“Profit Paradox” and Its Solution

The profit paradox is a phenomenon where some companies are able to generate high profits while others struggle to make a profit. There are a number of reasons for this, including:

  • Different business models: Some business models are simply more profitable than others. For example, subscription-based businesses tend to be more profitable than businesses that sell products outright.
  • Different cost structures: Some businesses have lower cost structures than others. This can be due to a number of factors, such as economies of scale, efficient operations, or lower-cost inputs.
  • Different marketing and sales strategies: Some businesses are better at marketing and selling their products or services than others. This can lead to higher sales and higher profits.

If you are a business that is struggling to make a profit, there are a number of things you can do to improve your profitability. These include:

  • Re-evaluate your business model: If your business model is not profitable, you may need to change it. This could involve switching to a different business model, such as a subscription-based model, or changing the way you deliver your products or services.
  • Reduce your costs: If your cost structure is too high, you need to find ways to reduce it. This could involve negotiating better deals with suppliers, streamlining your operations, or reducing your workforce.
  • Improve your marketing and sales strategies: If you are not good at marketing and selling your products or services, you need to improve your skills in these areas. This could involve hiring a marketing or sales consultant, or taking courses on marketing and sales.

By following these tips, you can improve your profitability and avoid the profit paradox.

In today’s world, income and wealth inequality have increasingly become one of the core issues that people pay attention to. In the years since the publication of Thomas Piketty’s Capital in the 21st Century, there has been a steady stream of books on inequality, some of them insightful. The Profit Paradox by renowned economist Jan Eeckhout is one of them.
Eckhout is a professor at the ICREA Institute of Pompei Fabra University in Spain, a tenured professor at the University of Pennsylvania, and the vice chairman of the European Economic Association. He has taught at University College London, Princeton University and New York University. He has very in-depth research in the fields of labor economics and market power theory. The Profit Paradox is his seminal work for using the theory of market power to explore inequality.
What is the Profit Paradox

In today’s era, with the continuous advancement of science and technology, people’s lives are becoming more and more comfortable, and the number of poor people is also rapidly decreasing. However, with the rapid development of science and technology, the increasing prosperity of the economy, and the gradual growth of enterprises, the income of ordinary workers has stagnated. Jan Eckhout describes roughly this phenomenon with the term profit paradox. Technological progress has been accelerating since the 1980s, dramatically increasing business efficiency and corporate profitability, but at the same time, employee compensation has stagnated or even declined despite growing prosperity. The corporate giants have obtained excess profits, but instead of providing more employment opportunities, they have cut wages and led to a decline in the income of ordinary workers.
For the “profit paradox” that Jan Eckhout expounds in a whole book, readers who are familiar with the literature of labor economics may have a different understanding: isn’t he talking about the phenomenon of “continuous decline in the labor income share”? (Of course, it’s not)? Abroad, since Oliver Blanchard and Edmund Phelps first noticed this phenomenon in the 1990s, it has been a hot research topic; , this issue has also become a persistent hotspot in economics research.
In the 1930s, the great economist Keynes once said that the “remarkable stability” of factor income shares in an economic system is a “miraculous fact”. Later, when Nicholas Kaldor summed up the six typical characteristics of the steady state of economic growth in the 1950s—the so-called six “Kaldor facts”—the income of various factors of production accounted for national income. As one of the “stylized facts”, the distribution share of the developed economies in the West remained stable. Of course, after the end of the Second World War until the 1980s, the initial distribution of the developed economies in the West also basically conformed to this law: the United States The labor income share has fluctuated around two-thirds in 2009, with Western European countries having slightly higher labor income shares than the United States, and none showing a clear upward or downward trend.
But since the 1980s, economists have observed that labor’s share of income has been falling in the United States and across the OECD countries. Taking the United States as an example, the share of labor income has dropped from about two-thirds to about 58%. In this regard, many economists have given different explanations from various angles, and these explanations can generally be attributed to two directions: technological change and market structure. Economists such as Daron Acemoglu consider biased technological change in relation to economic growth, changes in labor’s income share, and income inequality, arguing that capital-enhancing technological change reduces the need for labor to sustain production demand, leading to a decline in the labor share of income. Economists such as Blanchard give explanations mainly from the perspective of market structure and the bargaining power of the labor market: when the market is not perfect, enterprises with market power can obtain excess profits through price markup, these ” The distribution of “excess” profits is related to the institutions of the product and labor markets.
What is unique about Jan Eckhout is that he adopted a comprehensive research approach, not limited to discussing the problem of the decline of the labor income share, but also focused his analysis on large enterprises. On the one hand, he pointed out that the source of the decline in the labor income share is the growing market power of large enterprises (thus the phenomenon of the decline in the labor income share indicates that the degree of market competition is declining). On the other hand, he also emphasized that the rapid expansion of market dominance is just a result of technological changes. Then, on this basis, Jan Eckhout elaborated in detail how, when large enterprises blindly pursue profits, and society lacks an effective mechanism to curb market dominance, it leads to the decline of labor wages, the deterioration of working conditions, Small and medium-sized enterprises have difficulties in survival, innovation and entrepreneurship.
Who does the profit paradox hurt?

