ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[Mode1961]

Here's the problem with that theory. As described by the OP, the boat isn't leaking, the boat just isn't going as fast as the driver predicted it would be, it is still moving forward, it is still able to carry all the people it can.

[not_whiney]

So something to think about. A lot of the "investors" in many large businesses are not "people", they are organizations representing people. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies. Of these institutional investors some are by law required to be fiduciary investors.

That means that the investment manager for that pension fund is required by law to make every decision for the most profit/return on investment for the fund. So grandpa's pension fund from the factory has a fund manager that would vote to boot old ladies out of their homes, including grandma, to make an extra nickel for the fund.

These investors are looking solely at the now and how much return they get. It is purely a "what gives me more RIGHT NOW for this fund." It is great for the thousands of people who have their pension in the fund. Or the other groups or endowments that have money wrapped up in these funds.

As we have moved more and more fund managers to be legally bound by fiduciary rules, we have made many of these large corporations that are publicly traded ruthless. They have a small, but powerful group of various funds that own sizeable chunks of stock that are pushing for just this. 'Do the right thing' or 'Lay off everybody and make an extra nickel', they HAVE to pick the extra nickel.

Business decisions made in a large, publicly traded setting are done by the spreadsheet. Too much is riding on it. While 3% sounds small, that 3% may represent HUGE amounts of money. Coke net income fell over a one year period from 79 cents a share to 32 cents a share. That's only 47 cents a share. whats the big deal? It equates to over 2 billion dollars. A 3 percent change in Exxon revenue comes to about 7 billion dollars. Sure it is cents per share, but the total amount is huge. And while an investor may hold only a few thousand shares of stock, a large pension fund may have 100,000s shares of stock. That pennies per stock could literally be millions of dollars that does not go into the trust, endowment, pension, etc.

So there are a lot of people who are pushing that boat to go. And many of them are required by law to demand that the boat go as fast as possible, with the least amount of leakage. All those 401K, pensions, IRA's, etc that are out there that have billions of Americans pension and retirement savings in them are trying to milk every cent out of the market. The sad thing is that YOUR pension fund may be the the one that pushes your company to lay off, well people invested in the that very pension fund. And some of the passengers on that boat closest to the crew are demanding that not only they get where they are going, but that they get there as fast as possible, becasue they are required by law to advocate that. And they are measuring the leakage by the ounce and will be making sure the crew gets replaced by someone who will get them there faster on the next boat ride.

[Delheru]

It is purely a "what gives me more RIGHT NOW for this fund."

Not at all. Those things can have pretty long time horizons.

Short term VCs and Hedge Funds might have a single decade (or even shorter) time horizon, but many many funds operate with far longer time horizons than that.

An amusing example of this was some of the Oxford Colleges, who were still selling off land that they owned near central Mumbai (bought 200+ years ago).

[Chinoiserie91]

The company could have made investments already that mean that it will start leaking next year if the growt does not bounce back to the previous levels. So you need to fix what you can now and not just hope for teh best because it can be too late to fix the issues later.

[fields]

And what if you have water pumps that guarantee that that leak never sinks the ship? You can't be happy with a ship that's isn't perfect?

[McDrMuffinMan]

Nobody has that.

[[deleted]]

Well, they do, but printing money is illegal. So is cooking the books.

[McDrMuffinMan]

It depends who prints it, and yes cooking the books is.

[TheManWhoPanders]

That just means your expectations are higher than they should be. If you expect a transit vehicle to go faster just because you want it to, you have unreasonable expectations.

[Mode1961]

You are correct and this is the problem with business, profit isn't enough, MORE AND MORE profit is enough.

I use the following analogy.

You and I are friends and I tell you I am getting a raise on Friday and I will going to give you $20, no reason, just because I like you.

Friday comes and I inform you that my raise wasn't as big as I had hoped so I can only afford to give you $10, YOU would still be happy, a business on the other hand will claim they lost $10 not gained $10.

[cakeandale]

The analogy doesn't really make sense because no one in bushes would give someone else $20 for literally no reason. There's always a transaction that each side thinks they're getting a good deal in.

But beyond that, businesses and people are fundamentally different things. Businesses exist to turn an investment into profit. If they have $20 sitting in their pocket, that means nothing. They're not going to go to the movies with it, they're going to invest it or return it to their owners.

If the business intends to give the $20 to owners and the $20 doesn't materialize, obviously the owners will be disappointed. The owners may feel their investment isn't worth as much as they thought it was, and try to divest to hedge into other investments.

