If a particular operation is unprofitable, that means that it absorbs resources that have a higher monetary value than the outputs it produces. In other words, everyone else in society outside of that operation thinks that its input resources are more valuable than its output goods (or services). This is feedback from everyone else telling the people running this operation: “You are reducing the value of economic resources available to the rest of us, so consider carefully what you have been doing. Is there a tweak you can make to your enterprise, so that you absorb fewer inputs and/or produce outputs that the rest of us value more highly?”
I often point out that government-promoted recycling operations tend to be unprofitable. For me, this creates a presumption that the value of the output in recycling is less than the cost of the inputs. In short, recycling wastes resources.
Read the whole essay. This is the sort of analysis that ought to be stressed to first-year (and later) economics students.
The output is a public good and not priced correctly.
Is it?
It’s a public good? So it’s either non-rivalrous or non-excludable (or both)?
I think what you mean is that it generates positive externalities. I’m not sure that’s the case, but I’d love to hear your defense of that view.
Of course it wastes a vast amount of resources but it makes me feel good about myself so who cares?
“Recycling may be the most wasteful activity in modern America: a waste of time and money, a waste of human and natural resources.”
http://www.nytimes.com/1996/06/30/magazine/recycling-is-garbage.html?pagewanted=all
I’m concerned about the overall conclusion because, yes, pricing is the issue. There is a process of managerial accounting, in effect, and cost and profit centers are not always properly bounded; so that value being captured and value being created are disassociated. Why do we memorialize great … whatevers? Musicians, artists, scientists, etc? Because we weren’t able to pay them their due when they were alive and we aren’t able to pay people like them their due, but we want to encourage a similar kind of performance in the coming generations. So we create a sort of perpetual annuity that also rewards their children and grandchildren. This is also what is so corrosive about revisionist histories that scurrilously seek to undermine the reputation of those who have been valorized.
I’d like to see more than a token nod to public services (Murphy uses single example of public park). In the realm of markets and profit-based firms, this way of thinking makes sense – if you are not able to profit, then obviously your inputs are costing more than you can get for the outputs. But in the public realm where there are often no pricing mechanisms, and financing is through taxes, I’m not sure it makes much sense. It is worthwhile to think about what kinds of activities/outputs are kept in the public realm, and why.
Arnold, I’ve thought this topic is one way to make PSST mathy.
Bulk garbage pickup is probably the best recycling program we have. In my town the city picks it up once a month. It unintentionally serves a coordination function for local junk dealers who can drive ahead of the city garbage collectors and take anything of value.
Profit as measured against the interest rate, which is why profitability can change. You might like Capitalism: Competition, Conflict, and Crisis by Anwar Shaikh then, who considers profitability as the endogenous organizing principal, a bit of reversion to original classical thought.
the vast majority of companies in the S&P 500 are barely or not earning their weighed avg cost of capital. What say you to that?
Economists are surprised. They all should break even exactly.
Do economists really see this as an insight?
A firm can be unprofitable because it doesn’t execute well enough, which you can “tweak”, or because the assumptions that lead to their longer term capital decisions were not met, which you can’t. You can be highly competent at planning and still fail to predict the future. It is rare when a firm can find a risk free market opportunity.
In the case of recycling, contracts require assumptions about the value of the recycled waste stream. When the price of aluminum or paper drops enough, recycling loses money. It’s a bad business because success or failure is almost mostly subject to commodity prices that are out of the control of the firm, and it requires a consistent, long term, capital intensive commitment.
If “…government-promoted recycling operations tend to be unprofitable. For me, this creates a presumption that the value of the output in recycling is less than the cost of the inputs. In short, recycling wastes resources.”
then how about:
“…government-promoted operations tend to be unprofitable. For me, this creates a presumption that the value of the output in government-promoted operations is less than the cost of the inputs. In short, government-promoted operations waste resources.”?