Should Entrepreneurs Give Back to Society?
NB, I am not Davy.
You must hear it; that entrepreneurs and rich business people “should give back to society”. You hear it from the entrepreneurs themselves. Many philanthropists such as Warren Buffet, Bill Gates and Richard Branson talk about sharing wealth and “giving back to society” almost as if it were a duty.
The question is, should they give to society? What have they taken? They can’t give back what they haven’t taken.
The fact is that entrepreneurs can not take anything if they increase their wealth through peaceful exchange. The wealth they gain is earned through production of goods. Successful and honest entrepreneurs take low value input and by using the factors of production they create high value output. When an entrepreneur makes a profit, it means they have added value above all of the costs involved.
Consumers voluntarily decide to trade things which they own for the goods produced by others. They can decide not to buy if they believe their money is best placed elsewhere. Providing there is no force involved in the exchange, both the buyer and seller are benefiting from the trade. They both receive what they want. The entrepreneur receives money while the customer receives the good they agreed to buy. They both profit through mutual benefit.
Every individual has a maximum price which they would be willing to purchase a product or service. This is often known as the willingness to pay (WTP) and is determined by the expected utility of that purchase against alternatives. Since people place a certain amount of utility on the certain amount of money, the more they have to give up, the more utility is lost from the money. Therefore, people will take price into account with decisions. WTP is usually considered the price point at which the utility lost is equal to the utility gained in an exchange. In reality, the WTP is determined at the price point where the utility gained from an exchange is the highest out of all alternatives. People will try to make the largest gain in utility, also known as psychic profit. People wont make a purchase if the opportunity cost is higher than what they think the purchase will give them. They will go for their highest preference. If people make successful decisions with purchases, they will benefit from the trade even when someone has taken their money. This is because they place higher value with the purchase than with keeping their money.
Sellers will often set an asking price. If the supply is low for a particular product sold by a business, the price can rise. Less individuals will accept the price because it exceeds their WTP and the overall sales will reduce, hopefully near to the low supply. This way, the business doesn’t sell out too quickly and makes the greatest profit possible, unless they are now unable to sell all the stock supplied because the price was set too high.
Businesses can increase demand by reducing prices and they can try to increase supply to meet this demand. This may be effective at increasing profit when the price elasticity of demand is high but may be ineffective as gross profit margins get smaller and smaller. Reducing prices is not always beneficial to a business because they have to maintain margins and price elasticity of demand is not linear. As businesses compete to make profits, markets naturally create supply and demand equilibrium at ideal prices so economic resources are utilised more effectively. The greed for profit is a good thing when it involves mutually agreed trade.
The price is something agreed between buyers and sellers. Whatever the asking price is, the buyer will only enter a deal if the price is below or equal to their WTP. Entrepreneurs need to make improvements through production so that people value the end product and so that they will trade at prices which will leave the entrepreneur with a profit. People will not enter a deal if they do not think the value the product will give to them is worth the asking price.
Prices can often be lower than a consumer’s WTP. This is known as a consumer surplus in economics. Businesses may use price discrimination to reach closer to a consumer’s WTP. In highly competitive markets with high price transparency and little differentiation, people will easily move to the cheapest competitor making price discrimination virtually impossible.
There is no taking involved in peaceful exchange. Entrepreneurs create a product which people are willing to pay for at prices higher than the unit cost. The difference between the costs for all units and the revenue from all units is called the gross profit. The gross profit goes towards paying off fixed costs. Gross profit minus fixed costs is the net profit. This is profit which has been earned and is deserved. When a business makes more profit while being non-agressive, they have reduced the costs, increased the amount of money people have been willing to spend on the end-product and/or increased sales. It’s clear to see that the more legitimate profit, the better.
Taking wealth from others with no mutual consent is called extortion. Taxation is an example of extortion. Governments take away from society all of the time and when they might try to give back, they simply ruin everything because governments are ineffective at providing goods and services.
But can businesses take advantage of extortion?
