Surplus: Winners and Losers

the-weight-of-the-2032357_960_720In attempting to understand the consequences of the new technological and economic conditions, and the changes that covid-19 has brought along with it,we need to take a look at the list of products that were not available previously. The list on the previous blog post is a good starting point. Then try to imagine what life would be like without them. In some cases, like no Smartphones and no Interstates, it is even difficult to conceive of the possibility. There is no question that many of the changes have made almost everyone better off.

That is certainly true for anyone who has an adequate surplus, making it possible for them to purchase those products. Those who developed the new products and made them available deserve to be rewarded for their contribution. They benefit from the changes and have been pushed into the upper-end of the income distribution.

However, that is not true for everyone. Let us take a look at the effects on consumers  when companies charge prices in excess of the long run costs of production and distribution.

Consumers and other users benefit from the new products that become available. They also benefit when the lower costs that are the result of the new processes of production and distribution lead to lower prices. Clearly, the companies who provided those products benefit as well. So do their suppliers and distributors. In addition, the executives, managers, owners and employees of each of those firms experience an increase in their surplus.

Importantly, those changes, are largely the result of the new set of technological and economic conditions. The innovations that lead to a decline in the cost and price of existing products also contributes to the size of consumer surplus.

And then there are the changes that made others worse off. Included are the companies and their employees who previously supplied products that are no longer in demand, including any employees who lost their jobs as a result. The same is true for those employees who lost their benefits when their company or its successor adopted the new processes of production, some of whom were replaced by robotics. They are among those individuals and households that were harmed by the new developments and who were pushed towards, perhaps into, the lower-end of the income distribution.

There is another important effect on some consumers who purchase products at prices that are above the company’s long-run costs of production. Those prices contribute to the firm’s excess profits. Every dollar above the long run cost of production is a dollar taken out of consumer’s hands — out of their surplus — and into the company’s pocket. Ultimately, some of those funds go into the pockets of their executives, managers and owners — pushing them further into the upper-end of the income distribution. The extent that list prices exceed the Black Friday and Cyber Monday prices is an indication of how much list prices exceed the long run cost of production.

There is an additional adverse effect that is experienced by the customers. The higher price they are forced to pay makes it impossible for them to buy the goods or services they could have purchased with the additional funds they would have had if the product was priced lower.

Moreover, the lower price would have made it possible for additional buyers to purchase the product. One example is when the high prices pharmaceutical manufacturers charge prevent some patients from getting the medications they need. All those potential customers are made worse off and pushed towards the lower-end of the income distribution by the excessively high prices.

Furthermore, the funds provided by the excess profits make it possible for the company, its executives, managers and owners to promote their personal economic and political agendas.

First, here’s a reminder. When the firm has a new product or new process of production or distribution, with or without a patent, initially it is in a monopoly position. A position that enhances its control over the market. With its excess profits, the firm is in a place to use those funds to promote its private agenda. I have written an entire essay on the subject called: Monopoly Pricing.

Here are some of the ways companies have used the newly gotten excess profits to further their corporate interests:

  • Promoting their products in existing and into new markets, including some that go beyond national borders.
  • Developing related products or modifications in the process of production.
  • Engaging in price-fixing or other anti-competitive practices.
  • Acquiring or merging with other firms, some of whom could be rivals, suppliers or distributors.
  • Attempting to develop new products or processes of production, which may or may not be related to the current ones.

Those are just some of the activities firms can engage in to reinforce or enhance its market position. Some of those activities are potentially in violation of the antitrust laws.

Now let’s take a look at ways in which companies have used their excess profits to promote their private agenda by engaging in activities that are outside of their production and marketing responsibilities. Some of the funds go to the firm’s executives, managers and owners, adding to their surplus and pushing them further into the upper-end of the income distribution. At times it is difficult to distinguish between the company and the individuals themselves.

Here are just a few examples — ones we know about — of the ways that companies have used their excess profits to promote their market and private political agendas at the public’s expense.

  • For years the tobacco companies hid the fact that smoking is addictive. Nonetheless, the companies promoted the use of cigarettes among teenagers. Today e-cigarette companies are following the same path.
  • Purdue Pharma extensively promoted the use of the painkiller, OxyContin, an addictive and potentially fatal opioid, without informing physicians and users about those possible effects.
  • VW violated US federal regulations by selling vehicles that did not conform to the carbon emission standards.
  • The American Legislative Exchange Council — ALEC — redefined the definition of “free markets” to mean markets that were free of government intervention, rather than the traditional economic definition — markets free of corporate manipulation. In addition, ALEC, an organization of corporate executives and legislators, financed and promoted their private objectives at the State level.
  • The Koch Brothers used their extensive funds to promote their private political agenda.
  • The New York Times reported that in fiscal year 2017, FedEx owed more than $1.5 billion in taxes. In 2018 FedEx paid zero. Assuming that FedEx did well in 2018 as it did in the previous year, the federal government has $1.5 billion dollars less to provide its services, including ensuring that everyone pays their fair share of the tax burden. Either those funds come from other sources or the amount of services the government can provide has to be reduced. A likely result is that some federal employees and contractors will lose their jobs. Consequently, it will be more difficult for the government to ensure that corporations and those in the upper-end of the income distribution are in compliance with the law.

You can find greater details and additional examples regarding corporate behavior in my book entitled: Making the Poor Richer: The Causes, Consequences and Potential Remedies for the Greater Inequality in the Income Distribution.

Up to now we have focused on the recent significant development of new products and new processes of production and the differential effects they have had on the individual’s and the household’s surplus. Some have been made better off, others worse off. The changes have led to a new set of technological and economic conditions. It is important to recognize that each new development mandates a reallocation in society’s limited resources. In short, the new products have to be produced and distributed to consumers. While at the same time, products that were previously important disappear. Importantly, the new developments have also had differential effects on various segments of the population. Those changes have led to a significantly greater inequality in the income distribution.

In the next blog post we will examine how the new developments and the associated changes in technological and economic conditions have affected society as a whole — the Community.

 

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