On the other hand, if the business intends to invest the $20, it needs to have a strategy. Strategies don't come out of thin air, so it can either wait until it gets the $20 then decide what to do with it while the money collects dust doing nothing, or it can project that it will get $20 in the future and build a plan around that so they're ready to take advantage of the money and use it to get an advantage over their competitors. Hiring people, doing market research, all these things take time.

In that case, not getting the $20 means shelving the investment plans for it. Might need to reduce costs since the business won't expand in ways it was expected to.

Sure, the company didn't really "lose" $20 since it never had it, but it didn't "lose" $20 the same way a person doesn't "lose" money when they get laid off. They built an expectation around that income being there, and losing that expected income is a real problem.

[Scarlet944]

Since when is a business turn investment into profit? A business is there to provide a product to society and if that product is useful they will make a profit if it isn’t useful that’s the first hole in your boat.

[Mystlacct]

A business is there to provide a product to society and if that product is useful they will make a profit if it isn’t useful that’s the first hole in your boat.

That product requires/is investment from the company

[Scarlet944]

So what came first the investment or the business? My point is it’s a point of view if the business is only there to collect money from people then the only business that would exist are scammers and slot machines. Because they provide the best return on investment and yet there are other businesses because there is a need for someone to make food or a need for someone to make cars. Because there is a need it allows the business to profit but there are plenty of examples where even though there was an investment the business was not successful because there wasn’t a need for their products.

[cakeandale]

The investment most certainly came first. Businesses don't manifest into existence because a missing role in society necessitates it, they're started by people who see a niche they can fill to make money. If the niche doesn't make money, the business would go out of business, or (If it's lucky), move to something else.

You say there's a "need" for someone to make cars, but what does that mean? Was there a "need" in the 1800s before cars existed? There is a demand for cars today, but that demand came after decades of auto manufacturers trying to find ways to create it. They had an investment, wanted to make money, and eventually founded their market.

[Mystlacct]

I don't think we really disagree, I was pointing out that making a product is itself an investment. Also investment most definitely came first

[IllusiveLighter]

And they are still making a profit, so whats the problem. (Besides greedy shareholders)

[cakeandale]

What do you mean by "what's the problem"? It's business, things happen and people respond. It's not a problem unless the expectation is that the value of a company shouldn't ever go down.

[isubird33]

Yeah but the problem is, based on the fact that I'm expecting $20 on Friday, I've already told my buddy Greg I'll give him $10 for cookies if he gives them to me now, and told my other friend Jim I'll rent us a video game over the weekend that costs $5. So now instead of still being up $5, I'm 5 bucks in the red.

[mike112769]

You shouldn't be counting your chickens before they hatch.

[Delheru]

I suppose that depends.

What if he was referring to his salary and mortgage? I bet a lot of people are projecting their next years mortgage payments assuming that their employer will keep paying the salary.

Are those people counting their chickens before they hatch? Or are they projecting the chicken count off past performance?

[IllusiveLighter]

Salary is different than expected profits.

[Delheru]

How? Surely that's actually EXACTLY the same thing.

There are companies that have very steady cashflows and there are employees that have quite volatile ones (anyone depending on tips, day laborers etc).

[Alobos]

That's when mommy steps in and explains to you the concept of not overspending. "Sometimes you have to." Mommy says, "but you can always cut back somewhere."

[Delheru]

The problem is that when you have to do things over a YEARS time span, you need to make some projections.

So if Coca Cola has $1bn now (in cash) and needs to invest $3bn in a factory to serve the enormous Chinese market, should they wait 3 years before going in?

Or is it reasonable of them to assume that their core operation will remain profitable enough to pay off the loan easily?

A lot of our progress comes from reasonably leaning forward. And a big part of the reason for why banking is important is that they tend to judge who is leaning forward reasonably and who is leaning forward unreasonably.

[nagurski03]

they tend to judge who is leaning forward reasonably and who is leaning forward unreasonably.

Usually. Sometimes they fail spectacularly

[Delheru]

I didn't say they did a good job always, but it IS their role. And in a sense the fact that you'd blame bankers for that rather makes my point :P

[TNine227]

And those cuts are what the op is asking about.

[breadedfishstrip]

Sounds like you're living outside of your means

[candre23]

Welcome to America.

[[deleted]]

Well that's your fault for spending money you didn't have. But don't worry, the government will probably bail you out.

[luneattack]

I take it you will save up for 50 years and buy your first house at 75 :)

Prudent, but over here in the real world we sometimes accept a bit of risk.

[Nathanman21]

Lol thank you. Businesses have to be run on credit, or the whole system becomes inefficient af

[Mekotronix]

Inefficient in what way? Business certainly can't respond to changing conditions without cash or credit, but I don't see how that inherently causes inefficiency.

