Goldman Sachs May Be Forced to Fundamentally Question Capitalism

http://www.bloomberg.com/news/articles/2016-02-03/goldman-sachs-says-it-may-be-forced-to-fundamentally-question-how-capitalism-is-working?cmpid=google&google_editors_picks=true

by kohito • 10 years ago

6 6 10 years ago

bloomberg.com

nefitty3• 10 years ago

Can anyone elaborate on this point? I found the article too short and too technical for me to understand.

zzalpha• 10 years ago

So, let's start with the basics: the profit margin. Basically, if it costs you $1 to make a good, and you sell it for $2, then you have a $1 margin.

The current data shows that margins are quite wide. This means that companies are selling products, services, etc, at a cost that's a lot higher than it's taking to produce them.

This is normally explained through things like labour arbitrage (move production to cheaper places), efficiency gains through technology, and demand growth that allows one to command higher prices for the same goods.

Basically anything that allows you to either cut production costs or increase prices.

But, a large profit margin means a competitor should be able to step into the market, by accepting a lower margin in order to reduce prices. This is the "pricing cycle" they refer to in the article. If that doesn't happen, that indicates something fundamentally odd is going on in the system.

nefitty3• 10 years ago

Perfect. That clarifies things. Thanks!

Thomas_Lord2• 10 years ago

Profit margins are very high compared to historic trends. Why?

GS notes that costs of production have been going down. Firms move jobs from parts of the world with higher wages, to parts with lower. Firms eliminate jobs through mergers.

GS notes that some commodity demand has been strong as places like China develop.

Lowering costs and keeping demand strong has kept profits high, says GS.

After a time, that should end. Beyond a certain point, mergers are less likely to pay off. Beyond a certain point, there aren't many jobs left to ship to low-wage regions. At the same time, global demand for commodities is weakening.

Those trends should cause immediate drops in revenue, hence profit margins. As these drops take hold, the price of capital assets like factories or tankers of oil or silos of wheat should fall. This should result in job losses, wage reductions, and generally a spiral that further reduces demand, increases deflation, and shrinks profit margins.

Many would argue that deflation and collapse in the corporate profit rate should already be going on, yet it hasn't been. Why? (There are good explanations but this article doesn't talk about them.)

GS quipped, roughly, that if the profit margins don't fall, maybe that means capitalism is broken and doesn't work anymore.

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Not in that article but just FYI: A marxian argument can be made that the real rate of profit is, on average, already negative. If so, that is a sign that capitalism is, as GS suggests, maybe self-destructing at long last. The GS quip is, I think, kind of a wry nod to the marxian view.

nefitty3• 10 years ago

Thanks for the explanation. Can we expect to see large financial firms throughout the US economy begin questioning the basis of capitalism? I am also interested in the explanations as to why deflation and collapse in profit rate is not occurring. Any resources you could point to would be appreciated!

Goldman Sachs May Be Forced to Fundamentally Question Capitalism

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