shares with Amazon's profits. Instead, they chose to reinvest that profit into Amazon in the form of new fulfillment centers and new workers. This gave Bezos even more potential profit, but again he chose to reinvest it in the company. This compounded for two decades, so now Amazon is a trillion dollar company. Without someone holding the stock, Amazon would not have grown to the extent that it had. Even if Bezos sold his shares to someone else, that other person needs to decide to reinvest Amazon's potential profits back in the business.
Do you know how much those potatoes are worth to the farmer who starts with dirt, water, sunshine and diesel and grows them if the supply chains and infrastructure aren't there to get them to consumers? Zero. We saw this with the pandemic when the normal supply chains were disrupted and farmers literally ended up plowing their potatoes back into the fields because there was suddenly no way to sell them all. In fact, technically it's negative - the fuel and time to dispose of them costs something. (Of course, all the left-wing activists blamed some capitalist conspiracy for this, as though the potatoes would magically fly from field to plate if we did away with capitalism.) The core of the modern economy is specialization - instead of everyone growing their own food, a much smaller number of people grow food for everyone, freeing up a bunch of time for other things beyond just basic sustenance - and the actual multipliers involved are pretty huge.
FWIW, I don't think one needs to believe in capitalist conspiracies to feel repulsed by a situation in which stranded food is being buried in bulk to minimize losses, because there's not market mechanism to get it to people during a pandemic, while there are miles of lines at food banks, and record levels of food insecurity. Not everything needs to be couched in an ideological battle between capitalism and socialism, IMO.
> If Alice values potatoes at 1.01 apples and Bob values apples at 1.01 potatoes, and they trade, maybe they've created 0.01 apples worth of value but they certainly have not created two, they started with two and ended with approximately two. If they change their mind and trade back, they've not created 0.02 apples worth of value, they've revealed that the whole thing was a waste of time.
Selling used goods often leads to valuations like this because human preferences change over time. Consider a used bookstore where people buy books they haven't read before, sell them back when they are done, and then buy some of them yet again much later to reread. The same physical items can trade hands multiple times and keep creating value.
> No, it's the farmer who starts with dirt, water, sunshine and diesel and grows the apples and potatoes who is creating value. "Efficiency of resource allocation" are a lot of big words that do little more than justify the speaker diverting a little of the revenue stream to themselves.
Isn't the farmer just efficiently allocating the solar system's resources? If not apples and potatoes, grass and trees would grow.
If the farmer produces value by directing 1KW/m^2 in a certain way then why can't Jeff Bezos create value by directing a company in a certain way?
Selling used goods often leads to valuations like this because human preferences change over time. Consider a used bookstore where people buy books they haven't read before, sell them back when they are done, and then buy some of them yet again much later to reread. The same physical items can trade hands multiple times and keep creating value.
> No, it's the farmer who starts with dirt, water, sunshine and diesel and grows the apples and potatoes who is creating value. "Efficiency of resource allocation" are a lot of big words that do little more than justify the speaker diverting a little of the revenue stream to themselves.
Isn't the farmer just efficiently allocating the solar system's resources? If not apples and potatoes, grass and trees would grow.
If the farmer produces value by directing 1KW/m^2 in a certain way then why can't Jeff Bezos create value by directing a company in a certain way?
>If Alice values potatoes at 1.01 apples and Bob values apples at 1.01 potatoes, and they trade, maybe they've created 0.01 apples worth of value but they certainly have not created two, they started with two and ended with approximately two.
I believe this to be incorrect. For instance, let's say that Alice runs a hamburger stand, and wants potatoes to sell alongside her burgers. Conversely, perhaps Bob makes apple pies which he then sells.
In a situation like this, they both would value (the verb) the other food more than the one they had, which would cause them to enact the trade - they are increasing their wealth by doing so. (This leads to a whole additional conversation about wealth, but I'm trying to keep it short here.)
The reason they would value it more is because they could create more value from the other's food. Bob can sell an apple pie for perhaps 10 bucks, of which most is profit. He cannot do anything with a potato, so the value of a potato is significantly less. Likewise, Alice might be able to sell one potato's worth of french fries for $5, generating a significant profit, and thereby creating value.
I believe this to be incorrect. For instance, let's say that Alice runs a hamburger stand, and wants potatoes to sell alongside her burgers. Conversely, perhaps Bob makes apple pies which he then sells.
In a situation like this, they both would value (the verb) the other food more than the one they had, which would cause them to enact the trade - they are increasing their wealth by doing so. (This leads to a whole additional conversation about wealth, but I'm trying to keep it short here.)
The reason they would value it more is because they could create more value from the other's food. Bob can sell an apple pie for perhaps 10 bucks, of which most is profit. He cannot do anything with a potato, so the value of a potato is significantly less. Likewise, Alice might be able to sell one potato's worth of french fries for $5, generating a significant profit, and thereby creating value.
"The whole point is that no human, not even Jeff Bezos, can generate 200 billion dollars worth of value by working"
This is untrue and unlikely.
Invent a star trek type transporter. I bet you could sell your work for 200 billion in cash or 1 trillion in fedex stocks.
You are never going to create 200 trillion value working for Jeff so he pays you 200 billion. Amazon is setup so the value create goes to Jeff and other shareholders. If you are lucky you get 100th of the value you are part of creating. (Yearly profits + yearly valuation increases) / total employees / 1000 is your pay if you are lucky
This is untrue and unlikely.
Invent a star trek type transporter. I bet you could sell your work for 200 billion in cash or 1 trillion in fedex stocks.
You are never going to create 200 trillion value working for Jeff so he pays you 200 billion. Amazon is setup so the value create goes to Jeff and other shareholders. If you are lucky you get 100th of the value you are part of creating. (Yearly profits + yearly valuation increases) / total employees / 1000 is your pay if you are lucky
You are wrong about apples and potatoes - the blog post author does mention your story just under different term: utility, which is a standard way to express the notion you touched: the total utility of an apple and a potato in the right hands is higher than utility of them in the wrong hands. So barter increases utility, but economy as a whole isn't any more valuable because of it (externally it'll trade the same). It's also echoed in OP's point about utility of money (and a question whether Amazon actually increases or decreases total utility in the economy).
Bezos claims he created 310 B of value and you say "as shareholder I care about value of the company", but you and other shareholders who own (together) 100% of Amazon didn't get 310 B of value, did you?
That's the thing. Neither did the economy "gain" all this value. If I work for 10 hours and earn a 1000 uSD, my employer didn't create 1000 USD worth of value. We traded my time/effort/exhaustion for money. Maybe there was some actual value created through that work for us or economy/society, or maybe it was meaningless work (and we even stole value from the society by e.g. burning me out).
Bezos claims he created 310 B of value and you say "as shareholder I care about value of the company", but you and other shareholders who own (together) 100% of Amazon didn't get 310 B of value, did you?
That's the thing. Neither did the economy "gain" all this value. If I work for 10 hours and earn a 1000 uSD, my employer didn't create 1000 USD worth of value. We traded my time/effort/exhaustion for money. Maybe there was some actual value created through that work for us or economy/society, or maybe it was meaningless work (and we even stole value from the society by e.g. burning me out).
> So barter increases utility, but economy as a whole isn't any more valuable because of it
Many things factor into the value of a good, including where it is and who owns it. If the bartering involves the apple and the potato trading places it’s easy to see how value is created, as the value of a good depends on its location and transporting it to a location where it is more highly valued creates value. (Otherwise transportation as an industry could never create value, in which case, why would anyone ever transport anything?)
It’s more rare that ownership will factor into value, but it comes up sometimes. An example is when the whole of something is worth more than the sum of the parts, like buying the last missing piece of a city block so that you can put a full-block development on it.
Many things factor into the value of a good, including where it is and who owns it. If the bartering involves the apple and the potato trading places it’s easy to see how value is created, as the value of a good depends on its location and transporting it to a location where it is more highly valued creates value. (Otherwise transportation as an industry could never create value, in which case, why would anyone ever transport anything?)
It’s more rare that ownership will factor into value, but it comes up sometimes. An example is when the whole of something is worth more than the sum of the parts, like buying the last missing piece of a city block so that you can put a full-block development on it.
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It is false, but so is Bezos' claim - if you would take $100K in salary, but wouldn't take $90K, that means your time is worth X where $90K <= x < $100K. Let's assume x = $95K.
If your work is worth to me $120K, and you accept $100K, you have created $20K for me.
Therefore our employment agreement created $25K in value each year.
If your work is worth to me $120K, and you accept $100K, you have created $20K for me.
Therefore our employment agreement created $25K in value each year.
I remember reading something like this in Marx's first volume of Capital, where he was explaining how the labour is "self-expanding", that is, producing more than it costs to sustain (except he used work-hours in accounting). Funnily enough, if you read Marx's account closely enough, there is no unfairness in payment: what's bought is "ability to work", its marginal price in the competitive market is exactly the cost of living, and the fact that the price of the resulting product the higher is irrelevant.
If someone pays you $100K, then your value is, by definition, $100K, because the value is what someone is willing to pay. 100% of that value, by the way, is created by you developing from a $0K-salary baby into a $100K-salary adult. So that's 100K value created by the employee (and the people in their life to an immeasurable degree).
If your work is worth $120K to your employer, the difference, like you said, is $20K of value created by the employee.
All this to importantly note that the employment agreement didn't create $120K of value -- the employee did, for the employer.
If the employer takes 2 of you, each individually providing $120,000 of value to their customers, and, through managing you as a team, manages to extract $250,000 from a customer, then the employer has finally created value -- specifically, $10,000 worth.
If your work is worth $120K to your employer, the difference, like you said, is $20K of value created by the employee.
All this to importantly note that the employment agreement didn't create $120K of value -- the employee did, for the employer.
If the employer takes 2 of you, each individually providing $120,000 of value to their customers, and, through managing you as a team, manages to extract $250,000 from a customer, then the employer has finally created value -- specifically, $10,000 worth.
It's a interesting approach to accounting, except for the fact that the manager is not paid $10k when employers are paid $120k each.
And anyway, that's not the manager who produced that value: it's the sales team, without them the product is literally worthless. So what is manager paid for, again?
And even more interesting question now would be "what are shareholders are paid for anyway, after they've been repaid the initial investment with the interest on top?"
And anyway, that's not the manager who produced that value: it's the sales team, without them the product is literally worthless. So what is manager paid for, again?
And even more interesting question now would be "what are shareholders are paid for anyway, after they've been repaid the initial investment with the interest on top?"
That is definitely an interesting way of interpreting what I said
No, the author is right. He says that barter does not create market value which is true. Barter may or may not lead to a better allocation of goods, in terms of exchange efficiency, but the market value (i.e. price) of those goods and the amount of goods remains unchanged.
For the record, the post you are responding to (and many others sharing similar criticism) was made before I changed "no value" to "no market value" (this edit is called out in a footnote).
Maybe you need to read the article again, because in this comment you are conflating different kinds of “value” as if they are all equally meaningful.
> When people say value is created for shareholders
From the Bezos letter:
"Summarizing:
Shareholders $21B
Employees $91B
3P Sellers $25B
Customers $164B
Total $301B"
This article is criticizing "employee value" and "customer value", not shareholder value.
From the Bezos letter:
"Summarizing:
Shareholders $21B
Employees $91B
3P Sellers $25B
Customers $164B
Total $301B"
This article is criticizing "employee value" and "customer value", not shareholder value.
I think it quibbled over standard language that every business uses in it's releases and used Bezos as a whipping post to make a point because it wouldn't have gotten traction otherwise.
So what? That’s why is meaningful. It exposes falsehood that we are too distracted to see and understand.
I for one appreciate having my mind blown once in a while and my dogmas questioned.
This
I also read the letter from Bezos and thought "ok is just useless propaganda"
But having someone break it down for me and questioning every statement, was somewhat useful, and possibly increased my awareness to this kind of krap... ehm double standards
I also read the letter from Bezos and thought "ok is just useless propaganda"
But having someone break it down for me and questioning every statement, was somewhat useful, and possibly increased my awareness to this kind of krap... ehm double standards
If you care more about the dollar than Amazon:
https://www.mathsisfun.com/puzzles/where-did-the-dollar-go--...
>When the Waiter returns 3 dollars, the 3 friends had paid $25 to the Cashier and $2 to the Waiter. $25+$2 = $27 = 3 x $9.
https://www.mathsisfun.com/puzzles/where-did-the-dollar-go--...
>When the Waiter returns 3 dollars, the 3 friends had paid $25 to the Cashier and $2 to the Waiter. $25+$2 = $27 = 3 x $9.
Rewriting the question as if the room was supposed to be free also makes the bad math clear:
> Three tourists stop at a hotel, and the manager tells them that a shared room will cost $30. Finding the price agreeable, they pony up $10 each and retire to the room. Later that afternoon, the manager, who is honest, realizes that the room was meant to be priced at $0. The manager orders the bellhop to return the excess $30 to their guests. The bellhop, who is not honest, takes $30 from the register and return only $1 to each tourist, pocketing the remaining $27.
> Now, each of the three tourists has spent $9, for a total of $27. The bellhop has retained $27, which brings the total to $54. Where did the other dollar go?
> Three tourists stop at a hotel, and the manager tells them that a shared room will cost $30. Finding the price agreeable, they pony up $10 each and retire to the room. Later that afternoon, the manager, who is honest, realizes that the room was meant to be priced at $0. The manager orders the bellhop to return the excess $30 to their guests. The bellhop, who is not honest, takes $30 from the register and return only $1 to each tourist, pocketing the remaining $27.
> Now, each of the three tourists has spent $9, for a total of $27. The bellhop has retained $27, which brings the total to $54. Where did the other dollar go?
When you word it that way, I get a bit angry when I read "which brings the total to."