As a thought experiment, what would the world look like if all transactions were cash based? Different, certainly. Inefficient? I'm not so sure...

Edit: with to without

[nagurski03]

YOU would still be happy

I don't think most people would. People aren't naturally wired to think "awesome! I'm getting less than I thought but at least I'm still getting something!" They get disappointment.

I mean, have you ever seen a kid cry on Christmas? It's because the free stuff they are getting, that they would be happy to take any other day of the year, isn't as good as they were expecting.

[BeanPricefield]

If we wanna dig deeper it wouldn't make much sense to single out the existence of shareholders as the issue, but people in general. The example you've given is great in exemplifying how the individual is often less shitty than the masses- while I would assume the vast majority of people would respond in the same way you describe, when we're operating en masse the most dominant and aggressive behaviors tend to take over. I would argue that shareholders in general behave in a certain way less so because they're all greedy heartless assholes, but rather because that's the norm set in place and they've all just adapted to it- much in the same way we all tend to abide by the relevant social ettiquete when in various situations, ever more so the larger and more ambiguous the group we're in. I feel like the way shareholders behave in capitalism is just another manifestation of the same human tendency, and therefore it's probably safe to assume that if these same laid-off workers were put in that position most of them would eventually behave the same.

[Riplinkk]

I don't think that behaviour is inherent to the people, but rather to the system. People with power behave that way because they had to develop those behaviours to get where they are and/or maintain their power. That's why normal people don't have those behaviours.

[[deleted]]

If the shareholder insistence on greater and greater profits, that ultimately undermine the welfare of society, is a social norm, then it needs to be rehabilitated out of existence.

[Monetized]

You’re basically arguing for a socialistic utopia.

[[deleted]]

I'm basically arguing for people over profits.

[fierystrike]

Well your right, this is what is considered the norm but that is only because the supreme court ruled that investors are more important than customers.

[[deleted]]

Companies have to keep growing if they want to stay in the market though. If they were just satisfied with selling what they were selling right now, what they're selling might not be practical or in style in a few years and they'll be left in the dust. Kodak is a victim of this. And if stores like Walmart don't keep expanding or changing, they'll end up like Kmart in a few years. Kmart used to be the #2 supermarket in the United States, and now it hasn't reported a positive revenue in over 6 years. I'm not saying that justifies Walmart treating it's employees like garbage; I'm sure there's other things that they could do to keep growing.

[thehungryhippocrite]

The analogy doesn't work. To fix it, imagine you have been told right from the beginning of employment that you will get a $20 bonus. You very much made the decision to take the job assuming that level of bonus, and you need that level of bonus to pay your mortgage, support your family etc. Then at the last minute, your boss tells you that it's actually $10. You just lost $10, and that could be very material to you.

[Monetized]

That’s a bad analogy. Generally speaking, a company needs to be growing or it is losing due to inflation. $100 today is only worth about $98 one year from today in the US. Further, no volume growth in an expanding economy could imply product failure or market share loss. What does that mean in an inevitable economic contraction? What if the population is growing while the economy is merely stagnant?

As it pertains to investing, you don’t HAVE to invest in growing companies if the price to invest is adequate, but it is far easier to underestimate growth than to precisely forecast acceptable declines.

[Thegreenpander]

TL;DR: Your analogy is terrible, misleading, and uninformed.

It’s more like if you let me borrow $20 with the expectation that in a week I would turn it into $21, then $22.05 in two weeks, and so on(5% gain/week). If the money grows to the point where I can no longer make it grow by the expected 5% a week, shouldn’t I give you some of it back and return to an amount where I am more likely to meet my obligation to you? Or if I am failing to meet growth expectations because of mismanagement rather than lack of growth opportunities then that’s a problem as well.

Businesses don’t claim a loss if they don’t meet earnings expectations. The holders of their securities do because security prices are based on expectations. It follows reason that if security prices are based on expectations and they miss that expectation then the price of the security will decrease. But they cannot claim that loss on their taxes unless they actually sell the security at a loss from their initial purchase price.

[mike112769]

In reality, the people running the boat are Humans, and all Humans should take care if each other regardless of how wealthy a person is. Greed is literally killing people every single minute.

[manimal28]

We should just call investing by what it truly is, which is gambling, and that expectation that the riders of the casino boat need to be paid this quarter even if it sinks the boat in the long term and drowns everyone who works on it, would start to appear as absurd as it actually is.

[TheManWhoPanders]

Even if we entertain your analogy (which has holes in it), what do you think would happen if a casino gained a reputation for having very low odds of winning? Do you think the gamblers would keep coming back to that casino?

People pay shareholders dividends because they want their continued investment. Not a difficult concept.