Indeed they can. For example, Bill Gates, who advocates “giving back to society”, has profited with the patent and copyright laws designed to prevent people from freely participating in ideas (patents) and copying information (copyright). Corporate lobbying gains businesses subsidies and favourable laws which can give certain companies an advantage without adding value properly (Actually making things better). Most of this lobbying is done behind closed doors so we can never truly understand the scale.
A business may not use extortion directly but they may take advantage of law which allows them to destroy competition through agression. This will give them profit but not virtuous profit. Any profit made with agression is not earned. Profit is no longer a measure of added value but is a measure of stolen and destroyed value.
To conclude, entrepreneurs have nothing to give back to society if they didn’t take anything. True honest entrepreneurs are the ones which generate and trade value with zero agression and they deserve everything they have.
May 24th, 2011 at 1:17 pm
True. I hate this ‘giving back’ rhetoric. But entrepreneurs can donate if they want to – just call it something else.
May 24th, 2011 at 2:20 pm
@Michael Fawke: +10
Wish they wouldn’t donate at all though… it’s a rather arrogant assertion that you know better how to allocate resources for the improvement of people than rational self-interest. Better that they invest in new projects, and the market will decide the success or failure of those projects, grow efficiently, and provide for everyone in the best possible manner.
Though I’ve no problem with Children’s charities – for mostly obvious reasons.
May 24th, 2011 at 4:16 pm
I’d suggest the most pressing requirement we need from our entrepreneurs is longevity. We need them to stick with the business they build and grow it for a very long time. The fashion of starting a business and then selling out as soon as you can at a good enough price which provides a comfortable lifestyle.
Too many good businesses have been sold only to end up as part of a much bigger group most of which are owned by overseas investors. This reduces the likelihood of the profits being reinvested locally which further damages the local economy.
I’d also suggest that throwing money at “causes” or being seen to bid large amounts of money for items, which are well above their actual value, at charity auctions are counter productive. They have their place but perhaps it’s not the best outcome.
Charities engaging entrepreneurs directly would learn better business practices etc. which would equally benefit their operations and increase efficiencies resulting in a positive effect on their budgets and balance sheet.
Working directly with charities would also help entrepreneurs understand what is required based on seeing things for themselves. It’s easy to give donations but much harder, although ultimately more beneficial, to provide actual support.
May 24th, 2011 at 4:32 pm
@PeteM “Too many good businesses have been sold only to end up as part of a much bigger group most of which are owned by overseas investors. This reduces the likelihood of the profits being reinvested locally which further damages the local economy”
Where else are they going to reinvest British Pounds if not in the UK?
May 24th, 2011 at 5:36 pm
Starting businesses is arguably the hardest part.
May 24th, 2011 at 10:06 pm
Haha I liked Petes comment. “Not reinvesting” is damaging to the economy. Reminds me of those people who say Not taxing is a subsidy, absolute out of their minds.
May 25th, 2011 at 12:34 pm
Tricky question Davy.
How about they export the profits back to their country of origin? How about they use the profits they make here which they use in their home market to subsidise prices there. The customers in the UK pay more because our economy allows it. Think of electricity, banking, airports, water even food.
May 25th, 2011 at 12:40 pm
Interesting reply James.
Not taxing is a subsidy. You will remember perhaps back to the times of mortgage relief? It was driven by the desire of the relevant governments to increase private ownership of property.
You will also no doubt be aware of the changes in taxation recently which allows companies to lay tax at the rate of their home market not at the rate in the UK. Again a subsidy to encourage them to stay or to set up in the UK.
Re-investing is core to any business and is a good indicator of a thriving, growing and ambitious business. The more investment the greater growth, the more employment and the more wealth created. Basic business stuff.
May 25th, 2011 at 2:54 pm
But the profits they make here will be in pound sterling, how can they subsidise prices at home using our currency? Their people will have no use for the currency unless it’s to spend it on UK exports, at which point it all evens out. Imports, minus a few caveats here and there, must equal exports.
May 25th, 2011 at 6:42 pm
Well Davy, let’s see…
When you go on holiday do you take a wad of British notes with you? No. Thought not. You change it to the currency of the country you are going to visit.