Yes, that phrase is definitely doing some work here :). The followup might be "the total of what?" +1 to sibling post on proper bookkeeping but we can also sum inflow/outflow for each of the entities. There isn't a node where it makes sense to add +$27 and +$2.
The customers collectively are at -10*3 + 1*3 = -$27. The hotel is at 10*3 - 5 = $25 The bellhop is at 5 - 1*3 = $2
And those sum to zero for the system; no money was created or destroyed.
Or, thinking in terms of physical bills, the bellhop's two dollars are a subset of the 27 the customers paid out and adding them is double-counting. The real math behind the problem is just 27 = 25 + 2.
The customers collectively are at -10*3 + 1*3 = -$27. The hotel is at 10*3 - 5 = $25 The bellhop is at 5 - 1*3 = $2
And those sum to zero for the system; no money was created or destroyed.
Or, thinking in terms of physical bills, the bellhop's two dollars are a subset of the 27 the customers paid out and adding them is double-counting. The real math behind the problem is just 27 = 25 + 2.
It clicked for me when I allowed negative balances
Customers: 0 -30 -30 -27
Hotel : 0 30 25 25
Bellhop : 0 0 5 2
Total : 0 0 0 0As an aside, this shows the value and reason behind double entry bookkeeping. More setup in the beginning, but ultimately much less confusing.
"The bellhop, who is very nice, takes $5 from the register and return $2 to each tourist, paying $1 from his pocket— the guests don’t have to fuss over uneven change that way.
Now, each of the three tourists has spent $8, for a total of $24. The bellhop has spent $1, which brings the total to $25. Where did the other 5 dollars go?"
"The bellhop, who is very much not honest, takes $10 from the register and return only $1 to each tourist, pocketing the remaining $7— the guests don’t have to fuss over uneven change that way.
Now, each of the three tourists has spent $9, for a total of $27. The bellhop has retained $7, which brings the total to $34. Where did those other 4 dollars come from?"
Now, each of the three tourists has spent $8, for a total of $24. The bellhop has spent $1, which brings the total to $25. Where did the other 5 dollars go?"
"The bellhop, who is very much not honest, takes $10 from the register and return only $1 to each tourist, pocketing the remaining $7— the guests don’t have to fuss over uneven change that way.
Now, each of the three tourists has spent $9, for a total of $27. The bellhop has retained $7, which brings the total to $34. Where did those other 4 dollars come from?"
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This was my first time seeing said puzzle, and when I got to the end I instantly was thinking? WTF you need to subtract $2 to get to the price of the room, not add to try and get to some imaginary amount of money spent.
The room is $25. Everyone paid $25 for the room + a $2 "tip" to the bellhop.
That said, I'm going to have fun emailing it to my parents. ;)
The room is $25. Everyone paid $25 for the room + a $2 "tip" to the bellhop.
That said, I'm going to have fun emailing it to my parents. ;)
The puzzle is a lot simpler once you merge the 3 tourists into a single unit since there is no reason to treat them separately. Then it's:
1. A three-headed tourist gives $30 to the hotel.
2. The bellhop takes $5 from the hotel.
3. The bellhop gives $3 to the tourist.
Now it's clear that the tourists are down $27, the hotel is up $25, and the bellhop is up $2.
1. A three-headed tourist gives $30 to the hotel.
2. The bellhop takes $5 from the hotel.
3. The bellhop gives $3 to the tourist.
Now it's clear that the tourists are down $27, the hotel is up $25, and the bellhop is up $2.
When I was a teenager this blew our minds and stumped us for days.
I'm mid 40's, and really glad someone posted an answer, because that was starting to drive me nuts :)
Surely you're familiar with the Monty Hall problem, but if not:
https://en.wikipedia.org/wiki/Monty_Hall_problem
https://en.wikipedia.org/wiki/Monty_Hall_problem
The most recent viral maths problem I recall is Cheryl's birthday out of Singapore.
https://www.youtube.com/watch?v=emiMj8cCL5E
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one might consider that, taking the marginal utility of money into account, a dollar in the hands of an Amazon employee is in fact more valuable than the same dollar in the hands of an Amazon shareholder.
I'm not at all certain this is correct. Yes, Jeff Bezos owns a lot of Amazon; but so do pension funds and other institutional investors. Amazon has a lot of very wealthy employees, and I wouldn't be surprised in the slightest if the average employee is wealthier than the average beneficial owner of Amazon stock.
I'm not at all certain this is correct. Yes, Jeff Bezos owns a lot of Amazon; but so do pension funds and other institutional investors. Amazon has a lot of very wealthy employees, and I wouldn't be surprised in the slightest if the average employee is wealthier than the average beneficial owner of Amazon stock.
I don't know about average but the median Amazon employee, including all those working in warehouses, driving trucks, etc. is unlikely to be wealthier.
The right tail of Amazon shareholders' wealth is much longer than the right tail of Amazon employees' wealth, since it includes the richest (and 21st richest) person in the world. The best paid employee in the world probably doesn't work for Amazon, and they are also much less rich compared to the median employee than the richest person is compared to the median wealth holder.
I don't know what your point is.
I was making a distinction between "average employee" which can be distorted by having vastly wealthier individuals amongst their number, and "median employee,' which is not. I hope Amazon does have a large cadre of well-paid employees but they're vastly outnumbered by the warehouse workers, delivery staff, etc.
I was responding to someone speculating that because a lot of Amazon stock is presumably held by pensions and other institutional investors, the value of those stocks goes to very average people who are not wealthy (by U.S. standards). I think that even if a lot of Amazon stock is held that way, if you have a job for which you receive a pension or contribute to a retirement fund that's worth a damn, you're not wealthy but you're probably wealthier than the bottom half of Amazon employees.
I was making a distinction between "average employee" which can be distorted by having vastly wealthier individuals amongst their number, and "median employee,' which is not. I hope Amazon does have a large cadre of well-paid employees but they're vastly outnumbered by the warehouse workers, delivery staff, etc.
I was responding to someone speculating that because a lot of Amazon stock is presumably held by pensions and other institutional investors, the value of those stocks goes to very average people who are not wealthy (by U.S. standards). I think that even if a lot of Amazon stock is held that way, if you have a job for which you receive a pension or contribute to a retirement fund that's worth a damn, you're not wealthy but you're probably wealthier than the bottom half of Amazon employees.
My point is that the 'average employee', as compared to the 'median employee', is probably distorted much less than 'average shareholder' compared to 'median shareholder'.
Therefore I don't agree with you that while the average employee might be richer than the average shareholder, the median employee might be poorer than the median shareholder. If the average employee is richer than the average shareholder (which I doubt), then the median employee is probably much, much more richer than the median shareholder.
Therefore I don't agree with you that while the average employee might be richer than the average shareholder, the median employee might be poorer than the median shareholder. If the average employee is richer than the average shareholder (which I doubt), then the median employee is probably much, much more richer than the median shareholder.
Thanks for the clarification.
Part of my thinking assumes Bezos himself counts as an Amazon employee so all by himself he heavily affects the difference between average and median employee (he might be the only billionaire employee, Andy Jassy is presumably one of the wealthiest employees and he's below $500m).
Since Bezos is also a shareholder (I assume the largest individual shareholder), he also distorts that average. However, since I assume there are orders of magnitude more shareholders (through their stake in pension and retirement funds) than working for Amazon, all those additional data points smooths the difference out more.
Part of my thinking assumes Bezos himself counts as an Amazon employee so all by himself he heavily affects the difference between average and median employee (he might be the only billionaire employee, Andy Jassy is presumably one of the wealthiest employees and he's below $500m).
Since Bezos is also a shareholder (I assume the largest individual shareholder), he also distorts that average. However, since I assume there are orders of magnitude more shareholders (through their stake in pension and retirement funds) than working for Amazon, all those additional data points smooths the difference out more.
>In a typical transaction, no value is created
This claim isn't true - it completely ignores producer and consumer surplus. It adds nothing to the economy, but it adds value to both sides of the transaction.
Suppose A and B trade items a and b. This happens because A values item b more than B does, and B values item a more than A does. So by trading both sides have more value to them than originally.
Almost zero trades happen right at the margin.
This claim isn't true - it completely ignores producer and consumer surplus. It adds nothing to the economy, but it adds value to both sides of the transaction.
Suppose A and B trade items a and b. This happens because A values item b more than B does, and B values item a more than A does. So by trading both sides have more value to them than originally.
Almost zero trades happen right at the margin.
> Every single dollar of compensation paid out is done transactionally: it is used to purchase labor.
This is my gripe whenever I hear about my employer "covering" part of my health insurance or other benefit etc... No, I pay for EVERYTHING with my labor.
This is my gripe whenever I hear about my employer "covering" part of my health insurance or other benefit etc... No, I pay for EVERYTHING with my labor.
Including the profit your employer retains -- employers necessarily pay you less than the value of your labor.
> employers necessarily pay you less than the value of your labor.
Untrue. Employers aim for that but they often fail.
The Credit Suisse employees that lost $5 billion due to Archegos were overpaid.
Alternatively if I am the only person that can do a particular necessary job for a business, I should be able to reap the majority of the profits due to my monopoly.
Finally, for some professional jobs productivity is hard to measure, yet you may employ many people because in aggregate they make a profit. At an individual level, the profit margin can vary from negative to positive.
Untrue. Employers aim for that but they often fail.
The Credit Suisse employees that lost $5 billion due to Archegos were overpaid.
Alternatively if I am the only person that can do a particular necessary job for a business, I should be able to reap the majority of the profits due to my monopoly.
Finally, for some professional jobs productivity is hard to measure, yet you may employ many people because in aggregate they make a profit. At an individual level, the profit margin can vary from negative to positive.
> Untrue. Employers aim for that but they often fail.
> The Credit Suisse employees that lost $5 billion due to Archegos were overpaid.
Edge cases. Most people work for businesses that make a profit, and those businesses' profit comes from the difference between the value its employees create and the salary it pays to them (at least in aggregate).
> Finally, for some professional jobs productivity is hard to measure, yet you may employ many people because in aggregate they make a profit. At an individual level, the profit margin can vary from negative to positive.
You're confusing what is meant by the "value of your labor". Of course what GP meant is "the value of your labor as seen by your employer". If everyone could create the same value they create in an organized business while working solo then nobody would work a job as it would just be losing money.
> The Credit Suisse employees that lost $5 billion due to Archegos were overpaid.
Edge cases. Most people work for businesses that make a profit, and those businesses' profit comes from the difference between the value its employees create and the salary it pays to them (at least in aggregate).
> Finally, for some professional jobs productivity is hard to measure, yet you may employ many people because in aggregate they make a profit. At an individual level, the profit margin can vary from negative to positive.
You're confusing what is meant by the "value of your labor". Of course what GP meant is "the value of your labor as seen by your employer". If everyone could create the same value they create in an organized business while working solo then nobody would work a job as it would just be losing money.
> employers necessarily pay you less than the value of your labor.
That’s not true “necessarily” unless you assume all employers are sustainable, in idealized competitive markets, and that all of their inputs are also purchased in idealized competitive markets such that they don’t have monopsony savings they can spend on surplus wages without impacting sustainability.
Obviously, even with idealized market assumptions, one reason an firms fail is paying more total for inputs than the value they produce, and lots of firms fail.
That’s not true “necessarily” unless you assume all employers are sustainable, in idealized competitive markets, and that all of their inputs are also purchased in idealized competitive markets such that they don’t have monopsony savings they can spend on surplus wages without impacting sustainability.
Obviously, even with idealized market assumptions, one reason an firms fail is paying more total for inputs than the value they produce, and lots of firms fail.
Ok, that's fair, I was painting with a broad brush. I acknowledge that yes, employers can pay employees more than the value they bring in, but it's likely that doing so isn't sustainable long term.
And I dodged entirely around worker coops and other arrangements where the excess value is distributed back to employees.
And I dodged entirely around worker coops and other arrangements where the excess value is distributed back to employees.
This only follows under the assumption that a company only derives value from the labour of its employees, ie. “there is only labour”.
But there are many other kinds of assets - cash, brand, real estate, natural renewable resources etc.
One could have a zero labour company that is profitable.
But there are many other kinds of assets - cash, brand, real estate, natural renewable resources etc.
One could have a zero labour company that is profitable.
That part is fine and understood when you take a job with a for profit company. I just don't like it when employers think that are doing you some sort of favor.
>The most egregious misrepresentation of value creation in the letter is the $91 billion figure that Amazon has paid out in compensation to employees. This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor. In a typical transaction, no value is created.
This is just wrong. The employer gets value because they make more (in expectation) from the worker than they pay; the worker gets value because they get paid more than the the minimum they'd be willing to work for. There's surplus on both sides in most transactions.
The article makes some correct points. But it's frustrating to see it combining those with nonsense.
This is just wrong. The employer gets value because they make more (in expectation) from the worker than they pay; the worker gets value because they get paid more than the the minimum they'd be willing to work for. There's surplus on both sides in most transactions.
The article makes some correct points. But it's frustrating to see it combining those with nonsense.
How's it nonsense? If I buy $499 dollars at face-value and sell them for $500 there's no possible justification for the claim that I created $500 of value. Perhaps I created $1.
Paying for labor is absolutely as transactional as paying for other inputs to your business. Because you (hopefully) create marginal value on top of that comp doesn't mean the total comp is your value creation.
You can't just add total employee comp to your "value created" pile. There's maybe some marginal value creation you could kind-of claim in that your presence increased employee comp over some hypothetical world where you didn't exist—but that's getting well into bullshit territory, since there's no way to know some competitor you crushed wouldn't have ended up creating more total value and paying their employees even more. It's pure fantasy.
Paying for labor is absolutely as transactional as paying for other inputs to your business. Because you (hopefully) create marginal value on top of that comp doesn't mean the total comp is your value creation.