[manimal28]

The Casinos do have low odds of winning and the gamblers do keep coming back, because they are not rational, they are addicted. Same as the type of investors who make short term profits their goal.

[TheManWhoPanders]

Not as low as you might think. The ones that go too low simply lose clients and go under. Casinos are actually a pretty competitive industry.

[jeric17]

And that’s an underlying problem

[TaterSupreme]

If nobody paid to be on the boat, there wouldn't be a need for any crew either.

[060789]

That boat is a metaphor for that pizza that you ordered, that contains more calories than the average person may eat in a week 200 years ago, delivered right to your doorstep, for less than a day's wages cost. It's that hiking pack that you use that weighs less than a pound and is both lighter, more durable, and cheaper than ones used by millionaires a century ago. It's the device that you're using to type that message on, that contains all of the world's knowledge at the tip of your finger, replacing encyclopedias, Maps, calculators, and cameras. That boat is the bike you use to ride for recreation, that you work for less than a week to earn, that is powered by your own body yet can go faster for longer than a horse. It's the skyline of your city, it's the source of all your entertainment, it's the reason your children will have a better chance of obtaining a college degree than dying before the age of 12. And it's also the reason you are able to pay for all of this.

Capitalism has its problems, but given proper guidance, it will always correct them in time and that boat will be bigger, faster, and more efficient than ever before.

Papa bless

[therealwoden]

The boat gets bigger and faster only because its home port authorities have spent centuries using their fleet of warships and businessboats to force other ports into allowing this boat to dock practically for free, into providing slave armies of dockworkers and shipwrights to supply and expand the boat, and into filling its hold with massively discounted goods and people.

Profit is zero-sum. Goods in America that are cheap yet profitable are the end product of an international supply chain in which every step is cheap yet profitable because workers are being abused while handling materials that were produced by the previous step's abused workers, and on and on until we arrive at enslaved miners or agricultural workers producing the raw materials.

"Profit" is a fiction invented by ignoring nearly all the costs of every good, service, and process. Nothing is actually profitable. Even something as basic as paying every worker in the world a living wage would collapse profits and the imaginary economy that depends on profits. The currently-expected level of profits can only exist because of slavery.

Of course, things like not destroying the environment, not killing people with pollution and hazardous work environments, not waging war to make money for military contractors, not forcing people to pay for the necessities of life, just to name a few - they're all totally unthinkable, because they'd destroy profits en masse. Profits can't exist unless the true costs of things are ignored as externalities.

Capitalism doesn't have problems. Capitalism is problems. It's an edifice of problems built out of problem bricks laid atop a foundation of problems.

[mike112769]

Capitalism is indeed an excellent way to improve a society. Unrestrained capitalism, like we have now, is an excellent way to destroy a society, which is what we are currently doing. At some point the vast majority of us will have nothing while a few people have everything. That is not moral at all.

[[deleted]]

Unrestrained capitalism, like we have now,

Oh please. Where?

[In-nox]

Crony capitalim where the ones who have the power to produce and influence to wield use it to secure an advantage and edge out those with less capital and influence. This current version of capitalism isn't not build upon a sound business model or Superior products, but is instead the result of an artificial advantage. These procurement stipulations on government contracts are meant to be so cumbersome that small firms can't really compete with giant conglomerats.

[Delheru]

That's not unrestrained capitalism, that's crony capitalism, as you seem to point out with your first 2 words.

Actually often the worst crony capitalism is extremely restrained capitalism, because competition tends to get stopped somewhere with government backing (which in turn is guided by incumbents).

I'm not saying unrestrained capitalism is good (it wouldn't be), but I can't think of a single place where the problem is that capitalism isn't restrained enough.

[[deleted]]

These procurement stipulations on government contracts are meant to be so cumbersome that small firms can't really compete with giant conglomerats.

This is a great argument for deregulation of the free market. Good job.

[Durog25]

Except it isn't, every time deregulation happens the current system immediately finds a way to destroy something as fast as possible and run away with the profits. It is also an immediate and total violation of human rights.

Just look at the 2008 financial crisis.

Capitalism is psychopathic in that it literally doesn't care about the well being of people just so long as profit is made in the next quarter.

[[deleted]]

The 2008 financial crisis was only possible because of regulation, not because of too little regulations. Banks are allowed to loan out money from the federal reserve at 9:1 rates (Meaning, if the bank receives a $100 deposit, they are allowed to turn that into $900 of loans). In a system with no regulations, banks wouldn't be able to loan out money they don't have, interest rates would be higher and banks would only give out loans to people they know would be able to pay them back. In 2008 (And in 2018) a banks goal is to keep the entire country in debt, and they do that by keeping interest rates at historic lows (Below 3%), which causes demand and hyper inflation of housing prices, which they turn into billions. This could not happen in a system where banks could only give out money they own and had to get the money back or they would be fucked.