The profit paradox embodies a tension. On the one hand, with the increasing profitability of a handful of large corporations (concentrated in the form of their soaring market capitalizations), the economy appears to be very healthy. On the other hand, the wages of most workers have not increased but have fallen (after taking inflation into account), the vitality of the labor market has declined, and the proportion of small businesses and start-ups has also continued to decline. The heart of the profit paradox, therefore, lies in the antagonism between big business and labor and small business, not in the general decline in labor’s share of income. What Jan Eckhout wants to emphasize is that what is good for big business is not necessarily good for the rest of the economy, because these few giants are able to do well in the market because of Technological progress and innovation, more importantly, because they have gained too much dominance in the market (and this market dominance is also a result of technological progress and innovation), actually do not need to face effective competition. The extremely high profitability of large enterprises has brought unprecedented difficulties to ordinary workers and small and medium-sized enterprises. Therefore, under the profit paradox, not only ordinary laborers are harmed, but capital itself is also harmed in a certain sense.

The damage suffered by ordinary workers can be seen at a glance. Jane Eckhout pointed out in the book that since the 1980s, although labor productivity in the United States has increased steadily, wages for most labor forces have stagnated, and the gap between the two has continued to widen . Today, the overall labor income share in the United States has fallen from about two-thirds in 1980 to below 580/0, and the willingness of workers to change jobs has also dropped by one-third. The result is that the average working class, despite their hard work, is inevitably moving down the slide of social class.

Jan Eckhout uses the markup index to measure the market power of large firms. The markup index, simply put, is the ratio of selling price to cost. Large firms with market power have soaring markups and are thus able to grow profits even when sales and output of products decline, so they employ fewer workers, invest less capital, and produce fewer goods . Of course, not all enterprises can obtain higher profits, only those large enterprises with market dominance can achieve this. The increase in the markup index is either because companies have raised prices or because they have cut costs. Firms with market power are better able to reduce costs by driving down wages or laying off some workers.
The market power of big business has also led to an unthinkable result: not only is labor’s share of income falling, but so is capital’s share. In other words, the share that enterprises spend on capital investment has also become lower and lower, that is, the cost of purchasing and using buildings and machinery has also decreased. This means that the investment of the whole society is declining relative to the profits of large enterprises. In the United States today, labor’s share of income is about 59 percent of GDP (gross domestic product), and profits are about 12 percent of GDP; by comparison, in the 1970s, labor’s share of income was about 65%, profit accounted for about 3%. That is, the relative share of productive capital has also declined considerably. This means that capital accumulation has become relatively less, which may affect the long-term development of the entire economy.
Thus, it is not only ordinary workers who are harmed, but also small and medium-sized business owners and entrepreneurs. Jan Eckhout emphasized, “Market dominance has led to no one being able to shake the hegemony of corporate giants, which not only makes life more difficult for the poor, but also makes life harder for the middle class and small and medium-sized enterprises. Capitalist society It is changing from ‘pro-market’ to ‘pro-enterprise’, which makes most families become disadvantaged, and many young people’s careers and lives are worse than those of their parents’ generation.”
As a result, Jan Eckhout warns, today’s society has become increasingly inequalities and classes, as a small number of large corporations use their powerful market power to disrupt competitive markets that should be functioning normally, stifle the economic vitality of society, and exacerbate inequality and class solidification. The economic train of the United States is heading towards another new “Gilded Age”. “Inequality has now returned to pre-World War I levels, discontent is spreading rapidly among the population, and only a series of drastic measures can be taken. Only then can we hope to turn the situation around.”
Resolving the Profit Paradox: Three Races