There is no difficulty in moving money overseas. Simple.
May 25th, 2011 at 10:25 pm
You don’t “change” currency. You buy foreign currency using local currency, it’s a purchase like any other.
May 25th, 2011 at 10:26 pm
Not stealing money is not the same as giving money… How can you even begin to get those confused?
May 26th, 2011 at 8:27 am
You exchange currency. Buy it. Whatever. The result is the same. The money leaves the UK and goes elsewhere. It is invested elsewhere.
Where did stealing come from? It’s all legitimate but that doesn’t make it right especially when the majority of countries around the world are far less enthusiastic about who owns what and where the profits end up.
My original post was positive and reflects my experience in business and on working with charities to help them make the most of the money they get by being effective in what they do.
Your experience of business and charity may differ from mine. What is your experience?
May 26th, 2011 at 1:09 pm
What? Buying it, means other people IN THE UK get the money (in exchange for foreign currency) and then those sellers of foreign currency invest it IN THE UK. Not that the actual amount of money of any given currency matters because the same currency is circulated via more than one exchange in any given period of time – all that matters is how much Purchasing Power people have to exchange. That Purchasing Power does not decrease overall in the UK when currency is exchanged.
Taxation is theft. Not taxing people is not stealing. Not Taking is not the same as Giving.
My experience? When I’m not being Taxed – I’m not being given the money, it’s my money. And my experience of charity is similar, calling it a charity doesn’t usually mean it’s a charity – especially given the amount Governments pour into most. And I’ve had far more success helping people by investing money in whatever I like, and helping to provide work than has ever been achieved by any “charity”.
May 26th, 2011 at 3:50 pm
Before you can go on holiday, you need to earn enough to afford it. When you choose to go on holiday you are placing money in what you want. It makes sense that tourism industries will do better in prettier, warmer places and places of interest. You can’t dictate that everyone have crappy holidays in the UK.
Same with import/exports. People will naturally use imports if they are cheaper. They are usually cheaper because of government intervention which makes local good expensive and good in other countries cheaper.
If they are cheap in other countries for a good reason, then local business will have an incentive to be more efficient or add some other competitive advantage over price. If one country has a natural advantage, then it makes sense that local businesses stick to what is best locally.
For example, if one country can get oil out of the ground cheaply and effectively, it’s useless to compete if you can’t in your own country.
Ultimately it comes down to production and producing the right things, in the right way, for the right price and for the right people.
Spending your money on expensive, ineffective local goods is not good for the economy. It’s rational and economically good to spend on what is best for you. The profit and loss system and competition fixes the rest.
Imagine that pineapples in your country cost a lot to produce and you can get them cheaper elsewhere. If you spend your money on those expensive, poor pineapples to “stimulate the local economy”, what you are actually doing is allowing the expensive, crap, economically inefficient pineapples to continue to exist.
May 26th, 2011 at 4:05 pm
Great answer Matthew!
Interesting, you give a great example with pineapples, of the kind of madness that comes of people who pretend they are doing their bit from the environment. People buy “local” food in order to pretend they are reducing the need for Glocal Distribution, but they never want to eat “local” food, and so they encourage the massive cost, inefficieny, and environmental unfriendliness of adapting and creating an environment for growing foreign Food locally, when it can be done so much better abroad.
May 26th, 2011 at 8:40 pm
What a winding and weaving path we have here.
1. If you think that money is not being removed from the UK by large overseas businesses you haven’t been paying attention.
2. Cheap overseas labour is a temporary benefit for some businesses. I used to source stuff in China. We just made sure we dealt with people who were outside the good road network and they were always cheaper than those with better infrastructure.
3. China now Africa soon. I for one will be absolutely delighted when that happens. The NGOs and the Fair Trade and enviros will get their comeuppance. DDT available and a huge drop in the 300 children who have been dying daily because of malaria.
4. If we are libertarians we choose who we work for and how we spend the money we make. It’s not easy. The market is crying out for an adjustment. It will happen. It will be messy.
5. We need a constant supply of new businesses who will innovate and enrich our communities. They will produce jobs, the money will be spent locally. We do not want these same people to sell up when they get to a particluar sixe based on value.