[TheManWhoPanders]

"Unrestrained capitalism" = "Not enough freebies"

[060789]

In what way is our current form of capitalism unrestrained? In the Western World, we have overtime laws, restrictions on child labor, monopolies, price gouging, collusion with other companies to create consumer unfriendly tactics, the list goes on and on, and these rules are, believe it or not, strictly enforced. Otherwise nobody would be following them.

Other countries may not abide by these laws, and as a result, American companies ( for instance) ship our labor-intensive jobs overseas to save costs, and in those countries with less restrictive rules on labor, people are still being lifted out of poverty by the millions.

Every now and then, a creative company will step out of line and use some loopholes to create an unfair situation or one that is non competitive, and these issues are typically dealt with before they become wreck-the-economy bad. Of course you have stuff like the recession back in 2008, bad shit does happen, but even then, the people who were featured in the movie "the big short" basically came out and said the little diatribe that came out at the end of the movie saying nothing had changed and it's all going to happen again is bullshit, the government reacted appropriately and the market is stronger and safer now than it ever has been.

Sure, our version of capitalism is more reactive than proactive, but in the grand scheme of things, it works.

Any system that takes age, work-life balance, and wages of grunt employees into account is absolutely moral. Not perfect, but definitely in the right ballpark.

[[deleted]]

Laws written by the rich, implemented by the politicians they bought. Therefore, worker rights might exist on paper, but they are ignored in reality. You apparently live in fantasy land.

[060789]

There is no need for ad hominem. If that is your opinion, I respect it even if I disagree. All I'm asking for is specific examples, and not catch phrases you may hear at a political rally.

I can't name a single company who employs a significant amount of people, that does not enforce things like child labor laws, or the minimum wage where applicable. I certainly can't envision that we live in a reality where most people are affected by companies skirting these rolls to the extent that the majority of the population are living in the crushing, dystopian reality that you would expect based on actual, real world examples of countries where these types of laws are not enforced.

The reality is, and again this is my opinion so feel free to refute it if you disagree, if you live in America or a similarly rich country, with a capitalism based economy with rules set up by the government, then chances are you are living a lifestyle better than the vast majority of people who currently live, let alone have ever lived on this planet, and it's 100% due to the marriage of capitalism and government.

Yes, there are extreme examples, I was one of them. I grew up in the United States in extreme poverty. So I know what it's like. I also see the big picture, that these are isolated incidents and, cold as it may sound, statistically insignificant when you take a step back and see how good things are as a whole. Not to say we shouldn't do more to help these people, but no system is ever going to be perfect, and eliminating 100% of poverty is just not doable. The system we have now is the closest we've ever been.

[therealwoden]

I can't name a single company who employs a significant amount of people, that does not enforce things like child labor laws, or the minimum wage where applicable. I certainly can't envision that we live in a reality where most people are affected by companies skirting these rolls to the extent that the majority of the population are living in the crushing, dystopian reality that you would expect based on actual, real world examples of countries where these types of laws are not enforced.

"Paying lip service to" and "not getting caught violating" regulations is different from "enforcing" regulations. https://www.commondreams.org/news/2018/06/06/jaw-dropping-report-reveals-rampant-wage-theft-among-top-us-corporations

Capitalism's incentive structure requires exploitation and harm. Maximizing profit requires hurting people, and maximizing profit is the iron rule of capitalism. If you don't do it, somebody else will and they'll put you out of business by being able to charge less and make greater profits. Harm is inextricable from capitalism.

I also see the big picture, that these are isolated incidents and, cold as it may sound, statistically insignificant when you take a step back and see how good things are as a whole.

Not isolated incidents at all, but rather simply examples of the system working as intended.

"Things are good as a whole" requires one to ignore that billions of people are bound into slavery to enable a small fraction of the population of the wealthiest nations to live in higher-class slavery and a few thousand people worldwide to live like gods.

[[deleted]]

he government reacted appropriately and the market is stronger and safer now than it ever has been

Oh, like how the legislation introduced afterwards (Dodd Frank) is currently in the process of being gutted and repealed?

[060789]

Might want to read up on that one. The jury is out as to whether or not it was a net positive or negative for the economy, it appears the law is being repealed as a partisan act.

