Where did the other dollar go, Jeff?

https://blog.cloudandtree.com/2021/04/the-other-dollar/

by ezrast • 5 years ago

407 229 5 years ago

blog.cloudandtree.com

Grimm15• 5 years ago

First I clicked on this hoping it was some interesting thing to learn, and then I saw it quickly devolved into another Bezos rant.

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.

ct0• 5 years ago

The title of the piece includes "Jeff", As in Jeff Bozos. I read your comment and would like my time back too.

Grimm15• 5 years ago

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.

onionisafruit• 5 years ago

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.

lucasmullens• 5 years ago

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.

ezrast4• 5 years ago

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.

Grimm15• 5 years ago

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.

jdmoreira5• 5 years ago

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.

Grimm15• 5 years ago

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.

jdmoreira5• 5 years ago

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.

Kranar• 5 years ago

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.

MattRix• 5 years ago

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.

burkaman• 5 years ago

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.

LeifCarrotson2• 5 years ago

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.

underdeserver• 5 years ago

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.

jakubp• 5 years ago

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).

lottin• 5 years ago

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.

igorzx31• 5 years ago

Jeff Bezos worked at D.E. Shaw not Renaissance Technologies. Different funds.

jdmoreira5• 5 years ago

Thanks! I must have mixed it up in my mind. Wetware Memory sucks.

dools7• 5 years ago

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.

MR4D3• 5 years ago

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.

bombcar• 5 years ago

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.

StevenWaterman• 5 years ago

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   0

rthomas6• 5 years ago

As an aside, this shows the value and reason behind double entry bookkeeping. More setup in the beginning, but ultimately much less confusing.

Joker_vD4• 5 years ago

"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?"

jccalhoun• 5 years ago

When I was a teenager this blew our minds and stumped us for days.

briffle• 5 years ago

I'm mid 40's, and really glad someone posted an answer, because that was starting to drive me nuts :)

rgoulter• 5 years ago

The most recent viral maths problem I recall is Cheryl's birthday out of Singapore. https://www.youtube.com/watch?v=emiMj8cCL5E

bentcorner• 5 years ago

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?

neogodless• 5 years ago

When you word it that way, I get a bit angry when I read "which brings the total to."

massung• 5 years ago

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. ;)

munificent• 5 years ago

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.

cperciva• 5 years ago

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.

extra883• 5 years ago

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.

ingleswood2• 5 years ago

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.

ChrisLomont• 5 years ago

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.

seiferteric2• 5 years ago

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.

Pfhreak3• 5 years ago

Including the profit your employer retains -- employers necessarily pay you less than the value of your labor.

dragonwriter• 5 years ago

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.

seiferteric2• 5 years ago

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.

robocat2• 5 years ago

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.

rafd• 5 years ago

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.

ikeboy4• 5 years ago

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.

kfarr• 5 years ago

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.

fighterpilot3• 5 years ago

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]

zajio1am2• 5 years ago

Exactly. This is just a level of ignorance that for me makes whole article not worth reading.

intergalplan2• 5 years ago

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.

simonh8• 5 years ago

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.

albatruss2• 5 years ago

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...

PaulDavisThe1st• 5 years ago

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.

kixiQu2• 5 years ago

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.

intergalplan2• 5 years ago

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.

ikeboy4• 5 years ago

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.

mckeed• 5 years ago

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.

JKCalhoun2• 5 years ago

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.

ezrast4• 5 years ago

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.

sriram_malhar• 5 years ago

I think it might cause less confusion if you moved the end-note to the beginning.

anigbrowl2• 5 years ago

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.

ikeboy4• 5 years ago

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.

chmod6005• 5 years ago

"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?

Kalium2• 5 years ago

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.

chmod6005• 5 years ago

"It makes sense if you believe value to be an objective thing"

Does any serious economic philosophy actually believe that foolishness?

aidenn0• 5 years ago

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.

chmod6005• 5 years ago

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.

Pfhreak3• 5 years ago

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.

chmod6005• 5 years ago

Doesn't it take labor to facilitate the matchmaking, transportation, and transaction costs associated with barter?

simonh8• 5 years ago

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.

grecy• 5 years ago

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.

skybrian4• 5 years ago

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.

khazhoux• 5 years ago

This actually creates 1BTC.

chmod6005• 5 years ago

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.

robocat2• 5 years ago

And unless you both pay your tax on your $10,000 income, you are defrauding the IRS (assuming you are in the US).

dools7• 5 years ago

I think the point is that value is created here when the fruit is grown not because we swap the fruit

pas4• 5 years ago

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.)

pwinnski• 5 years ago

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.

gweinberg• 5 years ago

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.

btilly• 5 years ago

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".

jdmoreira5• 5 years ago

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!