One of my friends built a business which was very innovative. He employed 300 people and he sold out for £20 million. He had to stay out of the marketplace for a couple of years which he didn’t. The American conglomerate who bought the business closed it with all jobs being lost.
He started again and now employs 400+ and has improved the product so it’s now better and sells more than his first attempt.
I have other friends who have done similar things. They are neither socialist nor capitalist they are libertarians like me.
May 26th, 2011 at 11:18 pm
What is the problem with money being spent abroad? Tell me exactly. If you restrict spending into one area, it’s a recipe for disaster.
PS: Nice picture on the article as well.
May 27th, 2011 at 7:36 pm
Guys,
There is nothing wrong with spending money abroad. It’s a personal choice.
However, when a successful UK business which is UK based and owned, employs a lot of people and buys from local suppliers is sold to an overseas business this proves to be damaging.
The new owners take the profits overseas. The money is lost to the UK and the local economy. Tata Steel have demonstrated this on many occasions over the past few years. Asks someone who works for Corus what they think.
May 27th, 2011 at 7:42 pm
Oh yes… Tell me how you feel about having to pay more for your electricity. Not too keen? The prices contain a significant percentage which is there purely as a means of getting money which is then paid to subsidise wind mills etc.
This distorts the market. It’s a government ploy.
Walmart has enormous buying power which dwarfs Tesco etc. Why aren’t Asda hugely cheaper than Tesco then? Because Walmart keep the prices higher than they could do and use some of that profit to subsidise the prices American pay in Walmarts in the USA.
May 27th, 2011 at 9:03 pm
@Petem: Say some Chinese company buys up a UK business. They earn £1,000,000 in profits. How can they take those British pounds out of our economy? I mean I suppose they could hoard the cash short-term, but ultimately that money has to be spent in the UK. Other countries don’t accept pound sterling. In fact the speed with which our government inflates the currency any kind of hoarding would be suicidal. What’s going to always happen in reality is that the money will be reinvested in the UK, either in the company in question or in a bank which will do the reinvesting on behalf of its depositors.
Am I missing something here? (that goes out to everybody reading not just Pete. I’m curious if I’ve lost a grip of basic econ: imports must equal exports?!)
May 27th, 2011 at 11:11 pm
So taking profits overseas is a bad thing, you are saying? If a foreign company buys a local company then yes but when they do that, the previous owner then has money to make investment elsewhere, perhaps in foreign businesses as well.
May 28th, 2011 at 9:08 am
Think of profit as wealth creation. The wealth created is sent overseas.
If you suddenly gain a large amount of money what do you do with it? Buy a flash car or two which will almost certainly not have been built in the UK.
Invest through the markets most of which will be based on overseas trading.
Invest in the UK. Develop the UK to be a true democracy with the population wealthy in quality of life, life expectancy and valued.
Charity begins at home.
May 28th, 2011 at 1:21 pm
If they buy a UK company, they will reinvest in that same company. They may move production etc. but that is if it is beneficial. High UK taxes don’t help the situation.
With free markets there wouldn’t be any problem with globalisation. Free markets form equilibrium naturally.
May 28th, 2011 at 6:00 pm
Will nobody address what I’m saying? Imports must equal exports. You can’t take british profits out of the UK because British pounds can only be spent in the UK!!!
May 28th, 2011 at 8:51 pm
Davy is right: If a company from abroad sells goods here, it sells them for pounds stirling. The only thing that can be done with pounds stirling is buying British goods. Sure, it could take them to a bank and get them “changed,” but this “change” is really just the bank buying them in exchange for the local currency, which it will only do if it can itself expect somebody else to buy them from it, to change the local currency to pounds stirling.
May 29th, 2011 at 7:57 am
I said exactlty that 15 posts ago lol…
May 29th, 2011 at 2:53 pm
I SAID IT 17 POSTS AGO!!!!!1111111ELEVEN
May 29th, 2011 at 4:09 pm
Profits don’t create wealth just like money isn’t wealth, money is a representation of wealth.