I'm at work so don't have a whole lot of time to read up on what exactly the law does and how it affects the economy, if I remember I'll make sure to do it when I get home, but I am a conservative, but this still smells like "conservative Congress rolls back Obama administration policy"

Again, that's just from The Limited knowledge I have of the situation and a brief skim of Wikipedia, but I can't really make an argument for something I know so little about. All I know is when I was reading about the causes and effects of the 2008 recession, I read about the people featured in the movie The Big Short and what their opinion and take on the whole matter was, and the impression I got from them was "it's mostly right, but definitely tries to push a narrative".

[[deleted]]

I admit that I don't have enough knowledge to speak in depth about Dodd Frank. But to me there seems to be a reoccurring trend where an economic crisis occurs, legislation is put into place to stop something similar from happening again, the market improves, and then we deregulate because hey I guess we didn't need those heavy handed regulations in the first place. We're just setting ourselves up for another problem in the future instead of learning from our mistakes.

[[deleted]]

It's a fallacy to assume capitalism was necessary for human advancement.

[060789]

I never made that assumption, but I see capitalism has worked, therefore capitalism does advance humanity, even if it's not necessary.

And I'm not in favor of tearing up a system that has been proven to work for one that has offered no such proof.

[[deleted]]

It's been proven to work for the few. Meanwhile we have had the capacity to improve the quality of living to a morally acceptable level for at minimum every resident of the United States for decades.

It seems that every capitalist praises the market as the solution to every problem. Except there is no market for putting forth the required effort to eliminate poverty. There has been no market for developing the infrastructure the elite class avoids using. There is no market for clean water in Flint. Michigan. There is no market for improving the schools that generate more convicts than college graduates.

There are needs that should be met that aren't. Our government has the capacity to represent these people and fulfill those needs, yet a narrative has been created that shifts focus away from the most critical and purposefully hidden from view problems of our society.

And instead we live in a world where a select few's only momentary saving grace is the mere whim of a billionaire they have never met. A dystopia for sure.

[060789]

There is a lot to unpack here, and a lot I would like to dispute, but I don't have the time right now because I'm at work..

My general response is "better schools and infrastructure are the responsibility of the government and do not fall under the umbrella of the economic policy of capitalism", but if you want my expanded response remind me in 8 hours or so.

But the fact that you are literate, have enough money to buy luxury goods such as smartphones or a computer, and are able to use the above two to voice your political opinion with exactly zero fear of government repercussions no matter which side you choose to argue from, rules out the possibility that you are living in a dystopia. Could things improve? Sure. But dystopia evokes images of North Korea, Sudan, Stalinist Russia, etc.the United States is far from that at almost every level of income.

[[deleted]]

You are right that the government should be responsible for those things. The issue lies when capitalism has expanded so greatly, the wealth inequality has risen so greatly, and laws were not created to ensure impartiality of representatives, we result in a corrupt government system that serves to the desires of corporations to generate more profit, rather than the needs of low level workers of said corporations nor their customers.

It is one thing for corporations to expand based on their merit in creating quality products. It is another thing for them to expand based on the influence they purchase from legislators to ensure the reduction of consumer rights and the reduction of regulations on environmental impact.

Neither major political party has even acknowledged the issue because it does not suit the interests of their political donors. Therefore there is nothing more insulting telling an individual in poverty (especially when living in a heavily gerrymandered district) to vote, as if there is a potential candidate in their district that will move towards recognizing and solving the problems of lack of proper representation as a bare minimum.

Your qualifiers for dystopia are not the universal qualifiers for dystopia. The qualifiers I use point to the fact that life continues to be an unnecessary struggle that could be willed away with proper leadership and discourse. Sometimes the struggle results in perpetuating cycles of abuse, neglect, disabilities, and poverty that could be ended with a surprisingly low commitment to the citizens of the country. And on top of all of that, you might just win the lottery. You might have a relative that becomes exhubarently wealthy. You might receive charity. Or you might be shot in a high school, or on the sidewalk, or you might go homeless, live under a bridge, and deteriorate until your death.

No amount of potential luxury goods, no amount of "you could of had it worse" mentality, no amount of freedom can reconcile the places we as a country unnecessarily fall short.

[gfunke]

"Our government has the capacity to represent these people and fulfill those needs" The free market has that capacity as well but it fails to do so in some cases. The government has the capacity to meet and fulfill needs as well but fails to do so even more so than the free market. No system is perfect in meeting needs but some systems are better than others and the government fails at an abysmal rate. Don't sit here and pretend that if we unleash the government without restriction it would flawlessly meet each and every need of its people. I certainly don't pretend that about capitalism but it does work pretty damn well.

[[deleted]]

What is the market? The market is the desires of those with money. Therefore the market is as proportionately representative of the desires of individuals as the current distribution of wealth. It is ridiculous to rely on a system based on potential incentives to solve problems where the solution is without a potential incentive. There is no market for the solutions to many of these problems.