You can't just add total employee comp to your "value created" pile. There's maybe some marginal value creation you could kind-of claim in that your presence increased employee comp over some hypothetical world where you didn't exist—but that's getting well into bullshit territory, since there's no way to know some competitor you crushed wouldn't have ended up creating more total value and paying their employees even more. It's pure fantasy.
To be clear, I object to this sentence as nonsensical:
>In a typical transaction, no value is created.
As I explained, in typical transactions value is created for both parties.
>In a typical transaction, no value is created.
As I explained, in typical transactions value is created for both parties.
> As I explained, in typical transactions value is created for both parties.
The value created in a transaction is orthogonal to the total sum of money exchanged in the transaction. That was the meaning of the criticism.
You are correct though in that the author worded it very unfortunately, which undermined the critique.
The value created in a transaction is orthogonal to the total sum of money exchanged in the transaction. That was the meaning of the criticism.
You are correct though in that the author worded it very unfortunately, which undermined the critique.
There is a directly following paragraph about how this exchange is not exactly zero-sum, but so far from being representable by the dollar value changing hands that it doesn't matter for the purposes of identifying the value as $91 billion.
The value the employer gets is double-counted later as part of the profit.
The value to employees is tricky. Without Amazon they might make more from a competitor with less market power. Without the industry, they might make more selling or transporting things directly.
The value to employees is tricky. Without Amazon they might make more from a competitor with less market power. Without the industry, they might make more selling or transporting things directly.
I'm sorry for being frustrating! This criticism is valid, and I've edited the article to clarify that I meant market value. I hope that makes it less nonsensical.
I think it might cause less confusion if you moved the end-note to the beginning.
The employer gets value because they make more (in expectation) from the worker than they pay; the worker gets value because they get paid more than the the minimum they'd be willing to work for.
The worker does not get value in that arrangement. The employer is (often but not always) a price maker, the worker is (often but not always) a price taker. This can change depending on whether there are inelasticities of supply or demand.
The worker does not get value in that arrangement. The employer is (often but not always) a price maker, the worker is (often but not always) a price taker. This can change depending on whether there are inelasticities of supply or demand.
Price takers still get value, since the price they're taking is above their reservation price. The employer may capture more of the total surplus if they have market power.
I don't regard that as value; your reservation price is what you can't afford to go below, not what you want.
Of course you don't want the reservation price; a transaction at that price provides no value to you by definition.
You prefer a transaction at a higher price to one at the reservation price. Satisfying that preference is valuable.
You prefer a transaction at a higher price to one at the reservation price. Satisfying that preference is valuable.
> the worker gets value because they get paid more than the the minimum they'd be willing to work for
I can't find technical fault with your comment, but I think we should be clear, very desperate people will work for nearly nothing.
I can't find technical fault with your comment, but I think we should be clear, very desperate people will work for nearly nothing.
Exactly. This is just a level of ignorance that for me makes whole article not worth reading.
Which part's ignorant? If I pay $10,000 for land and $50,000 in materials and pay $90,000 in labor to produce a building that I sell for $200,000, did I create $50,000 in value? $140,000 because for some reason my labor costs count as value creation? $200,000 because all costs count as value creation?
[EDIT] Ah, I think I see, you don't like their assigning zero value to changes in distribution of goods. That makes sense.
[EDIT] Ah, I think I see, you don't like their assigning zero value to changes in distribution of goods. That makes sense.
> Which part's ignorant?
Statements like: "In a typical transaction, no value is created."
> If I pay $10,000 for land and $50,000 in materials and pay $90,000 in labor to produce a building that I sell for $200,000, did I create $50,000 in value? $140,000 because for some reason my labor costs count as value creation?
In terms of production (value creation), we consider separately short-term inputs (e.g. materials) compared to long-term resources (capital, labor). In this example i would say that organization as a whole created $140000 in value using its capital and labour and used $90000 to compensate its labor (some other part to compensate capital, pay taxes and so on). This is essentially how GDP is computed, and also how VAT (value-added tax) is taxed.
Statements like: "In a typical transaction, no value is created."
> If I pay $10,000 for land and $50,000 in materials and pay $90,000 in labor to produce a building that I sell for $200,000, did I create $50,000 in value? $140,000 because for some reason my labor costs count as value creation?
In terms of production (value creation), we consider separately short-term inputs (e.g. materials) compared to long-term resources (capital, labor). In this example i would say that organization as a whole created $140000 in value using its capital and labour and used $90000 to compensate its labor (some other part to compensate capital, pay taxes and so on). This is essentially how GDP is computed, and also how VAT (value-added tax) is taxed.
Even the fruit analogy is laughably wrong. If I have a basket of oranges and you have a string of sausages, and we swap some of each, there are no more sausages or oranges but the diet and nutrition of both of us has significantly improved. That's why merchants create value, buying from people with a surplus and selling to people with a need. You can kind of understand why medieval nobles didn't understand this, but in this day and age it's not exactly rocket science.
He gives his socialist credentials away later with the art example, only a worker making something can possibly add any value. It's the classic theory that managers and investors are all parasites and only workers create value. Again, value can absolutely be created by identifying an imbalance in supply (labour) and demand (products and services) and then working out how to resolve it. Somebody has to do it.
I'm not saying Bezos' sums are credible or accurate or even mean anything, but this critique is crazily off base.
He gives his socialist credentials away later with the art example, only a worker making something can possibly add any value. It's the classic theory that managers and investors are all parasites and only workers create value. Again, value can absolutely be created by identifying an imbalance in supply (labour) and demand (products and services) and then working out how to resolve it. Somebody has to do it.
I'm not saying Bezos' sums are credible or accurate or even mean anything, but this critique is crazily off base.
> Again, value can absolutely be created by identifying an imbalance in supply (labour) and demand (products and services) and then working out how to resolve it. Somebody has to do it.
1) it's an axiom that "Somebody has to do it". You can't demonstrate that this is anything other than a feature of the political/power structure within the society where this putative imbalance happens. You can't demonstrate that the imbalance is inevitable, nor that it requires action by a 3rd party to resolve, only that these things happen a lot in our current society.
2) You make the remarkably naive assumption that the receiver of said orange and sausage have somehow freely computed the value of the exchange to them, compared it with the cost they incur to the merchant, and found the result to create value for them. In the real world, they may not have sufficient information to even begin this computation. They may not be in a position to do the computation at all.
1) it's an axiom that "Somebody has to do it". You can't demonstrate that this is anything other than a feature of the political/power structure within the society where this putative imbalance happens. You can't demonstrate that the imbalance is inevitable, nor that it requires action by a 3rd party to resolve, only that these things happen a lot in our current society.
2) You make the remarkably naive assumption that the receiver of said orange and sausage have somehow freely computed the value of the exchange to them, compared it with the cost they incur to the merchant, and found the result to create value for them. In the real world, they may not have sufficient information to even begin this computation. They may not be in a position to do the computation at all.
I don't know if the author is a socialist but Marx himself would certainly agree with your first paragraph. In his own words: https://www.marxists.org/archive/marx/works/1867-c1/ch05.htm...
I’m not sure how you can think that if you read Marx. He’s explicit that merchants are parasitic because he makes an artificial distinction between use value and exchange value. From your link:
“ If equivalents are exchanged, no surplus-value results, and if non-equivalents are exchanged, still no surplus-value. Circulation, or the exchange of commodities, begets no value.”
He makes the distinction so that he can special privilege the value of labour as productive “use value”, but the value of all goods derive from their use. The job of a merchant is to buy something from someone who has no or little use for it, and sell it to someone who has greater use for it.
In the same text he claims that no value can be created by converting a currency note into change, but this is trivially not true. With coins I can buy things from people who can’t change a note. I can also buy things from a vending machine that won’t accept notes. In some circumstances coins are more useful, in others notes are. That’s why people expend time and effort to go to banks to exchange one for the other.
Marx cannot accept any of this though, because if he does his entire economic analysis of capitalism comes crashing down.
For Marx distribution of goods creates no value. Seriously, read the text. He had no answer to the question why anyone would ever pay to transport a product from a factory to a purchaser. No value can possible be created by doing this. Really.
“ If equivalents are exchanged, no surplus-value results, and if non-equivalents are exchanged, still no surplus-value. Circulation, or the exchange of commodities, begets no value.”
He makes the distinction so that he can special privilege the value of labour as productive “use value”, but the value of all goods derive from their use. The job of a merchant is to buy something from someone who has no or little use for it, and sell it to someone who has greater use for it.
In the same text he claims that no value can be created by converting a currency note into change, but this is trivially not true. With coins I can buy things from people who can’t change a note. I can also buy things from a vending machine that won’t accept notes. In some circumstances coins are more useful, in others notes are. That’s why people expend time and effort to go to banks to exchange one for the other.
Marx cannot accept any of this though, because if he does his entire economic analysis of capitalism comes crashing down.
For Marx distribution of goods creates no value. Seriously, read the text. He had no answer to the question why anyone would ever pay to transport a product from a factory to a purchaser. No value can possible be created by doing this. Really.
I'm not disagreeing with you or defending Marx, only pointing out a common misconception. Marx's project is frequently misunderstood.
> but the value of all goods derive from their use
That's the definition of value economists adopt today following the marginal revolution, just as artificial as Marx's definition of value, which he qualifies as use-value or exchange-value. Marginalism is a great descriptive explanation for situations like the diamond-water paradox, but it is not really relevant to Marx's prescriptive project, as it concerns only what Marx calls use-value, and Marx's project very much relies on exploring this distinction he identifies between use-value and exchange-value. Whether that exploration is correct or important is another question, but I hate seeing this confusion of definitions and goals crop up all the time. Marx doesn't hold all these obviously stupid straw men views people ascribe to him regarding (use-)value, rather he thinks that the way we conceive of value should be rethought.
> but the value of all goods derive from their use
That's the definition of value economists adopt today following the marginal revolution, just as artificial as Marx's definition of value, which he qualifies as use-value or exchange-value. Marginalism is a great descriptive explanation for situations like the diamond-water paradox, but it is not really relevant to Marx's prescriptive project, as it concerns only what Marx calls use-value, and Marx's project very much relies on exploring this distinction he identifies between use-value and exchange-value. Whether that exploration is correct or important is another question, but I hate seeing this confusion of definitions and goals crop up all the time. Marx doesn't hold all these obviously stupid straw men views people ascribe to him regarding (use-)value, rather he thinks that the way we conceive of value should be rethought.
It’s a shame the ways he rethought value were so toxic. Defining everything that isn’t primary production as parasitic really isn’t a healthy way to look at an economy.
I was also surprised by this assumption and the lack of discussion or validation: "in a typical transaction, no value is created"
From my econ 101 high school days I remember a super simple example of 2 islands, 1 with only oranges and 1 with only pineapples. Simply by trading 1 orange for 1 pineapple (and vice versa) value is created since both parties get to experience different resources which offer them economic utility.
From my econ 101 high school days I remember a super simple example of 2 islands, 1 with only oranges and 1 with only pineapples. Simply by trading 1 orange for 1 pineapple (and vice versa) value is created since both parties get to experience different resources which offer them economic utility.
Trade almost always creates value for both consenting stakeholders. It should be the default assumption and anyone arguing the opposite is talking nonsense.
In rare edge cases it can be argued that trade doesn't create value for consenting stakeholders:
(1) Information asymmetries that don't rise to the level of fraud, which cause one counterparty to make an uninformed decision.
(2) Trades that appeal to the dopamine system but otherwise work against the individual, e.g. with social-media doomscrolling, gambling, drugs, fast food. In this case the individual has diminished agency to make the best decision for themselves in all cases.
Anything else? [I'm ignoring externalities here]
In rare edge cases it can be argued that trade doesn't create value for consenting stakeholders:
(1) Information asymmetries that don't rise to the level of fraud, which cause one counterparty to make an uninformed decision.
(2) Trades that appeal to the dopamine system but otherwise work against the individual, e.g. with social-media doomscrolling, gambling, drugs, fast food. In this case the individual has diminished agency to make the best decision for themselves in all cases.
Anything else? [I'm ignoring externalities here]
I don't think TFA would dispute that transactions create value. The argument being disputed is that the value created by a transaction is meaningfully measured by the value transacted.
To use the pineapples and oranges island metaphor, imagine that on island A (which has lots of oranges but no pineapples) pineapples are valued at $1.1 and oranges are valued at $1, and v.v for island b, where oranges are $1.1 and pineapples are $1.
If you and I trade an orange on island A for a pineapple on island B, we both went from having $1 in fruit to having $1.1 in fruit on our islands. The value created by that transaction isn't $1, $1.1 (or $2.1 as Amazon appears to be double-counting some of the value between revenue, profit and wages), it's $0.2, which is the value we added to the fruit by moving it between islands.
To use the pineapples and oranges island metaphor, imagine that on island A (which has lots of oranges but no pineapples) pineapples are valued at $1.1 and oranges are valued at $1, and v.v for island b, where oranges are $1.1 and pineapples are $1.
If you and I trade an orange on island A for a pineapple on island B, we both went from having $1 in fruit to having $1.1 in fruit on our islands. The value created by that transaction isn't $1, $1.1 (or $2.1 as Amazon appears to be double-counting some of the value between revenue, profit and wages), it's $0.2, which is the value we added to the fruit by moving it between islands.
The general way to measure value creation would be to sum the difference between what both parties would be willing to transact for something with what they actually transact for it.
In your example, the value creation is $0.2 ($0.1+$0.1) due to the existence of a perfect substitute.
In other cases the value creation may be 10x the turnover or higher. For example, if there's a single surgeon that can give me a life saving procedure that costs me $50k when I would've happily paid $500k, then the value creation for me is $450k and perhaps $20k for the surgeon.