What’s the obsession with profits anyway, it’s the money left over after expenses have been paid, feel like they’ve been demonized somehow. The subtext almost seems to be that if your company makes a profit then it’s exploiting the workers in some way.
If you want to be philanthropic with the money you made then go ahead, set a good example or whatever, but you shouldn’t be vilified for not doing it.
May 29th, 2011 at 7:55 pm
I’m guessing here that some of you have no business experience.
A business requires to make a profit. Simple. It is not a bad thing to make profits. The UK is a business. At the moment the UK is not making a profit. At the moment the UK is borrowing heavily and building up debts.
In order for the UK to address this the government who are running the country/business increase taxes and other costs. These taxes or other costs are paid for by the shareholders in the UK. That’s all tax payers.
Profits are essential. A business has to make a profit to invest in new products or services, to react to the competition and of course to help it survive periods of n on profit making.
If there is a better system then please let’s hear what it is? A real example of the alternatives at a large scale would be very interesting.
Profits don’t create wealth? What do they create then?
Money isn’t wealth? That”s dependent on the amount.
Profits and the wealth created in general from business activities are subject to tax. The tax goes into the coffers of the government who spend it on welfare, NHS, armed forces, police fire etc. etc. These are only possible because of wealth creation and on the amount of wealth created.
Also bear in mind that the government has just stated it is increasing the amount of overseas aid. So UK as a business can’t meet it’s budget requirement and is having to borrow and from that borrowing it’s giving money to charity. How may people would go into debt to give money to charity?
May 30th, 2011 at 8:42 am
Money isn’t wealth it’s a piece of paper, a coin or a number in a computer that represents wealth. It can be used to create wealth through production or purchase wealth in the form of resources, land etc. It only has value via a bank.
You could argue that if the currency was made of something, or an object that has value independent of a bank/country then it is wealth.
That’s my take on it anyway, could be completely wrong.
May 30th, 2011 at 10:15 am
Let me make an observation here. What is more interesting than the post (interesting post by the way), is the way that Libertarians seem to behave with a pack mentality. I have actually had a lot to say about this article, but I have kept my discussion relating to the subject on Facebook between myself and Davy. The reason? Exactly what we can see here in these comments: Someone says something that has the gentle hint on straying from the pre-agreed rules of Libertarianism and everyone takes it in turn ripping that person to shreds, even using pedantry if needed.
As someone permanently put off Libertarianism by the rigid attitudes of the people that propose to support it, I was very interested to read PeteM’s counter arguments. I see that he is agreeing with some of what you are saying, but just trying to work out the details – something I am also doing to a lesser extent. However it seems that Libertarians don’t want to hear counter arguments, and the only time I hear devils advocate begin employed, it is done so in an OTT sarcastic way.
I’m probably over reacting again. You see I do that. Then I get told to fuck off, so I apologise in advance if somehow I am offending anyone. You see I spent a long time on this site trying to work out where I stood on many issues, and it certainly got me thinking. Mostly about people. Something about Libertarianism and more specifically Libertarians fascinates me.
I honestly think what the Libertarian movement is missing is the ability to change and also the ability to calmly explain viewpoints without getting defensive and aggressive. Davy, there is no need to claim you have lost a grip on the basics of economics, therefore implying that Pete has. James, who cares if exchanging money is buying it? Matthew, demanding answers generally doesn’t give them “Tell me exactly.”. When people suggest ideas counter to your way of thinking maybe instead of acting like a bunch of hyenas you should listen to what is said and give it some thought. Maybe some of it you would agree with if you spent less time defending your view point and maybe instead attacking it. Attacking an idea isn’t a bad thing. Isn’t that what we do with ideas? Try to prove them wrong? Maybe that’s just science, maybe ideas are actually more about faith.
Feeding time.
May 30th, 2011 at 12:16 pm
That’s a strange way to view the thread. It’s lucky Pete isn’t as sensitive as you because he seems perfectly able to argue his points. I honestly don’t know why you even bothered to make your “observation” because as usual it has nothing to do with the topic at hand. If debate is so stressful to observe then don’t read it.