B1FF_PSUVM• 5 years ago

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.

hinkley• 5 years ago

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."

adventured• 5 years ago

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).

HWR_14• 5 years ago

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.

838812052807016• 5 years ago

I wonder if you could apply similar reasoning to critique "carbon neutrality".

iudqnolq• 5 years ago

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.

Grimm15• 5 years ago

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.

seoaeu2• 5 years ago

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.

seoaeu2• 5 years ago

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...

theonlybutlet• 5 years ago

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.

animex• 5 years ago

This reminds me of Tesla's pricing page which shows your future gas savings deducted from the total cost of the car...

mensetmanusman• 5 years ago

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.

lifeisstillgood• 5 years ago

>> 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?

modeless3• 5 years ago

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.

JKCalhoun2• 5 years ago

I thought Bezos was attaching a monetary amount ($) to that value though — so pointing out that a fruit swap is zero-sum, monetarily, seems on point.

modeless3• 5 years ago

It's common to quantify value in units of dollars. It doesn't literally mean that money was printed.

greatgib• 5 years ago

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.

modeless3• 5 years ago

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.

paxys2• 5 years ago

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.

ebcode• 5 years ago

... 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.

Trias11• 5 years ago

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

paxys2• 5 years ago

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".

goldenkey• 5 years ago

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.

bartimus• 5 years ago

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.

A_non_e-moose• 5 years ago

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."

Sniffnoy• 5 years ago

Link to the actual post: https://www.econlib.org/archives/2012/01/an_answer_to_a.html

bartkappenburg• 5 years ago

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 :-)

cgb223• 5 years ago

This is a brilliant explanation of what a clearinghouse does

First time I’ve understood it intuitively

babaganoosh89• 5 years ago

Makes sense, all the people in town had $100 in debt and $100 in outstanding invoices.

Rebelgecko• 5 years ago

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.

long11l• 5 years ago

That almost sounds like it's endorsing check fraud

867-5309• 5 years ago

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

OscarCunningham• 5 years ago

This is why the central banks have been printing money.

phaemon• 5 years ago

Well the main reason they print money is so that there will be money. That's where money comes from. It's printed. Hence the pictures on it.

jonny_eh• 5 years ago

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.

dools7• 5 years ago

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”.

neilwilson• 5 years ago

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.

rytill• 5 years ago

Not at all. I can't convert between miles per hour and miles given an interest rate.

MR4D3• 5 years ago

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.

jameshart2• 5 years ago

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.

bo1024• 5 years ago

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.

tshaddox2• 5 years ago

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.

teawrecks• 5 years ago

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.

brundolf• 5 years ago

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

celticninja• 5 years ago

The rich tourist isn't even required if everyone communicated about their respective debts.

burnte• 5 years ago

Which no one will do because you want to put on a good front.

ric2b2• 5 years ago

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.

kemotep• 5 years ago

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

nanis• 5 years ago

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

ErikVandeWater• 5 years ago

What was the motel owner's plan if the $100 didn't come back her way?

csomar• 5 years ago

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.

panarky• 5 years ago

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.

maerF0x03• 5 years ago

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.

mdoms• 5 years ago

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?

maerF0x03• 5 years ago

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.

gshulegaard2• 5 years ago

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.

ezrast4• 5 years ago

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.

gshulegaard2• 5 years ago

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.

kixiQu2• 5 years ago

"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.

necovek• 5 years ago

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.

ShroudedNight• 5 years ago

Ah yes, the insidious cost of ringtone piracy:

https://youtu.be/GZadCj8O1-0

Animats• 5 years ago

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?)

eruci• 5 years ago

The other dollar is included in the three dollars they got back. 9x3 + 2 = $30.

baryphonic• 5 years ago

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.

SamvitJ• 5 years ago

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.

simongr3dal• 5 years ago

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.

cmeacham982• 5 years ago

Read the associated footnote for that line.

yossarian1408• 5 years ago

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.

riantogo• 5 years ago

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.

perryizgr8• 5 years ago

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.

badhabit• 5 years ago

10+10+10 = 30 = 25+5 = 25 + 2 + (1+1+1)

9+9+9 = 25+2

lucideer• 5 years ago

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.*

Where did the other dollar go, Jeff?

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