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Post No.: 0253economies


Furrywisepuppy says:


This continues on from Post No.: 0234 and the topic of how the rich get richer. I apologise again that it’s going to be more of an info dump than a neat post, but it’ll all hopefully make fuller sense eventually…


If you believe that it takes money (resources e.g. for R&D, advertising) to make things happen (which it typically does), then you’ll understand that it takes money to make more money, and therefore logically the rich find it easier to get richer. In efficient economies or markets, great rewards come with great risks, and one can risk more if one already has a lot of expendable capital to risk with too.


A big size also increases economies of scale – if you can afford to manufacture in bulk then you’ll be able to make things at a cheaper per-unit cost. Large firms can spread risk in markets easier (e.g. product-wise or territory-wise), find it easier to invest in further growth, can control their sources of supply more and negotiate lower per-unit prices from their suppliers due to the larger orders they make, can source capital easier and also source it cheaper (a ‘financial economies of scale’), can attract more specialised and therefore the best employees in their specialised areas and can afford a broader range of staff (a ‘managerial economies of scale’), can afford more expensive and specialist capital machinery or systems (a ‘technological economies of scale’), can afford more expensive and wide-reaching marketing campaigns and spread the marketing costs over a larger output (a ‘marketing economies of scale’) and can benefit from other economies of scale, economies of scope and economies of density or size. This is why small local businesses can struggle to compete with large firms; although small businesses can be more personal and ‘agile’ (quickly adaptable). Woof!


Those who advertise the most help their sales the most, but marketing costs can be huge (e.g. TV advertisements cost hundreds of thousands of dollars), but if one can afford it then one can benefit from it. Even a carefully manipulated PR (public relations) campaign costs money, despite PR not generally being classed as ‘paid’ or ‘owned’ media but ‘earned’ media.


The rich find it easier to fund their self-serving political agendas and propaganda campaigns too, exactly like rich firms with huge marketing budgets find it easier to fund their advertising goals and marketing hype.


Currently-established giants also frequently buy out young, innovative companies and headhunt industry talent for relatively cheap – although laden with risk, even a few billion dollars is cheap in the long-run compared to letting them build and become equal-sized or greater competitors in the future i.e. they buy out the future competition, thus keeping themselves on top, sometimes at the expense of consumers, who generally benefit the more competition there is in the marketplace fighting for their custom. So large companies will do, and would do so more if governments allowed them to (i.e. if it weren’t for enforced antitrust laws), everything they can to stifle broader competition, which is rationally good for those companies but usually bad for consumers and economies or markets as a whole. (Different countries regulate monopolies, oligopolies, monopsonies and oligopsonies differently.)


Check out football/soccer clubs – occasionally a giant can fall from grace and a minnow rise from obscurity (although this is usually after the result of some rich buyer coming in!) but typically what happens is that the existing rich and successful clubs get richer and more successful since they can afford the top players both in the transfer market and when it comes to their wage demands. Some clubs, although compensated for with the according transfer fees, feel like they’re essentially ‘feeder clubs’, who find or develop talent but then soon end up selling them to richer, more currently-successful clubs. They cannot hold onto these players against their wills if they want to move to bigger clubs.


So how can a small company or club eventually challenge the giants if the giants keep on buying out the competition when they’re relatively young and cheap? Likewise, even though it’s more (mid-term) efficient – how can other British cities compete with London when London continuously receives more investment than the rest (e.g. airports and terminals, even though London has some of the biggest airports already)?


Rich companies can attract the best human resources by luring them with larger pay packets, or they can simply afford to employ more staff. Relatively richer job seekers themselves can afford to pay for premium services that can help them get a job too – some job search services offer paid functions that help people find the jobs they want more easily i.e. it can help to already have a bit of money (to pay for these enhanced services) to improve your chances of getting a (good) job.


Some large conglomerates also fiddle their accounts via transfer pricing to make one profitable subsidiary in their portfolio seem less profitable – for tax reasons – by transferring costs to it from a less profitable sister subsidiary. This lack of ‘arms length’ trading between related companies is against free competition. (Insider trading similarly is not at ‘arms length’ and is against free competition – some laws and regulations exist to make the free market work fairer and more efficiently. Most of the time, the issue is not whether to have or not have regulations but finding the right balance between too light and too heavy.)


Fiddling accounts to avoid taxes messes up the market because it means that the market doesn’t have an accurate picture of itself (the truly profitable companies aren’t shown as being truly profitable, and vice-versa, because of all this fiddling) but it makes it easier for these large conglomerates to make profits as a whole (because the group has paid less in taxes as a whole) to keep themselves large in an unfair manner. And this is even without the use of tax havens. Again there are laws, but these tend to always need to play catch-up. Some will argue that if it weren’t for taxes then they wouldn’t be compelled to manipulate their accounts – but without taxes and enduring states these companies probably wouldn’t have existed in the first place.