I’m constantly engaged in forum threads where the vast majority of posters are from the mainstream opinion. If I got as bent out of shape as you do at a “pack of hyenas” (aka more than one person disagreeing) I wouldn’t last 2 seconds on the Internet.
Me asking about exports/imports was aimed at somebody like Richard/Dvide because I wanted some confirmation I wasn’t going mad cause nobody addressed the point and I thought there was a whole chapter on it in economics in one lesson but it has been a long time since I read it.
May 30th, 2011 at 12:54 pm
Clever Davy. Yes, it was all a clever plan to offend Pete. What do you call that – misdirection? Not sure on what it’s called but it’s clever.
Regardless, I do think maybe you should try and break some of your ideas. You asked me to do the same in the past after all. I did try!
Of course what I said has nothing to do with the topic – I gave up on that a while ago. This is just an observation of mine, I know you don’t agree with it but I felt a compulsion to state it after reading the thread. I won’t say it again as I know my opinions are not welcome here. Like you say, I probably shouldn’t bother, and I won’t any more.
Anyway have a great bank holiday. It’s pissing down with rain here so I’m glad I am working today. Laters.
p.s I will read that economics lesson if I get a chance later, thanks.
May 30th, 2011 at 4:28 pm
Voodoochilli, I don’t know why you think the way you do. Just because we don’t agree with something doesn’t mean we haven’t thought about it.
petem, it is important people buy the best thing or else profit and loss and competition doesn’t work. Buying something, simply because it is in the UK is a bad mentality.
Profits are good, providing at the end of the day those profits can go towards buying decent things and not crap produced by the “buy crap in the local area” mentality or other similar mentalities like “buy crap from struggling businesses to help them out despite them being crap”.
May 30th, 2011 at 6:49 pm
Where have I said that buying stuff overseas is bad?
Voodoochilli. I appreciate your comments. The people commenting are determined to twist and turn.
I’ve really had enough of the nonsense. They know exactly what I am saying ans they choose to push their ridiculous agenda which seems to be based on making interpretations which ensure they can criticize and take issue.
The blog is labelled libertarian. Maybe they should rethink it? I feel like I’ve gone a few rounds with lefties who argue black is white.
Libertarian? In whose eyes?
I won’t be troubling this site again.
May 30th, 2011 at 7:03 pm
Oh yes, you started talking about people buying businesses over here from other countries as a bad thing. Shares in businesses are to be bought and sold just like anything else.
It’s anti-libertarian to advocate limitations on the sale of businesses.
May 30th, 2011 at 10:07 pm
Ironically I feel the exact opposite of Voodoochilli! I often feel that Libertarians don’t back each other up in arguments in the same way as Statists. I’d often love for similarly minded people to jump to my defnese on the forums, and recently on Facebook. It tends to make me feel quite isolated, and suggests my ideas deviate from the “pack”. I’d suggest that – unless I am not paranoid! – Voodoochilli and I share a problem we should deal with personally, instead of projecting.
Also, congratulations Matthew, 63 likes, clearly a very popular article, kudos.
@PeteM: “Where have I said that buying stuff overseas is bad? ”
“Too many good businesses have been sold only to end up as part of a much bigger group most of which are owned by overseas investors. This reduces the likelihood of the profits being reinvested locally which further damages the local economy.”
Somehow I doubt it is we who twist and turn.
May 30th, 2011 at 11:33 pm
He was more specifically saying that he did not like foreign investors investing in UK companies because dividends go abroad but implied he did not like money going abroad generally.
I think that was what he was going on about anyway. It made no sense really. Nonsense.
And thank you for the congratulations. :-)
December 14th, 2011 at 1:12 am
The major problems with most reseller opportunities that you don’t mention are (1) price wars resellers undercutting each other and (2) the time you have to spend on setting up the website and, more importantly, customer service which can mean that affiliate marketing still ends up more profitable per hour of a person’s time. I realise these hassles don’t apply in the case of your ProHealthMind site but people should know they exist with most resale rights products … you have a very unusual reseller opportunity here!