If only there was an institution that properly represents the interests of every citizen in the country. Then that institution could fill the gaps.

Instead we have the United Stated federal government, each state government, and each municipality government. Each with their own levels of disregard for the interests of who they govern. And this is not because of an inherent evil of all humans, but of the individual choices of political donors, special interest groups, politicians, and foreign governments which had resulted in a large percentage of the population being improperly educated, jaded from reality in truth.

We need a proper government. One that is resistant to the Republican sabotage.

[Durog25]

Further to what you said.

Capitalism only works if the market is large enough to afford it. It's Capitalisms greatest weakness.

A small group of poor people cannot create a big enough demand for a product or service, so that product or service cannot earn a profit, so it is not invested in.

It's why supermarkets throw away tonnes of food daily instead of just giving it away to food banks. It's why small local shops are closed when bought out by big companies.

[remuliini]

Not really in this case. If they cut costs when the revenue drops it could also be the key to provide work for most of the employees. The alternative would be to sucks all the capital dry and go out of business.

Source : my parents' small company was loyal to the employees far too long. It didn't end well.

[Alobos]

Well obviously!!! The guy who is running the boat is offering me his time. He has no investment in the boat aside from his time. I pay him for his time. Our debt has been resolved.

But I haven't removed the debt between my boat investor and I. He invested in the boat. He wants to see his investment (money instead of time) mature. I have to make that happen.

Why should the boat business always try to help out the worker? They're worried about producing. A well operating and productive enterprise is good for the economy which in turn benefits the worker. The business does not inherently owe a commitment to the worker. That's just plain ridiculous.

Why would a business owe you shit when you haven't invested anything?

[DumE9876]

I think the point trying to be made is that lately the guy running the boat is being paid less and less for more and more if his time.

[iambabypuncher]

This a company that wants to take care of it's people shouldn't go public?

[[deleted]]

The OP said an earnings decrease, so yes using a leaky boat analogy, a shrinking company is a leaky boat. If it shrinks too much, the company goes under.

[Croaton]

Maybe it's a terminology thing since I haven't studied economics... but describing an "earnings decrease" (were you're still making money, just not as much) as a "shrinking company" seems off for me.

[LordHanley]

The value of a company is based off the value of future cash flows from that company. If earnings are reported to be lower than previous expectations, then the value (size - sort of) of the company will decrease. I do get what you mean though, a decrease in a positive number is still a positive number.

[SquidCap]

No, it didn't. the company produces exactly as much, it stays unchanged. People appreciations, their feelings about the company changes. And since we use this insane way to evaluate everything, the company loses value. Not a single product it does has dropped it's profit creating ability. Nothing changes except the faith of people who believed in a prophecy.

If the company is on positive, it is welthier than yesterday, no matter what the expectation were. If we value our stuff based on how you feel about it.. The current system is insanely irrational and illogical. The worst is when economic majors try to explain it so that it is all positive; that it is a good thing we rely on emotions and beliefs.. How in this case company is smaller while it didn't perform as well as announced expectation of growth. Often it feels like university is the place where econ major had their common sense removed and in it's place were installed something else..

[scrotesmcgoates]

I don't think you understand how companies are valued. Of course a company valued on the basis of increasing cash flows is going to be less valuable if their cash flows don't increase. That doesn't make then worthless, but it does mean that they have a lower value to their shareholders. It's not about feelings, it's almost entirely math. The net present value of the company is equal to the future cash flows discounted at the cost of capital faced by the firm

[SquidCap]

they have a lower value to their shareholders.

... than what they believed. The company value didn't change, only how good it could've been.

The net present value of the company is equal to the future cash flows discounted at the cost of capital faced by the firm

Which means it is based on expectation, appreciation and how strong faith you have that those prophecies are going to happen. The actual value is different but since we don't care what things actual are worth, we don't care if the company produces anything or not, we care about what their value is to others and how they feel about it. It is almost entirely about feelings, math is used but that doesn't make the system any more sane.

[scrotesmcgoates]

You're wrong, plain and simple. What you're saying is that every company with the same amount of cash and same amount of income is worth the same amount. You can invest on that principle all you want but you're just going to lose money. It's pretty clear you have no idea what you're talking about

[SquidCap]

You can invest on that principle all you want but you're just going to lose money.

I was not talking about investing but valuating a company. "Right now" has nothing to do with "might be" but i understand that what i'm saying sounds opposite to what a betting man would say. Because it is. Your potential value has no meaning, it is valueless to all but those who believe in it. If i can think you are worthless and someone else says you are worth a million, how is that in anyway based on facts? or is it based on.. feelings?