Some large and complex (complex because of their aggressive tax avoidance setups) multinational corporations/enterprises (MNCs/MNEs) can agree to be part of a preferential tax regime instead of paying their proper and fair amount of taxes. Some corporations can pay a fixed lump sum instead of their full liability – of course, a corporation will only agree to this deal if it’ll save them tax costs compared to completing a thorough and correct financial statements disclosure and tax computation! A lot more about tax avoidance and evasion will be said in future posts.


If you’re an already-rich individual then you can buy some recently privatised assets and become even richer, like some foreign oligarchs. Note that not all billionaires are the same – not all got to where they are due to real inventiveness, skill or hard work. Some get there the hard way with business nous because they can build many different and hugely successful businesses – but some strike oil, get incredibly lucky with an investment once, inherit it or acquire it via corruption, for instance. Money is therefore not a reliable measure of inventiveness, skill, hard work or even ‘genetic fitness’ – well if you lack the natural talent yourself, you can throw money at problems if you’ve got the money instead! (Albeit that’s sometimes what it takes.) Money can therefore sometimes mask ‘genetic weaknesses’ by compensating for them.


If ‘necessity is the mother of all invention’ then rich people lack the incentives to innovate because they’re seldom forced to do without. If they inherited wealth then they might not need to develop any social virtue either because rather than needing good social skills to get others to cooperate with them, they can just hire people and pay them to do things for them instead, and so live their lives just constantly looking down upon others. The rich find it far easier to get richer because assets do the work for them (e.g. the appreciating value of one’s estate, or accumulating economic rents), thus reducing the importance of genuine talent, which results in an inefficient human capital market.


Established brands find it easier to sell new products, even when those new products have nothing to do with the products that initially established their reputation. The board of directors and executives might even be completely different people now too – thus they’ve inherited the reputation they didn’t build themselves.


Already famous (and therefore usually also rich) people can likewise simply play on their own name or famous family or heritage as a brand, even though their products may be no objectively better than generic brands, and even if they have no real expertise regarding the products they put their name to. Even if they have expertise – would they have had quite the opportunity if it weren’t for their initial advantages? They can also attract funding far easier just because of their famous name. The question is – would anyone have cared (e.g. about that sex tape amongst probably hundreds) and would they have become famous if their parents weren’t famous? Some would have because some truly have individual and worthwhile talent, but some wouldn’t have. So is a lesson from capitalism ‘choose your parents wisely’?(!) But I suppose the market is partially to blame for falling for some things too.


By the way – why aren’t all scientists, teachers, nurses, etc. better paid than some people who contribute nothing to total human advancement? I’m not saying people who entertain and bring joy to others shouldn’t be paid but shouldn’t those who more directly make humanity move forwards be paid more? It’s a very strange human world!


Democratised crowd funding is great, but even here we’ve seen already-big names and famous people pushing their way onto these platforms and hogging the staff picks and highlights and therefore attention and funding.


Although not necessarily about being rich but about being famous/in the public eye, whether through initially worthy talents or not – if you’re not famous then you can pay hundreds of dollars to buy and wear expensive branded clothing from companies (which is like paying these companies to be a walking advertising sandwich board for them); whereas if you’re famous then you could get those clothes for free plus get paid millions of dollars to wear branded clothing from these companies (i.e. get sponsored and paid by companies to use and advertise their products). It’s therefore a really bad deal for people who spend a lot of money on expensive clothes with large emblazoned logos on – these customers are irrationally paying to advertise another company’s brand, when really the company should be paying them instead like any other advertising channel(!) I don’t blame the sponsorships and it’s free consumer choice though. For consumers, it’s to do with ‘signalling’ i.e. associating oneself with what a brand supposedly represents (e.g. its virtues, or superficially that one simply has the money to buy such expensive clothes, which is arguably fine as long as one does have the money and isn’t in problem debt) and this might be psychologically worth it to some people.


Of course, many of the big firms we see today grew from small acorns, but their growths were likely funded by many already-wealthy investor individuals who now own a lot of the shares in these companies in return. Many of these wealthy investors made their own wealth from relative scratch, but many of them inherited their wealth and opportunities too.


This is again nothing against people wanting to be, becoming or being rich and/or famous. It’s about elucidating some facts about the accumulated advantages of already being so, in order to hopefully reduce the hubris that some rich and privileged people have – particularly those born into relative wealth.




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