In the case of Amazon, their numbers are probably an exaggeration, yes. They've assumed that the turnover = value creation, which is false reasoning, as we both recognize. It might be higher or lower. The real number might be 0.4x of what they stated, if I was to hazard a guess.
But since the whole idea of value creation flies over the heads of so many people (and this misunderstanding of basic economics has profound policy implications), Amazon's exaggeration here is not a point I wish to focus on.
In your example, the value creation is $0.2 ($0.1+$0.1) due to the existence of a perfect substitute.
In other cases the value creation may be 10x the turnover or higher. For example, if there's a single surgeon that can give me a life saving procedure that costs me $50k when I would've happily paid $500k, then the value creation for me is $450k and perhaps $20k for the surgeon.
In the case of Amazon, their numbers are probably an exaggeration, yes. They've assumed that the turnover = value creation, which is false reasoning, as we both recognize. It might be higher or lower. The real number might be 0.4x of what they stated, if I was to hazard a guess.
But since the whole idea of value creation flies over the heads of so many people (and this misunderstanding of basic economics has profound policy implications), Amazon's exaggeration here is not a point I wish to focus on.
... Isn't TFA entirely about Amazon exaggerating their value creation and abusing the fact that said concept flies over many peoples' heads?
What's TFA?
The blog post says that "no value" was created which is the false claim we were discussing/debunking above.
Amazon also made a false claim. Yes. So it doesn't seem like we're disagreeing about anything.
The blog post says that "no value" was created which is the false claim we were discussing/debunking above.
Amazon also made a false claim. Yes. So it doesn't seem like we're disagreeing about anything.
"In a typical transaction, no value is created. If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard."
That seems wrong. If I trade, that means I value whatever I get more than what I gave up; and likewise for the counterparty. Isn't that a net positive even though nothing was physically created?
That seems wrong. If I trade, that means I value whatever I get more than what I gave up; and likewise for the counterparty. Isn't that a net positive even though nothing was physically created?
Shortly after that he does acknowledge that collective labor may be more valuable than individual labor.
However we can all agree that Amazon doesn't create $91B of value when it buys something for $91B in cash. The entire supply chain behind creating the thing Amazon buys, plus the raw inputs, creates something of value that Amazon then consumes.
You could maybe argue that in a market without Amazon, the workers may have been paid only, say, $85B, so Amazon has transferred $6B from consumers to workers. Even then, the value of transferring $6B from consumers to workers is unlikely to be $6B.
If I tighten the last bolt on a car that is worth $20k, I have not created anywhere near $20k in value.
However we can all agree that Amazon doesn't create $91B of value when it buys something for $91B in cash. The entire supply chain behind creating the thing Amazon buys, plus the raw inputs, creates something of value that Amazon then consumes.
You could maybe argue that in a market without Amazon, the workers may have been paid only, say, $85B, so Amazon has transferred $6B from consumers to workers. Even then, the value of transferring $6B from consumers to workers is unlikely to be $6B.
If I tighten the last bolt on a car that is worth $20k, I have not created anywhere near $20k in value.
I agree that the overall value that amazon is claiming is dubious at best. It's conflating consumer/producer surplus with net profits and conflating both of those with wages.
But the whole point of the article is to debunk these distortions and add clarity. Adding its own confusion and distortions is not a good way to start.
But the whole point of the article is to debunk these distortions and add clarity. Adding its own confusion and distortions is not a good way to start.
The best explanation I've heard:
If I pay you $10,000 to eat a pile of horse manure, then you pay me $10,000 to eat a pile of horse manure we have:
Created $20,000 of "value" for the economy and increased GDP $20,000. That's all great for PR!
In reality we both just have s--t eating grins.
If I pay you $10,000 to eat a pile of horse manure, then you pay me $10,000 to eat a pile of horse manure we have:
Created $20,000 of "value" for the economy and increased GDP $20,000. That's all great for PR!
In reality we both just have s--t eating grins.
While funny, that doesn't really apply here. We're exchanging an apple for an orange. That is a very reasonable barter transaction and I see no reason that it doesn't create value.
In fact, the value is likely to be undercounted by GDP. People are taxed on income, so casual transactions like the orange-for-apple trade are likely to be left out of GDP simply because they are unreported.
Your example is the opposite: over-counting GDP and the participants paying thousands of dollars in taxes.
In fact, the value is likely to be undercounted by GDP. People are taxed on income, so casual transactions like the orange-for-apple trade are likely to be left out of GDP simply because they are unreported.
Your example is the opposite: over-counting GDP and the participants paying thousands of dollars in taxes.
This actually creates 1BTC.
So okay, fraudulent transactions exist. That doesn’t tell you whether a particular transaction is fraudulent.
The shipping industry is useful and using it to ship bricks for some fraudulent scheme doesn’t change that. The value of a physical action isn’t inherent in the action itself, but rather depends on what purpose it serves.
The shipping industry is useful and using it to ship bricks for some fraudulent scheme doesn’t change that. The value of a physical action isn’t inherent in the action itself, but rather depends on what purpose it serves.
And unless you both pay your tax on your $10,000 income, you are defrauding the IRS (assuming you are in the US).
There are colloquial usages of 'value' that make this conversation more complicated. We might describe the value as the utility or desirability of the object -- use value -- where I value food because I can eat it.
Or the exchange value, ie, how many apples is this iron worth.
Or the labor value, ie, how much labor went into producing this item.
Or the price, ie, how much is this item worth in money.
It seems that in reading this sentence, the author is talking about the labor value of the fruits. The various parties may have different ideas about exchange values, prices, and use values, but the labor value doesn't change because the items have exchanged owners.
Or the exchange value, ie, how many apples is this iron worth.
Or the labor value, ie, how much labor went into producing this item.
Or the price, ie, how much is this item worth in money.
It seems that in reading this sentence, the author is talking about the labor value of the fruits. The various parties may have different ideas about exchange values, prices, and use values, but the labor value doesn't change because the items have exchanged owners.
Doesn't it take labor to facilitate the matchmaking, transportation, and transaction costs associated with barter?
It makes sense if you believe value to be an objective thing, where each good has a fixed value that is a fact.
In a slightly more complicated model - or the real world - the value of a good or service is informed by things like control and location. Value is not objective, but subjective. Value can be and often is created by moving good from a location where they are values little to a location where they are valued highly.
In a slightly more complicated model - or the real world - the value of a good or service is informed by things like control and location. Value is not objective, but subjective. Value can be and often is created by moving good from a location where they are values little to a location where they are valued highly.
"It makes sense if you believe value to be an objective thing"
Does any serious economic philosophy actually believe that foolishness?
Does any serious economic philosophy actually believe that foolishness?
In feudal times, merchants were often derided for supposedly charging a price different from the "true price" of products.
So perhaps not in any serious modern economic philosophy, but people definitely arrive at this idea in naive ways.
So perhaps not in any serious modern economic philosophy, but people definitely arrive at this idea in naive ways.
And rightly so. Value may be subjective, but cost – and thus the correct price of a good – is not.
To each person participating in the transaction, it's a net zero transaction. Person A values the item they're getting more than the item they've giving, but that also means they believe that Person B is getting the short end of the stick. So +1 for Person A is -1 for Person B. However, Person B obviously feels the opposite, as if +1 for Person B is -1 for Person A.
An outsider, Person C, might say that each of them has given up a fruit (-1), and gained a fruit (+1), so both Person A and Person B end up at 0. This is the point the writer was making.
An outsider, Person C, might say that each of them has given up a fruit (-1), and gained a fruit (+1), so both Person A and Person B end up at 0. This is the point the writer was making.
No, each person does not believe the other person is getting the shorty end of the stick. They have different preferences, they both know this, so they both know that they are both better off after the exchange. The third party know this also.
I think the point is that value is created here when the fruit is grown not because we swap the fruit
The point is that there's no objective value to fruit (or anything for that matter).
For someone with allergy to that fruit it's worthless.
Aggregated preferences usually show that specialization (comparative advantage) helps satisfy everyone's preferences more that if everyone would just do their owns things. (Hence trade usually brings prosperity.)
For someone with allergy to that fruit it's worthless.
Aggregated preferences usually show that specialization (comparative advantage) helps satisfy everyone's preferences more that if everyone would just do their owns things. (Hence trade usually brings prosperity.)
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The problem with accepting this premise is that it violates the core principle of socialism that only labour creates value. But yes, of course, if I have an orange grove and you have chickens, if we trade then the diets and nutrition of both of us improve.
Identifying imbalances in supply and demand and resolving them absolutely crates value, but that's the root of big scary nasty evil capitalism, so we can't be having it.
Not that Bezos' sums make and real sense at all either, but this critique is way off base.
Identifying imbalances in supply and demand and resolving them absolutely crates value, but that's the root of big scary nasty evil capitalism, so we can't be having it.
Not that Bezos' sums make and real sense at all either, but this critique is way off base.
The one figure that this didn't quibble with is also wrong.
Net profit definitely adds to shareholder value. But suppose that I make $30 billion, reinvest $20 billion, and create something that is worth $90 billion. My net profit is now $10 billion. But I actually added $100 billion in shareholder value!
Jeff Bezos knows this, and knows this well. For many years Amazon ran at a net profit around $0 because it was reinvesting all of its profits in new businesses. So it was adding shareholder value like crazy! (And people who didn't understand this were walking around saying, "Why is Amazon worth so much? They don't even make a profit!")
Of course doing this calculation correctly includes estimating the present value of the thing I created. And that is notoriously hard. So the proxy used in the real world is market cap. However market cap is volatile and subject to change based on the emotions of speculators. Certainly Amazon's actions last year are not the whole story for why they added $600 billion in market cap!
So while net profit is the wrong measure, there is no measure that can be used which really is right for "added to shareholder value".
Net profit definitely adds to shareholder value. But suppose that I make $30 billion, reinvest $20 billion, and create something that is worth $90 billion. My net profit is now $10 billion. But I actually added $100 billion in shareholder value!
Jeff Bezos knows this, and knows this well. For many years Amazon ran at a net profit around $0 because it was reinvesting all of its profits in new businesses. So it was adding shareholder value like crazy! (And people who didn't understand this were walking around saying, "Why is Amazon worth so much? They don't even make a profit!")
Of course doing this calculation correctly includes estimating the present value of the thing I created. And that is notoriously hard. So the proxy used in the real world is market cap. However market cap is volatile and subject to change based on the emotions of speculators. Certainly Amazon's actions last year are not the whole story for why they added $600 billion in market cap!
So while net profit is the wrong measure, there is no measure that can be used which really is right for "added to shareholder value".
The CEO class is still mostly old enough to remember corporate raiders, and of course we have the modern equivalent where groups buy companies, saddle them with debt, and exfiltrate the money long before the company goes bankrupt.
Having enough liquid assets to prevent a hostile takeover is not the most profitable thing short-term but it does protect you. Amazon is so big it doesn't have that problem. It's simply too big for anyone to get their teeth around.
I think this is another case of "you are not a FAANG, if you act like one it won't turn out the same for you."
Having enough liquid assets to prevent a hostile takeover is not the most profitable thing short-term but it does protect you. Amazon is so big it doesn't have that problem. It's simply too big for anyone to get their teeth around.
I think this is another case of "you are not a FAANG, if you act like one it won't turn out the same for you."
The ownership position that Bezos had through most of its history was enough to make a hostile acquisition nearly impossible. That's how they survived the bad years post dotcom bubble without being acquired for relatively cheap. It's very hard to pull off a successful hostile takeover if you have prominent insiders with ~25-35% of the company and they don't want to sell. Certainly after they began reporting AWS results and the stock skyrocketed that was the end of any serious hostile acquisition risk (in the few years prior to the AWS numbers they were a $100-$175 billion market cap company, which eg Walmart could have afforded had regulators allowed it and insiders not made it nearly impossible).
It was also compounding the money that would otherwise have to be paid in taxes if it were not reinvested. He is an excellent CEO!
Well, there's number of users and ARPU, or equivalently how much money flowed through ...
I understand telecoms and others get warm fuzzies from that.
I understand telecoms and others get warm fuzzies from that.
The people questioning why Amazon was worth so much, at least the ones I knew about, questioned the value of what Amazon was investing in and whether Amazon would be able to extract monopoly profits from eCommerce. Obviously, Amazon had some missteps (the Fire Phone was a huge sink of money), but their investments seem to have done well overall.
I wonder if you could apply similar reasoning to critique "carbon neutrality".
I found this a very good point. You can almost make a point that Amazon should get credit for the entire value created by every business on AWS, even if it's almost certainly technically wrong. If you then add on the money they paid you, it becomes absurd. They paid you the value (to them) of the thing they bought.
> The point is, when you purchase a service from Amazon, the future value created by your usage of the service belongs to you, not to Amazon. Even if it seems like Amazon should get some credit, there’s no reasonable way to measure such things, no scheme for attributing “value creation” fairly between the producers of every good and service you may have consumed on your way to running a business. Anyway, Amazon has already been credited for providing those services since they made money off the deal. Every business relying on Amazon contributes to that $21 billion in profit Amazon made.
> The point is, when you purchase a service from Amazon, the future value created by your usage of the service belongs to you, not to Amazon. Even if it seems like Amazon should get some credit, there’s no reasonable way to measure such things, no scheme for attributing “value creation” fairly between the producers of every good and service you may have consumed on your way to running a business. Anyway, Amazon has already been credited for providing those services since they made money off the deal. Every business relying on Amazon contributes to that $21 billion in profit Amazon made.
We use the exchange of money to approximate value. You won't pay me $1,000 dollars for my mousepad, because you don't value it at that. Someone around here used a bad example of rigging art prices, but the reality is, that painting is now valued at whatever 10's of millions of dollars it is regardless of personal feelings of mediocrity.