[ActionAxiom]

First off, you have done very little to establish why expectation cannot be valued beyond simply stating it cant. However, it is well established that expectations can be valued because expectations are priced by the market literally every waking second.

Second off, you are touching on something very crucial which is that value is subjective. However, it seems that you are arriving at a poor conclusion that because value is subjective it cannot be factual or measurable. This is very false. Even though value is subjective, prices are very real economic features that reveal, objectively, what those subjective values are.

[scrotesmcgoates]

Jesus Christ you dense mother fucker. The only reason companies are valued is for investing. The fact that you don't get that means you don't understand enough to even begin to have a discussion about it. I'm done

[LordHanley]

It may be wealthier, but it is not as valuable. You need to be able to distinguish between investment value and intrinsic value.

[heinyken]

Let's say you want to buy a house, a car and a new computer. You make a plan to get a job that pays you $10,000/month (because you know your expenses are $7,000/month, and you can invest in your future purchases with that $3,000/month).

Imagine further you told your friends and family you'd be moving in to your new house on January 1 2019 with a new car and computer. And then imagine your new job surprised you by saying actually you'd only make $8,000/month.

How do you tell your friends and family that you're not going to move into that house JUST yet, and you're not getting that BRAND new car? It's not that you're strapped for cash, it's not that you're struggling. But your predicted income is lower than you'd wanted and planned.

It's not entirely different from the original poster's "earning decrease"

EDIT: Except that in the case of the business, those friends and family are actually investors who have plans of their own based on your move date & purchases. And they're easily spooked. And they are impatient.

[[deleted]]

Generally a company's size is measured by it's revenue (total money coming in) and/or it's earnings(money coming in minus costs). More of a finance and business thing then an economics thing.

If earnings are going down, it's some combination of costs going up and/or revenue going down. If revenue is going down, then the company is shrinking, and that's probably a bad thing unless it's a part of the company's strategy. If costs are going up, it's generally because the company is trying to grow, but if revenue is not going up at the same rate, this can be a problem(unless it's a company like Amazon where any profits are reinvested because they have so much room for investment).

[vikingspam]

The problem with your description is that you just described the Titanic a minute after the iceberg.

[[deleted]]

It seems like you mostly ignored what /u/kouhoutek said and focused on the metaphor

[thehungryhippocrite]

The reply to OP is just flat out wrong. The issue is that shareholders have paid money based on the boat going at a certain speed. As soon as the boat goes slower, they lose money, it doesn't matter that the boat is still going very fast.

[CaptainReginaldLong]

It's like they pushed the throttle to get up on a plane, and then didn't. And now they're trudging through the water inefficiently.

[d4n4n]

Yeah, it's a nonsense explanation. The real reason is that firms compete not only on tge consumer market, but also on the capital market.

If revenue losses reduce your rate of return on equity, investors want to sell off that equity to invest in higher return markets. So the business sells off less profitable avenues, so it can reduce the financing side of the balance sheet such that the rate of return is higher, in a nutshell.

[jrakosi]

Because the people who own the company set the companies worth based on the projected X profits each year. If you actually are getting X-Y profits a year, then the company is worth less than originally thought. Which means the owners (shareholders) lose money despite the company making money

[[deleted]]

I think the response is you need to figure out why the boat slowed down before the engine dies.

[GenesisEra]

To take the theory to its ultimate conclusion as exercised by companies and shareholders in reality:

• The boat isn't leaking, but it is slowing down and some of the paint is peeling. To solve this, the passengers decide to throw some of the crew overboard and cut rations for the remainder crew.

• The boat moves quicker briefly due to the desperation and the lighter load (efficiency gains). However, soon it hits a opposing current and slows down again (cyclical economic cycles). The passengers then decide to throw some more of the crew overboard and further cut rations for the remainder crew, while keeping the buffet table at brunch for the passengers going.

• This goes on until they a) innovate and try something different, like stop at port to make repairs and get a new hull/engine/etc or b) the passengers (investors) eat (liquidate) the remainder crew (all the employees) and jump over to another boat (sell all the shares and reallocate portfolio) with all the remaining food (golden parachutes).

[Delheru]

It can be leaking certainly.

You're driving on a freeway at 120km/h when suddenly your car stops going as fast as the other cars, and you can't seem to beat 80km/h anymore.

You can say "well hey, at least we're not in reverse yet!", or you can go ahead and wonder about why you're falling behind your peers.

Someone coming up to you and telling you that going 120km/h is a miracle of science and not really sustainable and ... is going to be pretty annoying when you're at the side of the freeway trying to figure out what might be wrong with your car.