So, how to solve the problem of the profit paradox and restore the health of the economic system? Jan Eckhout put forward a basic principle: when the market dominance continues to form and develop, so that the degree of competition is severely reduced, it is necessary for the anti-monopoly agency to use regulation and other means to restore the vitality of market competition.
Some people may feel that this is just an overly general principle. In fact, because The Profit Paradox is an entire book about how the profit paradox develops and how it harms economies and people, the solution is already implicit in it. The author sums it up into three races: the race between innovation and scale effect, the race between education and technology, and the race between regulation and market dominance.
The first is the race between innovation and economies of scale. Technology can give large companies a “moat”, especially digital technology. Technologies tend to have increasing returns to scale, which means that after a large initial investment, the cost of scaling up production is very low, making large firms with new technologies prone to natural monopolies. Because if only one company really has the strength to make an initial investment, then there can only be one player on the entire track. In the case of a company that has already invested, the best choice for a company that enters later is to cooperate with a large company that was already in a natural monopoly position. This is one of the most important sources of market power for large firms. This is most evident in platform companies.
However, on the other hand, innovation is also a kind of “creative destruction”, which is the most fundamental market endogenous force to effectively prevent monopoly. If the speed of innovation is fast enough, and if a large number of new disruptive technologies emerge, the large companies that originally had market dominance will obviously suffer a huge impact, and they will not be able to consolidate their industry positions for a long time. This is the first race, which calls for creating better conditions for innovation, mainly a market that is tolerant of “different” and sufficiently competitive.
Next is the race between education and technology. Although big business can drive down the wages of ordinary workers, the law of supply and demand for labor is always in play. From this perspective, with the rapid development of technology, the demand for skills will change. If workers are able to adjust quickly, the rate of economic growth can be increased without unduly increasing inequalities in economic outcomes. Conversely, if the supply of skills required by current technological development grows slowly and the skill mix of the labor force itself cannot adapt flexibly to changes, then economic growth will slow down and inequality will increase. Obviously those who are able to make adjustments quickly, those who acquire new skills, will be rewarded, while others will be left behind. Therefore, the key lies in whether the relative demand for high-skilled labor matches the relative supply growth. This is a race between technology and education.
But there are two difficulties here. First, it is difficult for us to predict what new skills will be needed in the future. From the end of World War II until the 1980s, the “rewards” for increased demand brought about by new technologies were general skills such as numeracy, scientific knowledge, reading skills, and the ability to understand construction drawings, among others. These are skills that people can acquire through ordinary education. But since then, the skills required by technological development have changed, and to a large extent, they can no longer be acquired by ordinary people through general education, and they are also facing the challenge of “outsourcing” skills and replacing them with artificial intelligence. The second difficulty is that large corporations may adapt new technology on their own to ensure that no one else can benefit from it. Addressing the first difficulty requires reforming the education system; addressing the second requires emphasizing interoperability.
Once again, it is a race between regulation and market dominance. This is easy to understand and will not be described in detail.

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