Money is of course not value, and I'm sorry, but that is a completely basic statement that I'm surprised to see so many people it's just dawning on them now, but it is the tool we use to approximate actual value in our transactions, whether that be for labor purchase, value passed on to share holders etc. Of course it's an approximation with issues, someone define value for me? You can't because value is different to everyone but we use money to express the value we perceive something to have in matters of business.
The writer here doesn't seem to understand basic economics and money as a proxy for value, again in business, which seems likely and they should probably stay in their lane just like we tell other people who write things they know nothing about.
This standard proxy of value is true in every purchase you make, your salary, his stock value etc. and it's the standard we use, and is it perfect, hell no, but it's worked since the concept of exchanging coins in place of cows and barrels of spice came around and we haven't seen anything supplant it yet. The fact the author is quibbling over semantics to me means there is not much of an actual argument being made and everyone here just ate it up.
Money is of course not value, and I'm sorry, but that is a completely basic statement that I'm surprised to see so many people it's just dawning on them now, but it is the tool we use to approximate actual value in our transactions, whether that be for labor purchase, value passed on to share holders etc. Of course it's an approximation with issues, someone define value for me? You can't because value is different to everyone but we use money to express the value we perceive something to have in matters of business.
The writer here doesn't seem to understand basic economics and money as a proxy for value, again in business, which seems likely and they should probably stay in their lane just like we tell other people who write things they know nothing about.
This standard proxy of value is true in every purchase you make, your salary, his stock value etc. and it's the standard we use, and is it perfect, hell no, but it's worked since the concept of exchanging coins in place of cows and barrels of spice came around and we haven't seen anything supplant it yet. The fact the author is quibbling over semantics to me means there is not much of an actual argument being made and everyone here just ate it up.
The author directly acknowledges that money can be used to measure value:
> I’m going to tacitly accept [...] that “value” can meaningfully be expressed in terms of United States dollars
That doesn't mean you can just sum up a bunch of dollar figures and have the total make any logical sense. Doubly so when you are arguing that the sum represents value you created and not just the values of things you interacted with.
Like if a bank teller takes $5000 dollars and deposits it into a customer's account, they haven't created anywhere close to $5000 because the owner already had it when they walked through the doors of the bank. And if you add that number to the bank teller's wages and the price of a safe deposit box at the bank down the street, you haven't discovered the value of the transaction... all you've got is nonsense.
> I’m going to tacitly accept [...] that “value” can meaningfully be expressed in terms of United States dollars
That doesn't mean you can just sum up a bunch of dollar figures and have the total make any logical sense. Doubly so when you are arguing that the sum represents value you created and not just the values of things you interacted with.
Like if a bank teller takes $5000 dollars and deposits it into a customer's account, they haven't created anywhere close to $5000 because the owner already had it when they walked through the doors of the bank. And if you add that number to the bank teller's wages and the price of a safe deposit box at the bank down the street, you haven't discovered the value of the transaction... all you've got is nonsense.
Amusing that the original letter from Jeff Bezos doesn't list taxes paid as counting towards value provided to others. For a more 'normal' company that would be high on the list of ways they're contributing to society. But of course that doesn't work nearly as well when you're not actually paying much in taxes...
In reality, the only measurable value wrt Amazon is it's retained net profit.
For its shareholders, it is the net capital gain on their investment and dividends.
Edit: Were it not for the above, assuming an efficient market, the resources would be allocated elsewhere and therefore they cannot lay claim to others profits and value add, considered a cost in their results.
Edit: Were it not for the above, assuming an efficient market, the resources would be allocated elsewhere and therefore they cannot lay claim to others profits and value add, considered a cost in their results.
This reminds me of Tesla's pricing page which shows your future gas savings deducted from the total cost of the car...
Value is never created in a vacuum. If you could implement an idea that leverages 0.01$ of value from 500,000,000 people, you have yourself at least a $1,000,000 company.
>>> If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard.
Isn't this principle the entire Financial industry?
Isn't this principle the entire Financial industry?
[deleted]
> I’m going to tacitly accept some of Bezos’ underlying assumptions [...] I’m just meeting the claims on their own terms [...]
> In a typical transaction, no value is created. If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant.
Right here he has already failed to abide by his assertions in the previous paragraph. The transaction in fruit does create value because it transfers fruit from people who want it less to people who want it more. Improving the distribution of fruit in the world is valuable even when the total amount of fruit does not change.
The value Bezos is talking about is not the same idea of "value" that this guy has in his head. Sure, maybe Bezos is overcounting his value. But arguments like the above are just missing the point.
> In a typical transaction, no value is created. If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant.
Right here he has already failed to abide by his assertions in the previous paragraph. The transaction in fruit does create value because it transfers fruit from people who want it less to people who want it more. Improving the distribution of fruit in the world is valuable even when the total amount of fruit does not change.
The value Bezos is talking about is not the same idea of "value" that this guy has in his head. Sure, maybe Bezos is overcounting his value. But arguments like the above are just missing the point.
I think that you did not grasp the concept of "value" that is used in the article.
There is a difference between the general "value" and an amount of money that pre-exist anyway. In the same way, the "monay value you give to something" is not the "value" of the thing.
For example, if you buy 10$ a stock that has a financial value of 100$, you had a good deal btut the stock value is still 100$.
In the case of the apple transaction, if the price you got the apple is 10$, and now the product and conditions are the same, but because of the demand some people are ready to buy it 20$ from you. It was not 10$ of value created but just transferred. Someone got a bigger part of money and the other one has less money remaining. But the total amount of money stays the same globally.
There is a difference between the general "value" and an amount of money that pre-exist anyway. In the same way, the "monay value you give to something" is not the "value" of the thing.
For example, if you buy 10$ a stock that has a financial value of 100$, you had a good deal btut the stock value is still 100$.
In the case of the apple transaction, if the price you got the apple is 10$, and now the product and conditions are the same, but because of the demand some people are ready to buy it 20$ from you. It was not 10$ of value created but just transferred. Someone got a bigger part of money and the other one has less money remaining. But the total amount of money stays the same globally.
I think that you did not grasp my point, which is that the article claimed to be making a good faith argument accepting Bezos's assumptions, but then in the very next paragraph started using different assumptions about the definition of value.
Using Amazon's analogy, they exchanged an apple for an orange and are claiming they created an apple + orange worth of value. Really the value created is (1) the profit, which goes to their shareholders and (2) the benefit to their customer of having an orange instead of an apple, which is probably measurable but not quite as much as what they are claiming.
> ... having an orange instead of an apple, which is probably measurable ...
No, it is absolutely not measurable. We have known since time immemorial that you can't compare apples and oranges.
And now if we unanalogize the argument, ceteris paribus, we clearly see that it is similarly impossible to compare the value of an employee's wages with the value they provide to their employer. Cogito, ergo sum.
No, it is absolutely not measurable. We have known since time immemorial that you can't compare apples and oranges.
And now if we unanalogize the argument, ceteris paribus, we clearly see that it is similarly impossible to compare the value of an employee's wages with the value they provide to their employer. Cogito, ergo sum.
It's easy, depending how to ask question:
Checks and Balances CSV:
==============================================
Tourists,Cash Register,Bell guy
30,0,0
0,30,0
3,25,2
Checks and Balances CSV:
==============================================
Tourists,Cash Register,Bell guy
30,0,0
0,30,0
3,25,2
Didn't see Bezos's original comments, but yeah they seem weird. He simply added up a bunch of random numbers from Amazon's balance sheet and said "see we created exactly this much value".
To elucidate the bellhop problem, the $2 the bellhop has, should be subtracted from the $27 that the patrons paid. This leaves you with $25, which is the correct amount the hotel has after refunding $5.
> If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant.
That's not entirely correct. The economy isn't a zero sum game. If person A has 2 apples and person B has 2 oranges. They trade 1 apple for 1 orange. Now they both have an apple and an orange.
The value is increased for both parties.
That's not entirely correct. The economy isn't a zero sum game. If person A has 2 apples and person B has 2 oranges. They trade 1 apple for 1 orange. Now they both have an apple and an orange.
The value is increased for both parties.
Reminds me of the more adult 100$ debt riddle. Found it at econlib.org by David Henderson, but I've heard multiple variations before, so I have no idea where the original comes from.
"It’s a slow day in some little town…….. The sun is hot….the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich tourist from back west is driving thru town. He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night. As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill at the feed store. The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit. She, in a flash rushes to the motel and pays off her room bill with the motel owner. The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves. NOW,… no one produced anything…and no one earned anything…however the whole town is out of debt and is looking to the future with much optimism."
"It’s a slow day in some little town…….. The sun is hot….the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich tourist from back west is driving thru town. He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night. As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill at the feed store. The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit. She, in a flash rushes to the motel and pays off her room bill with the motel owner. The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves. NOW,… no one produced anything…and no one earned anything…however the whole town is out of debt and is looking to the future with much optimism."
Hence the existence of a clearing house in the stockmarket: cross off debt and credit in the whole market. Every one in your story has 100 credit and 100 debt which makes them worth 0. Aligning that in the right way makes a lot of sense :-)
To recast this in accounting terms, everyone had $100 in accounts receivable and also had $100 in accounts payable.
To anybody who has ever had accounting (and nightmares of t-accounts), this balances to zero.
To anybody who has ever had accounting (and nightmares of t-accounts), this balances to zero.
But everybody also knew everyone else was broke, so they had mentally discounted the future value of their accounts receivable (though obviously not to the point of actually writing it off yet). So their subjective sense of their future worth was negative, until the stranger showed up and injected liquidity into the market.
Shouldn't their future worth still be zero? Everyone has $100 owed to them (which is never coming) and $100 that they owe (which they aren't paying).
"Alice is never gonna pay me, which means I'm gonna have to go to Bob and tell him I can't pay him back, and he'll tell everyone in town and I'll never get credit again" - a future situation with negative value.
Vs.
"I may be out of cash, but at least I'm debt free. I wonder if Carol will lend me $10?" - a future situation with zero - or maybe even positive value?
Vs.
"I may be out of cash, but at least I'm debt free. I wonder if Carol will lend me $10?" - a future situation with zero - or maybe even positive value?
I appreciate you asking this question, as it wasn't obvious to me either
Sure, but it's not stable or dependable. If one person goes bankrupt or dies or moves away, then everybody would go bankrupt one after the other. Compare to a scenario where everyone actually is at zero.
This is how banks, and by extension - entire economies, implode when an over leveraged something fails, taking down all the other over leveraged players dependent on their success in a series of dominoes.
I saw an old PSA, maybe from the 50s or 60s, that had a similar situation (sans prostitute). The twist is, it's a paprr check instead of cash and the guy who wrote the check is broke. There's this whole chain of endorsements as the check is passed around town before it gets back to the guy who wrote it, saving him from the shame of a bounced check.
That almost sounds like it's endorsing check fraud
but a cheque has a giver and a receiver, the receiver cannot then give the check to someone else as payment since the giver and receiver printed on the cheque are different
Yes they can. By simply writing "Pay to the order of: X" in the endorsement area, the original recipient can create what's called a "third-party cheque". A bank would probably not accept this today, but it was certainly done in the past.
Interesting, I used to do that all the time (up until 2018 maybe?) to let friends or family cash checks for me and it worked with no problem, even though I wasn't even in the country. I just Googled it and apparently many banks still accept third party checks, although it does seem to be partly at the discretion of the bank manager and often requires both people present. Here's a decent list of banks' conditions: https://firstquarterfinance.com/where-can-i-cash-a-third-par...
Makes sense, all the people in town had $100 in debt and $100 in outstanding invoices.
That one is much simpler though, it's just a closed loop of people owing each other.
The interesting part is that it seems the motel owner was aware that the loop existed and would end up back with him, otherwise he would've been caught stealing from the tourist.
If he already knew this he would be able to get people together and agree to cancel all the debts, with no need for the external $100 to show up.
The interesting part is that it seems the motel owner was aware that the loop existed and would end up back with him, otherwise he would've been caught stealing from the tourist.
If he already knew this he would be able to get people together and agree to cancel all the debts, with no need for the external $100 to show up.
Getting everyone in a small community to agree to cancel all debts would be like a biblical Jubilee[0].
So it is not too far-fetched of an idea to have happen.
[0]: https://en.wikipedia.org/wiki/Jubilee_(biblical)?wprov=sfti1
So it is not too far-fetched of an idea to have happen.
[0]: https://en.wikipedia.org/wiki/Jubilee_(biblical)?wprov=sfti1
In an economy which was only weakly monetised and where it would be rare to have debt tenures of more than one growing season, debt jubilees are minimally disruptive. Imagine getting a mortgage in those conditions.
Immediately following a Biblical Jubilee, a 30 year mortgage is perfectly manageable. 10 years later it is still manageable. 10 more years later, and you might want to cap it at a 25-year mortgage. 10 more years later and new mortgages don't go much past 15 years. Then there's a space of 5+ years that people can only get 10-year mortgages. Then no mortgages for 10 years. Then we jubilee and everything busts open again.
I think it would be very hard to predict all the side effects of such a controlled cycle. It's easy to predict some of the effects. But I wouldn't have any confidence in any model that purported to tally it all up without actually living though several cycles in real life.
I think it would be very hard to predict all the side effects of such a controlled cycle. It's easy to predict some of the effects. But I wouldn't have any confidence in any model that purported to tally it all up without actually living though several cycles in real life.
This isn't strictly related to the biblical jubilee (wherein land ownership is reset every 50 years), but they also had debt cancelation every seven years (Deuteronomy 15). The Bible warns followers that they must not avoid lending as the seventh year approaches, calling this a sin.
Well that didn't work out too well, and at some point (end of the second temple Era, about two millenia ago) the rabbinic leadership led by Hillel invented a legal loophole to work around the law without explicitly overturning it, allowing debts to persist past the sabbatical year. To read more, search the web for "prozbol" (פרוזבול).
Anyway the takeaway is that good intentions aren't always enough, you have to think through the second order effects of the laws you create. The sabbatical year law was presumably invented to protect the poor, in effect it discouraged lending and helped no one.
Well that didn't work out too well, and at some point (end of the second temple Era, about two millenia ago) the rabbinic leadership led by Hillel invented a legal loophole to work around the law without explicitly overturning it, allowing debts to persist past the sabbatical year. To read more, search the web for "prozbol" (פרוזבול).
Anyway the takeaway is that good intentions aren't always enough, you have to think through the second order effects of the laws you create. The sabbatical year law was presumably invented to protect the poor, in effect it discouraged lending and helped no one.
It's much easier than a biblical jubilee, because all the debts cancel, so everyone gains the certainty of not having to worry about failed repayment and people only lose in proportion to their intent to default. That is probably a win for most people, and also those individuals for whom it's not a win probably have some trouble admitting that.
Link to the actual post: https://www.econlib.org/archives/2012/01/an_answer_to_a.html
This doesn't seem that puzzling to me. It only happens to work because all the debt in the whole town just so happened to form a perfect cycle, or equivalently (I think), everyone in town was owed the exact same amount that they owed. That seems exceedingly unlikely to occur and thus doesn't lead me directly to any conclusions about the absurdity of the real economy.
They don't have to line up perfectly for there to be a cycle and thus some minimum amount of debt everyone has that's not real. Someone in the loop might think they owe $1000 and actually owe $900, while someone else thinks they owe $100 but actually owes nothing.
I'm not sure what you mean. Assuming that everyone knows all of their own debts and credits, then they already know their net balance. In the riddle, everyone already knows their net balance is 0, so I would question why everyone is so pessimistic about the future unless the terms of their debts are less favorable than the terms of the credit they've given out.
Not only that, in the real world the people in debt and the people they're in debt to are usually of different economic classes, making a cycle even less likely
Here's the article[1]. It is important to note that there is no net wealth increase and the "much optimism" embodies so many unproductive value judgements.
[1]: https://www.econlib.org/archives/2012/01/an_answer_to_a.html
[1]: https://www.econlib.org/archives/2012/01/an_answer_to_a.html
That’s the classic stock/flow issue.
What people forget is that values like turnover and wages are denominated in $/month not $.
Mixing up the two is like mixing up miles per hour and miles.
What people forget is that values like turnover and wages are denominated in $/month not $.
Mixing up the two is like mixing up miles per hour and miles.
Not at all. I can't convert between miles per hour and miles given an interest rate.
You can convert between the two with an acceleration rate.
The rich tourist isn't even required if everyone communicated about their respective debts.
Which no one will do because you want to put on a good front.
Then why was the motel owner confident that the $100 bill would come back to him so he wouldn't be caught stealing from the tourist?
Clearly he knew this was happening.
Clearly he knew this was happening.
This is why the central banks have been printing money.
This is absolutely the correct answer. This joke/riddle gets to the heart of what "money is". It's a form of communication, it's merely a catalyst that enables trade.
Another way to look at it: The debt (or the $100 bill) allowed all these different professionals to offer services to each other, without a direct back-and-forth barter. If they had started with the prostitute renting the room with a $100 bill, there would have been no debt.
The reason why the physical $100 is so important (and why the Fed prints money), is that it allows for trade to occur without this accrual of debt. The existence of the debt creates the perception of risk, which prevents further trade from occurring.
Another way to look at it: The debt (or the $100 bill) allowed all these different professionals to offer services to each other, without a direct back-and-forth barter. If they had started with the prostitute renting the room with a $100 bill, there would have been no debt.
The reason why the physical $100 is so important (and why the Fed prints money), is that it allows for trade to occur without this accrual of debt. The existence of the debt creates the perception of risk, which prevents further trade from occurring.
It’s just double entry bookkeeping
There is no print money operation.
There is federal spending which creates net financial assets by first issuing new bonds in exchange for existing reserves and then spending those reserves back into the system.
There is swapping reserves for bonds either as they mature or as repurchases.
There is federal taxation which destroys net financial assets by draining reserves.
That’s it, there is nothing called “print money”.
There is federal spending which creates net financial assets by first issuing new bonds in exchange for existing reserves and then spending those reserves back into the system.
There is swapping reserves for bonds either as they mature or as repurchases.
There is federal taxation which destroys net financial assets by draining reserves.
That’s it, there is nothing called “print money”.
There is. Interest on Excess Reserves and the Open Market Operations are all done with magic dust as input.
The creation of that money is no different from any other government spending though. Usually people call swapping bonds for reserves "printing money" (AKA Quantitative Easing) or issuing reserves without the Treasury first issuing bonds on the primary market "printing money". But there is very little difference between issuing bonds "out of thin air" and issuing reserves "out of thin air". Most notably, from the perspective of the private sector, the fact that banks can satisfy their regulatory requirements by owning bonds just as well as they can by having reserves (and the fact that they can typically swap that collateral for reserves as required directly with the Fed) means that there is literally no immediate difference between the two.
So the term "printing money" is fallacious -- either that or you must call all bond issuance and federal spending "printing money" but that would make the term far less dramatic.
So the term "printing money" is fallacious -- either that or you must call all bond issuance and federal spending "printing money" but that would make the term far less dramatic.
Hm, yes, but ..
You're mixing up the fiscal - Treasury, bond auctions, taxes, deficit, debt service - with monetary - central bank, interest rates, reserve requirements, QE.
The Treasury doesn't have the authority to create money [0], and the Government has to pad its balance sheet with debt.
The central bank on the other hand doesn't have this requirement. (They have the dual mandate to keep PCE at 2% and keep unemployment low [at NAIRU].)
Of course this is "simply" a giant technicality, but people find it useful. (Bond auctions function as an important signaling mechanism. Also credit default swaps issued for sovereign debt, and their secondary market is a kind of useful indicator. Plus the swaps, and the interbank "overnight reverse-repos for reserves" themselves are useful instruments for managing/handling/pricing-in/reifying risk.)
Again, you're right that theoretically anytime someone says "i owe you" they are creating money. And you can run a local bank easily with a spreadsheet and a large initial equity (as criminals oft do).
[0] this might not be true technically, as they might be able to mint coins without Congressional approval and need for appropriations (and hence collecting taxes or issuing debt), but the Fed still has to buy the coins so it's again the Fed that's creating the monetary base for the coin ... ¯\_(ツ)_/¯ - https://en.wikipedia.org/wiki/Trillion-dollar_coin
You're mixing up the fiscal - Treasury, bond auctions, taxes, deficit, debt service - with monetary - central bank, interest rates, reserve requirements, QE.
The Treasury doesn't have the authority to create money [0], and the Government has to pad its balance sheet with debt.
The central bank on the other hand doesn't have this requirement. (They have the dual mandate to keep PCE at 2% and keep unemployment low [at NAIRU].)
Of course this is "simply" a giant technicality, but people find it useful. (Bond auctions function as an important signaling mechanism. Also credit default swaps issued for sovereign debt, and their secondary market is a kind of useful indicator. Plus the swaps, and the interbank "overnight reverse-repos for reserves" themselves are useful instruments for managing/handling/pricing-in/reifying risk.)
Again, you're right that theoretically anytime someone says "i owe you" they are creating money. And you can run a local bank easily with a spreadsheet and a large initial equity (as criminals oft do).
[0] this might not be true technically, as they might be able to mint coins without Congressional approval and need for appropriations (and hence collecting taxes or issuing debt), but the Fed still has to buy the coins so it's again the Fed that's creating the monetary base for the coin ... ¯\_(ツ)_/¯ - https://en.wikipedia.org/wiki/Trillion-dollar_coin
In reality there is very little difference between creating money (reserves) and creating bonds. The notion that private market discipline stops profligate government spending by limiting the issuance of bonds by treasury is proven false by two things:
Firstly if push comes to shove the Fed would never refuse to honour a Treasury payment and secondly that the bid to cover ratios in bond auctions always indicate a higher demand for bonds than the self imposed/legislated constraints of congress would allow.
So the real constraint on spending is legislation, we could just as easily legislate full employment instead of legislating a balanced budget target.
Firstly if push comes to shove the Fed would never refuse to honour a Treasury payment and secondly that the bid to cover ratios in bond auctions always indicate a higher demand for bonds than the self imposed/legislated constraints of congress would allow.
So the real constraint on spending is legislation, we could just as easily legislate full employment instead of legislating a balanced budget target.
That's a good story about how debt works. I hadn't heard that one before, thanks for that!
However it's a completely different story than the original post, which is about Amazon claiming credit for "producing value" when trading one thing for another thing of equal value.
However it's a completely different story than the original post, which is about Amazon claiming credit for "producing value" when trading one thing for another thing of equal value.
In real life, the butcher will use the $100 to buy drugs; and the drug dealer takes the money outside of the little town. You can't have that much debt build-up in this society without previous liquidity, and since liquidity suddenly disappeared, injecting it again will not fully fix the issue.
The reserve banking system works. The problem is that once some people in the chain stop making payments, the whole system collapses (liquidity crisis). A bailout by injecting money is basically all the economic players bailing out the defaulters (ie: people who got services but didn't pay for them).
There are many things that can screw your chain: Imports (negative money), Financial institutions making profits from some schemes without injecting the money back (negative money), or your own citizens taking dollar bills outside the country (again, negative money). Injecting liquidity is not always the answer.
The reserve banking system works. The problem is that once some people in the chain stop making payments, the whole system collapses (liquidity crisis). A bailout by injecting money is basically all the economic players bailing out the defaulters (ie: people who got services but didn't pay for them).
There are many things that can screw your chain: Imports (negative money), Financial institutions making profits from some schemes without injecting the money back (negative money), or your own citizens taking dollar bills outside the country (again, negative money). Injecting liquidity is not always the answer.
[deleted]
What was the motel owner's plan if the $100 didn't come back her way?
> Money and labor are both more abstract than fruit, so there is a little bit of leeway to interpret employment transactions as being non-zero-sum.
This paragraph gets into something i've been pondering about GDP/societal wealth. Imagine we have a carpenter and a plumber both sitting idle and who needs eachothers' services. If they cannot agree upon an exchange or price then the system loses out on the potential productivity. The system as a whole is made poorer by actors being disagreeable.
I have often wondered how rich life could be if we were more agreeable to give to the other the gifts of our marginally unused productivity (rather than giving it to netflix, facebook, instagram, and tik-tok...)?
Would poverty be erased, or other desirable things be achievable?
Now look at the ideas of a minimum wage or of being frugal. Both are a kind of refusal to participate in the economy leaving behind marginal potential value creation. If we refuse to spend our money it doesnt fund development of projects, if we refuse to work at a certain rate we lose out on the goods that could have been built.
Anyways that's a musing I was reminded of by this piece.
This paragraph gets into something i've been pondering about GDP/societal wealth. Imagine we have a carpenter and a plumber both sitting idle and who needs eachothers' services. If they cannot agree upon an exchange or price then the system loses out on the potential productivity. The system as a whole is made poorer by actors being disagreeable.
I have often wondered how rich life could be if we were more agreeable to give to the other the gifts of our marginally unused productivity (rather than giving it to netflix, facebook, instagram, and tik-tok...)?
Would poverty be erased, or other desirable things be achievable?
Now look at the ideas of a minimum wage or of being frugal. Both are a kind of refusal to participate in the economy leaving behind marginal potential value creation. If we refuse to spend our money it doesnt fund development of projects, if we refuse to work at a certain rate we lose out on the goods that could have been built.
Anyways that's a musing I was reminded of by this piece.
> I have often wondered how rich life could be if we were more agreeable to give to the other the gifts of our marginally unused productivity (rather than giving it to netflix, facebook, instagram, and tik-tok...)?
You think life would be better if we all never stopped working and simply 'did our part' 16 hours a day without compensation?
You think life would be better if we all never stopped working and simply 'did our part' 16 hours a day without compensation?
that is approximately the most negative spin you could have made on my point.
The point is that if the trade doesn't occur, both parties lose out on what good could be and sometimes we cannot actually see the good but could value the good of the other. I'm not saying everyone should go work for bezos for free because his utility will rise. But more like in normal community interpersonal relationships. Say a small business owner wants to use some services, but cannot afford an expensive experienced person like a large business could (Say a high priced contract engineer) during a quiet period the resource goes idle and the business loses out, when both could have had some value if one would be more agreeable and say "look, I'm not working right now and sure I'll work for X% off for that reason and because I like you"
And where it fits with the commentary on minimum wage is that it technically would be illegal if that percent off dropped below minimum wage, then no trade could happen leading to vicious cycles rather than virtuous ones. The business that got its website built can make more sales and can pay more for high priced engineers. Whereas the business that cannot get a website built loses out on sales and cannot give any future work to the engineer. There's a sort of symbiosis in the health of the actors in the system and their ability to pay for generally good things.
The point is that if the trade doesn't occur, both parties lose out on what good could be and sometimes we cannot actually see the good but could value the good of the other. I'm not saying everyone should go work for bezos for free because his utility will rise. But more like in normal community interpersonal relationships. Say a small business owner wants to use some services, but cannot afford an expensive experienced person like a large business could (Say a high priced contract engineer) during a quiet period the resource goes idle and the business loses out, when both could have had some value if one would be more agreeable and say "look, I'm not working right now and sure I'll work for X% off for that reason and because I like you"
And where it fits with the commentary on minimum wage is that it technically would be illegal if that percent off dropped below minimum wage, then no trade could happen leading to vicious cycles rather than virtuous ones. The business that got its website built can make more sales and can pay more for high priced engineers. Whereas the business that cannot get a website built loses out on sales and cannot give any future work to the engineer. There's a sort of symbiosis in the health of the actors in the system and their ability to pay for generally good things.
You've painted the above comment as a negative spin, but I'm not really understanding, in your post, where it isn't just a less extreme version of this same spin.
You're suggesting a human should spend otherwise free time (which would otherwise be spent enjoying leisure, which we can presume has high positive value for that human) to generate value for others, in the hopes of receiving value in return?
In a system where this isn't an iterated version of the game (e.g. you're only playing against other actors a small number of times each), I don't see how this could function without systems like social credit which are abusable at higher levels than the individual actors.
You're suggesting a human should spend otherwise free time (which would otherwise be spent enjoying leisure, which we can presume has high positive value for that human) to generate value for others, in the hopes of receiving value in return?
In a system where this isn't an iterated version of the game (e.g. you're only playing against other actors a small number of times each), I don't see how this could function without systems like social credit which are abusable at higher levels than the individual actors.
Yeah, i think part of what maybe you're assuming into the picture is that the engineer in the question is overworked and their labor has a net negative utility in their life without sufficient compensation to make up for that negative.
I see it more like people like/love their craft and sometimes it makes sense to just do it because one likes, and somehow gets "something" out of helping the other person too.
Think about a depression where people are refusing to work for eachother because no one can pay, nonetheless an engineer could build a website for a business just because they know if the business goes under it has perpetuated and exacerbated the depression... another more quaint example might be a cobbler who would fix people's shoes for whatever they can pay, because if he sticks to the normal price few could afford it and he'd be idle, but if he's generous enough to just do it anyways then at least the one in need is no longer.
In typing back and forth I guess it basically boils down to charity. The idea that charity could potentially nullify and turn around a vicious cycle in an economy because folks selflessly added to virtuous cycles. It doesn't have to be as brutal as a depression, but could be simple as a local business person you care about who cannot compete with the unlimited funds or whatever from another company.
I see it more like people like/love their craft and sometimes it makes sense to just do it because one likes, and somehow gets "something" out of helping the other person too.
Think about a depression where people are refusing to work for eachother because no one can pay, nonetheless an engineer could build a website for a business just because they know if the business goes under it has perpetuated and exacerbated the depression... another more quaint example might be a cobbler who would fix people's shoes for whatever they can pay, because if he sticks to the normal price few could afford it and he'd be idle, but if he's generous enough to just do it anyways then at least the one in need is no longer.
In typing back and forth I guess it basically boils down to charity. The idea that charity could potentially nullify and turn around a vicious cycle in an economy because folks selflessly added to virtuous cycles. It doesn't have to be as brutal as a depression, but could be simple as a local business person you care about who cannot compete with the unlimited funds or whatever from another company.
This is an interesting article but it starts off on the wrong foot for me:
> This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor. In a typical transaction, no value is created.
This, as I understand it in a limited fashion, is not true. There is a concept of the velocity of money in which more value than the initial transaction is created:
https://en.wikipedia.org/wiki/Velocity_of_money
This is, in part I believe, why a nation's GDP can exceed it's nominal cash in circulation. In particular, the Great Depression was a period of low monetary velocity and yet staggering inflation; the term "stagflation" (stagnation + inflation) was coined to describe this phenomena.
https://en.wikipedia.org/wiki/Stagflation
Which in turn calls into question the following criticism:
> But however you look at it, taking full credit for every single dollar of compensation as value creation— as if Amazon, and not the US Mint, created those dollars, and as if the many, many millions of hours of labor consumed by the company in return were valueless— is a ghastly overstatement.
While I would never want to make it seem like Amazon is some sort of altruistic entity who simply makes the lives of those on it's payroll better, it is not as ghastly an overstatement as claimed. There is a reason recovery from the Great Depression involved job creation through The New Deal and war-time production and not simply the US Treasury "creating those dollars".
These kinds of economic inconsistencies continue throughout the post. In particular there seems to be a pervasive belief that Monetary Supply is finite/controlled by the Federal Reserve and therefore cannot be used to measure value creation:
> But the value you created isn’t the money. The money already existed and was floating around the economy long before you picked up the brush. The value you created was in the art, which is now in someone else’s hands.
This is a false premise. Dollar-value estimations of created value like GDP are often imperfect measurements, but they do exist; furthermore, they often exceed the nominal amount of financial notes in circulation. There also certainly is additional value that isn't captured by a dollar value, such as the value an owner places on a created piece of art, but that is not the same as no monetary value created.
I don't know who the author is, but even my limited grasp of economic theory makes me question the main thrust of their arguments. But I also know my grasp of economic theory is threadbare at best, so perhaps I am completely off base.
> This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor. In a typical transaction, no value is created.
This, as I understand it in a limited fashion, is not true. There is a concept of the velocity of money in which more value than the initial transaction is created:
https://en.wikipedia.org/wiki/Velocity_of_money
This is, in part I believe, why a nation's GDP can exceed it's nominal cash in circulation. In particular, the Great Depression was a period of low monetary velocity and yet staggering inflation; the term "stagflation" (stagnation + inflation) was coined to describe this phenomena.
https://en.wikipedia.org/wiki/Stagflation
Which in turn calls into question the following criticism:
> But however you look at it, taking full credit for every single dollar of compensation as value creation— as if Amazon, and not the US Mint, created those dollars, and as if the many, many millions of hours of labor consumed by the company in return were valueless— is a ghastly overstatement.
While I would never want to make it seem like Amazon is some sort of altruistic entity who simply makes the lives of those on it's payroll better, it is not as ghastly an overstatement as claimed. There is a reason recovery from the Great Depression involved job creation through The New Deal and war-time production and not simply the US Treasury "creating those dollars".
These kinds of economic inconsistencies continue throughout the post. In particular there seems to be a pervasive belief that Monetary Supply is finite/controlled by the Federal Reserve and therefore cannot be used to measure value creation:
> But the value you created isn’t the money. The money already existed and was floating around the economy long before you picked up the brush. The value you created was in the art, which is now in someone else’s hands.
This is a false premise. Dollar-value estimations of created value like GDP are often imperfect measurements, but they do exist; furthermore, they often exceed the nominal amount of financial notes in circulation. There also certainly is additional value that isn't captured by a dollar value, such as the value an owner places on a created piece of art, but that is not the same as no monetary value created.
I don't know who the author is, but even my limited grasp of economic theory makes me question the main thrust of their arguments. But I also know my grasp of economic theory is threadbare at best, so perhaps I am completely off base.
You're not off base. I have no economic credentials and my discussion of the subject was simplistic. I appreciate your analysis.
The point I was trying to make wasn't that dollars shouldn't be used to measure value, but that if you're going to do so, those dollars need to actually correspond to something that isn't just pieces of paper or bits in a bank computer. It's not particularly interesting for $450 dollars to change hands in a vacuum; the transaction is given meaning because it represents something about the painting that was created and sold.
Similarly, velocity of money is given meaning because of the premise that each transaction functions to optimize resource distribution (i.e. a typical trade is in the interest of both parties). If the farmer and the mechanic from the Wikipedia article were to game the system by continuing to sell the same $40 of corn to each other over and over, velocity of money would technically increase, but then it would no longer meaningfully represent the health of the economy. The validity of the measure depends on this sort of double counting being precluded or accounted for (at least, in principle it does; I have no idea how much this kind of confounding factor shows up in real life).
The biggest intended takeaway of my post wasn't even that the dollars being discussed don't correspond to anything, it's that they correspond to a bunch of different types of thing that don't sum together cleanly. That I had to make a bunch of finer economic points to get there was kind of an accident, and one that I might reframe the article to avoid if I were to rewrite it today.
The point I was trying to make wasn't that dollars shouldn't be used to measure value, but that if you're going to do so, those dollars need to actually correspond to something that isn't just pieces of paper or bits in a bank computer. It's not particularly interesting for $450 dollars to change hands in a vacuum; the transaction is given meaning because it represents something about the painting that was created and sold.
Similarly, velocity of money is given meaning because of the premise that each transaction functions to optimize resource distribution (i.e. a typical trade is in the interest of both parties). If the farmer and the mechanic from the Wikipedia article were to game the system by continuing to sell the same $40 of corn to each other over and over, velocity of money would technically increase, but then it would no longer meaningfully represent the health of the economy. The validity of the measure depends on this sort of double counting being precluded or accounted for (at least, in principle it does; I have no idea how much this kind of confounding factor shows up in real life).
The biggest intended takeaway of my post wasn't even that the dollars being discussed don't correspond to anything, it's that they correspond to a bunch of different types of thing that don't sum together cleanly. That I had to make a bunch of finer economic points to get there was kind of an accident, and one that I might reframe the article to avoid if I were to rewrite it today.
Hmmm! Well thank you for your response! I think that I find myself far more in agreement with this additional detail.
> It's not particularly interesting for $450 dollars to change hands in a vacuum; the transaction is given meaning because it represents something about the painting that was created and sold.
And this:
> The biggest intended takeaway of my post wasn't even that the dollars being discussed don't correspond to anything, it's that they correspond to a bunch of different types of thing that don't sum together cleanly.
In particular resonate with me. This intended meaning I (personally) lost in the economic semantics. Hopefully my comment about not wanting to paint Amazon as some altruistic entity alluded to my own personal nuanced feelings here, but to expand on something that I think is more aligned with the point you were trying to make:
There is no doubt in my mind that the employment opportunities generated by Amazon provide value to the economy at large, but that doesn't mean that the value is as great as it could, would, or even should be. I think that there is a fair argument to be made that the labor practices at Amazon strays into labor exploitation and they only can do so since they benefit from an non-competitive market dynamic. And that bigger picture is potentially one of the bigger pieces of context which isn't captured by a simple payroll figure.
> It's not particularly interesting for $450 dollars to change hands in a vacuum; the transaction is given meaning because it represents something about the painting that was created and sold.
And this:
> The biggest intended takeaway of my post wasn't even that the dollars being discussed don't correspond to anything, it's that they correspond to a bunch of different types of thing that don't sum together cleanly.
In particular resonate with me. This intended meaning I (personally) lost in the economic semantics. Hopefully my comment about not wanting to paint Amazon as some altruistic entity alluded to my own personal nuanced feelings here, but to expand on something that I think is more aligned with the point you were trying to make:
There is no doubt in my mind that the employment opportunities generated by Amazon provide value to the economy at large, but that doesn't mean that the value is as great as it could, would, or even should be. I think that there is a fair argument to be made that the labor practices at Amazon strays into labor exploitation and they only can do so since they benefit from an non-competitive market dynamic. And that bigger picture is potentially one of the bigger pieces of context which isn't captured by a simple payroll figure.
"Employees' contribution to Amazon is literally zero; they should be appreciative of all this Value we generate for them by giving them money" is a pretty rough thing to read in that shareholder letter, not gonna lie. That insulting of an implication could only make it into a final draft in such an obvious state if it really reflects how the top people think, and that's... rough.
Heh, also reminds me of all the "piracy lost us this much" statements from Microsoft back in the day, and movie and music industry until recently (it's now "streaming nets us too little" instead).
As if there would have been a guaranteed transaction at sticker prices for each and every illegally copied unit.
As if there would have been a guaranteed transaction at sticker prices for each and every illegally copied unit.
Ah yes, the insidious cost of ringtone piracy:
https://youtu.be/GZadCj8O1-0
https://youtu.be/GZadCj8O1-0
This is why you always scroll down to the end for the GAAP financial statements.
(Has anyone ever see an "adjustments to income" item which decreased reported profits?)
(Has anyone ever see an "adjustments to income" item which decreased reported profits?)
The other dollar is included in the three dollars they got back. 9x3 + 2 = $30.
This article is a complete mess from top to bottom and the author is literally doing the sham accounting from the brain teaser that he (erroneously) attributes to Bezos.
I could go at length about everything wrong with it, but I'll take aim at one particular analogy he uses: the artist's painting.
> Bezos claims that Amazon made $21 billion in net income for the year, and counts that as value created for shareholders. [...] If you spend $50 on art supplies and turn them into a painting worth $500, you have created $450 worth of value. And when you sell the painting, you end up with net $450 that you didn’t have before, because that’s the difference in values between what you consumed and what you produced.
What!? No! Literally just before this paragraph is a passage claiming Amazon values its employees' time at $0. Now the author himself literally does this: in the story, the artist's labor is entirely unaccounted for. Where did the labor that produced the painting come from? Is it worth literally nothing? Did magical faeries come in the night and produce it?
In reality, we have "opportunity costs": what we give up in order to get things we want. When we trade our labor, we give up not only the labor itself, but also the alternative uses of our time, namely leisure or maybe labor that is more enjoyable. The most valuable thing (subjectively to us) we give up is the "opportunity cost" of our labor. Certainly the artist's leisure is worth more than $0.
> In this way, the amount of money you made is equal to the value you produced (we are assuming, like good little capitalists, that markets are efficient and that externalities don’t exist and all that).
Externalities? Dafuq? Is this "art" an ugly billboard or something? Maybe the paint is quite pungent and makes the artist's roommates angry? Is the author just cargo culting from an anti-capitalist word bank without any clue about what the words mean? I think so.
> But the value you created isn’t the money. The money already existed and was floating around the economy long before you picked up the brush.
Oh, Christ, money supply is not the same as currency in circulation. We have M1 and M2, for instance. This "money" is more than just dollar bills, but includes checking accounts, savings accounts, even things like CDs.
> The value you created was in the art, which is now in someone else’s hands. So while Amazon shareholders may be $21 billion richer than they were before, it’s not meaningful to say that value was created “for the shareholders”. It doesn’t matter whom value was created for— the shareholders would be the ones getting rich regardless.
Okay, let's use an analogy that properly maps to what Amazon is doing. Let's consider someone who commissions an artist to produce an artwork which the commissioner intends to sell. The "total value" produced for the commissioner (using the admittedly obnoxious "profit in dollars" meaning above) would be the sale price of the art less the cost of supplies and the compensation for the artist. But this is literally how Amazon is using the meaning here!
What value did the commissioner get? Well, he tied up his money in art supplies and an artist, and took the risk that he'd never get any of it back. Moreover, if we change this scenario back into the version the author himself presented, where the artist and commissioner are the same person, then the artist captures all of the value less cost of supplies. Isn't this exactly what Bezos is doing?
I think it would be a much richer conversation to question whether the sainted Amazon Shareholders or the Archangel Bezos himself are engaging in much risk-taking these days, or just exploiting monopoly profits and political connections for returns beyond a risk-adjusted level, and whether this allows Amazon to give labor and "human capital" short shrift, but alas, this seems to elude our author. Regardless, shareholders are tying up their money in something illiquid, and so should be compensated at least a little bit for their trouble.
The rest of the article is just as incoherent, sloppy and tendentious as this excerpt. And while the author is correct to criticize the concept of value as invoked by Bezos (and finance people in general), he accepts it for the sake of argument early on. So even the lone valid criticism is muddled and involves goalpost shifting.
I could go at length about everything wrong with it, but I'll take aim at one particular analogy he uses: the artist's painting.
> Bezos claims that Amazon made $21 billion in net income for the year, and counts that as value created for shareholders. [...] If you spend $50 on art supplies and turn them into a painting worth $500, you have created $450 worth of value. And when you sell the painting, you end up with net $450 that you didn’t have before, because that’s the difference in values between what you consumed and what you produced.
What!? No! Literally just before this paragraph is a passage claiming Amazon values its employees' time at $0. Now the author himself literally does this: in the story, the artist's labor is entirely unaccounted for. Where did the labor that produced the painting come from? Is it worth literally nothing? Did magical faeries come in the night and produce it?
In reality, we have "opportunity costs": what we give up in order to get things we want. When we trade our labor, we give up not only the labor itself, but also the alternative uses of our time, namely leisure or maybe labor that is more enjoyable. The most valuable thing (subjectively to us) we give up is the "opportunity cost" of our labor. Certainly the artist's leisure is worth more than $0.
> In this way, the amount of money you made is equal to the value you produced (we are assuming, like good little capitalists, that markets are efficient and that externalities don’t exist and all that).
Externalities? Dafuq? Is this "art" an ugly billboard or something? Maybe the paint is quite pungent and makes the artist's roommates angry? Is the author just cargo culting from an anti-capitalist word bank without any clue about what the words mean? I think so.
> But the value you created isn’t the money. The money already existed and was floating around the economy long before you picked up the brush.
Oh, Christ, money supply is not the same as currency in circulation. We have M1 and M2, for instance. This "money" is more than just dollar bills, but includes checking accounts, savings accounts, even things like CDs.
> The value you created was in the art, which is now in someone else’s hands. So while Amazon shareholders may be $21 billion richer than they were before, it’s not meaningful to say that value was created “for the shareholders”. It doesn’t matter whom value was created for— the shareholders would be the ones getting rich regardless.
Okay, let's use an analogy that properly maps to what Amazon is doing. Let's consider someone who commissions an artist to produce an artwork which the commissioner intends to sell. The "total value" produced for the commissioner (using the admittedly obnoxious "profit in dollars" meaning above) would be the sale price of the art less the cost of supplies and the compensation for the artist. But this is literally how Amazon is using the meaning here!
What value did the commissioner get? Well, he tied up his money in art supplies and an artist, and took the risk that he'd never get any of it back. Moreover, if we change this scenario back into the version the author himself presented, where the artist and commissioner are the same person, then the artist captures all of the value less cost of supplies. Isn't this exactly what Bezos is doing?
I think it would be a much richer conversation to question whether the sainted Amazon Shareholders or the Archangel Bezos himself are engaging in much risk-taking these days, or just exploiting monopoly profits and political connections for returns beyond a risk-adjusted level, and whether this allows Amazon to give labor and "human capital" short shrift, but alas, this seems to elude our author. Regardless, shareholders are tying up their money in something illiquid, and so should be compensated at least a little bit for their trouble.
The rest of the article is just as incoherent, sloppy and tendentious as this excerpt. And while the author is correct to criticize the concept of value as invoked by Bezos (and finance people in general), he accepts it for the sake of argument early on. So even the lone valid criticism is muddled and involves goalpost shifting.
This article starts of well, but quickly goes south.
> In a typical transaction, no market value is created. If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard.
Economics 101 begs to differ. Surprised at the level of economic illiteracy in this article (the author should read up on concepts like consumer surplus, labor markets, comparative advantage, economies of scale), given the interesting riddle it began with.
> In a typical transaction, no market value is created. If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard.
Economics 101 begs to differ. Surprised at the level of economic illiteracy in this article (the author should read up on concepts like consumer surplus, labor markets, comparative advantage, economies of scale), given the interesting riddle it began with.
I'm pretty sure Marx would disagree with you on that. A transaction creates no extra value by itself.
Just because we end up with a bigger use value through transactions doesn't mean any extra value was added to the world.
Funnily enough that was the point of the article, Jeff Bezos letter was conflating different types of values and adding them together because they could all be measured in the same unit, dollars.
Just because we end up with a bigger use value through transactions doesn't mean any extra value was added to the world.
Funnily enough that was the point of the article, Jeff Bezos letter was conflating different types of values and adding them together because they could all be measured in the same unit, dollars.
Read the associated footnote for that line.
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Good accounting, bad economics
>In a typical transaction, no market value is created.[1] If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard.
This is egregious. We no longer live in a world where trade is a zero sum game. Market value is created in every transaction.
If I have an apple tree, and my neighbour has an orange tree, and I want to eat oranges and my neighbour wants to eat apples, we might:
A) Forage for the seeds of the respective tree we want, cultivate an area to grow it, spend a significant amount of time looking after it while it grows, and all this for the risk of it dying or being eaten by bugs before it fruits, or
B) Trade surplus fruit of our respective trees for the respective fruit we want to consume.
While yes, in accounting terms we have traded 1 fruit for 1 fruit, in economic terms we have traded 1 fruit for 1 fruit as well as the time/effort/cost associated with option A.
This is because how economists see value is different to how accountants see value. This is represented in the concept of 'opportunity cost'.
>But however you look at it, taking full credit for every single dollar of compensation as value creation— as if Amazon, and not the US Mint, created those dollars, and as if the many, many millions of hours of labor consumed by the company in return were valueless— is a ghastly overstatement.
Amazon didn't create the money. They created the value. And this isn't to say that the millions of hours of labour spent were valueless, but it is a fact that if someone is working for Amazon, it is because it is the best value-per-hour they could get. Yes, in the absence of Amazon these people would probably all have other jobs, but the fact that they are working at Amazon and not these other jobs is evidence that Amazon is creating value in these people's lives above what would exist in the absence of Amazon existing.
>It doesn’t matter whom value was created for— the shareholders would be the ones getting rich regardless.
>And to be clear, using profit to measure value created is also fraught.
Except this is exactly the point of capitalism. It absolutely matters to whom the value is created for. The shareholders will only get rich if value is created for society. No rational person would make a purchase at their own expense, and the circumstances where the marginal value of utility is 1 to 1 are extremely rare, if possible at all. Outside of monopoly or oligarchy markets, value necessitates a profit-incentive.
> These are three completely different measurements: one is profit, one is savings, and one is time. They cannot be added together to anything meaningful.
They are all measurements of value, and the dollar figure attached is the dollar figure of this added value.
The author has done the same thing that he claims Bezos is doing, and as illustrated in the opening scenario. Juxtaposition of accounting, mathematics and economics so as to suit the purposes of getting to an answer that the author envisions. Except this time the aim isn't to educate but to mislead.
>In a typical transaction, no market value is created.[1] If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard.
This is egregious. We no longer live in a world where trade is a zero sum game. Market value is created in every transaction.
If I have an apple tree, and my neighbour has an orange tree, and I want to eat oranges and my neighbour wants to eat apples, we might:
A) Forage for the seeds of the respective tree we want, cultivate an area to grow it, spend a significant amount of time looking after it while it grows, and all this for the risk of it dying or being eaten by bugs before it fruits, or
B) Trade surplus fruit of our respective trees for the respective fruit we want to consume.
While yes, in accounting terms we have traded 1 fruit for 1 fruit, in economic terms we have traded 1 fruit for 1 fruit as well as the time/effort/cost associated with option A.
This is because how economists see value is different to how accountants see value. This is represented in the concept of 'opportunity cost'.
>But however you look at it, taking full credit for every single dollar of compensation as value creation— as if Amazon, and not the US Mint, created those dollars, and as if the many, many millions of hours of labor consumed by the company in return were valueless— is a ghastly overstatement.
Amazon didn't create the money. They created the value. And this isn't to say that the millions of hours of labour spent were valueless, but it is a fact that if someone is working for Amazon, it is because it is the best value-per-hour they could get. Yes, in the absence of Amazon these people would probably all have other jobs, but the fact that they are working at Amazon and not these other jobs is evidence that Amazon is creating value in these people's lives above what would exist in the absence of Amazon existing.
>It doesn’t matter whom value was created for— the shareholders would be the ones getting rich regardless.
>And to be clear, using profit to measure value created is also fraught.
Except this is exactly the point of capitalism. It absolutely matters to whom the value is created for. The shareholders will only get rich if value is created for society. No rational person would make a purchase at their own expense, and the circumstances where the marginal value of utility is 1 to 1 are extremely rare, if possible at all. Outside of monopoly or oligarchy markets, value necessitates a profit-incentive.
> These are three completely different measurements: one is profit, one is savings, and one is time. They cannot be added together to anything meaningful.
They are all measurements of value, and the dollar figure attached is the dollar figure of this added value.
The author has done the same thing that he claims Bezos is doing, and as illustrated in the opening scenario. Juxtaposition of accounting, mathematics and economics so as to suit the purposes of getting to an answer that the author envisions. Except this time the aim isn't to educate but to mislead.
I arrive at a village. I see 100 villagers with $1 each. I extract $1 from all, pocket $20, give $80 to one villager.
Resume: Made a villager extremely wealthy ($80 value created). Fucked up the whole village.
Resume: Made a villager extremely wealthy ($80 value created). Fucked up the whole village.
The whole point of any trade is that I give you something that I value less, but you value more. I have 10,000 apples just lying around. You have $10,000 in your bank account. So you pay me a dollar and I give you an apple. To you, $1 was more than fair for the apple, because you were hungry for apples. To me, 1 less apple for 1 more dollar was also more than fair, because I want to buy other things.
So when Amazon pays 100k to an engineer, it is not a zero sum transaction. To the engineer, 100k was worth more than his time. To Amazon, the work done by the engineer in that time was worth more than 100k. Value was created. How much value? I don't know, but definitely greater than zero.
So when Amazon pays 100k to an engineer, it is not a zero sum transaction. To the engineer, 100k was worth more than his time. To Amazon, the work done by the engineer in that time was worth more than 100k. Value was created. How much value? I don't know, but definitely greater than zero.
10+10+10 = 30 = 25+5 = 25 + 2 + (1+1+1)
9+9+9 = 25+2
9+9+9 = 25+2
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> The most egregious misrepresentation of value creation in the letter is [...] compensation to employees. This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor. In a typical transaction, no market value is created. [...]
> Money and labor are both more abstract than fruit, so there is a little bit of leeway to interpret employment transactions as being non-zero-sum. [...] But however you look at it, taking full credit for every single dollar of compensation as value creation— as if Amazon, and not the US Mint, created those dollars, and as if the many, many millions of hours of labor consumed by the company in return were valueless— is a ghastly overstatement.
It's obviously sensible for the author to focus on Amazon & Bezos' letter in the blogpost instead of casting a broad non-specific net, but I feel like this very argument is the main one used by various government ministers / congressmen / economists / etc. ad nauseum to justify various support & investments in large multinationals and the so-called "job creation"/"value creation" they offer national economies throughout the world. Time. And. Time. Again. And it has never made any sense to me for these exact reasons.
It also strikes me as a pretty basic fallacy that should not hold up to any scrutiny when used by high-profile decision-makers like this.*
> Money and labor are both more abstract than fruit, so there is a little bit of leeway to interpret employment transactions as being non-zero-sum. [...] But however you look at it, taking full credit for every single dollar of compensation as value creation— as if Amazon, and not the US Mint, created those dollars, and as if the many, many millions of hours of labor consumed by the company in return were valueless— is a ghastly overstatement.
It's obviously sensible for the author to focus on Amazon & Bezos' letter in the blogpost instead of casting a broad non-specific net, but I feel like this very argument is the main one used by various government ministers / congressmen / economists / etc. ad nauseum to justify various support & investments in large multinationals and the so-called "job creation"/"value creation" they offer national economies throughout the world. Time. And. Time. Again. And it has never made any sense to me for these exact reasons.
It also strikes me as a pretty basic fallacy that should not hold up to any scrutiny when used by high-profile decision-makers like this.*
Second what weird quibbling over standard language. I read this and feel like I'd prefer to have my time back. "I'm not endorsing an ideology" no instead you'll make it painfully obvious which one you don't.
"I’m just meeting the claims on their own terms in the pursuit of that which I truly value, which is quibbling about math."
And then proceeded to basically do nothing on the math, but argue about value creation or consumption.
I'm not stating if I agree or not, don't take this as that, I just feel the author was basically misrepresenting their goals in the post.