The changeover from profits to fees

Keith Hudson

The 1780-1980 phase of the industrial revolution (call it Capitalism if you like) started coming to an end with the drying-up of unique consumer goods and the increasing desperation of manufacturers, financial people, advertisers and politicians alike to try and keep consumers spending, spending, spending.

Most economists are desperate, too, because having been completely immersed in the spending ethos all through their training and their subsequent professional lives most of them haven’t the remotest idea of what to do about recessions.  All that they have in their locker are variants of Keynesianism — spiking up demand in one way or another — with little or no idea of how to encourage the prime mover of economic growth — the supply of uniquely new goods or services.

Customers don’t actually need to be encouraged to spend by others because making a profit is always appealing.  People don’t spend anything at all unless (a) it’s a matter of life or death — that is, food or water; or (b) they’re going to get a profit from it — that is, to receive more benefit (pleasure, excitement, relief, status) in exchange for their money.  Otherwise, why spend time or energy on shopping?

The only occasions when individuals spend money or time or energy without making an immediate profit is when they are generous. They hope they will receive a profit in due course, perhaps in a time of personal difficulty, but they can’t be reasonably certain of this unless they confine their altruism to other individuals they have got to know well — to those they have assessed as trustworthy — to those who will remit one day.  This hope is at its maximum in the case of a sexual partnership, a little less in the case of family, a little less in the case of work or leisure groups, a little less within one’s culture, but then tailing off steeply thereafter.

But there are variations of one’s altruism according to the perceived ability of the recipient, and thus the potential payback in due course.  And perceived ability more or less equates to social rank — more often than not, anyway.  Thus within any set of relationships, in a group, or a culture, individuals will tend to help other individuals of higher rank — either of oneself or of other possible individuals who need help.  Females will tend to confer sexual benefits on partners of higher rank in order to maximise security during child bearing and raising. Hence in environmental circumstances where individuals have to live in a  group in order to survive at all (e.g. early man on the African savannah) rank ordering becomes genetically instituted, and deeply so.

The converse of this — where someone of higher ability or social rank is called upon to help someone of lower rank — some immediate compensation is necessary.  In earlier times, deference is required.  In modern practice, fees are required.  Thus, because modern societies are large, extensive gradations in fees take place or, if the service providers are employed by a business, extensive gradations of salaries have to be paid.

Thus, as profits decline due to increasingly intensive global competition in a consumer goods economy — and constrained further with a fixed number of goods for almost all consumers, rich or poor, in an advanced country — the fee structure of personal services will grow.  That is, if we assume that the sophistication of the helpful personal services is also growing.  And, in view of the increasing amount of scientific research which lies behind the two fastest-growing services, education and health, I think we are safe in this assumption.

As we proceed (or more correctly, revert to) from the profit-seeking economy of 1780-1980 to an (essentially altruistic) fees-charging economy, the service providers may be acting individually with many different fee levels, or collectively in a business with many different salaries.  This is to be compared with the typical employment situation during the industrial era when very large numbers of individuals could be earning identical incomes.  Or, when businesses are considered, profit margins are now being successively shaved to lower and lower margins — tending to equality as they approach zero. (They will never reach zero because the social incentive of people working together making things will be powerful enough to keep employment  in physical manufacturing in being — that is, in humans being involved somewhere in the process, no matter how much automation will come about.)

But those businesses which are collectives of personal service providers will also be subject to global competition and their profits, too, will decline towards zero.  Because smaller organisations are essentially more efficient than larger organisations and also because individuals find smaller work groups more congenial, there will thus also be a trend to smaller size, towards partnership, towards freelance providers.  While successful manufacturing firms grow ever larger (in terms of infrastructure and financial assets) service providers, such as investment banks, are now growing smaller as increasing numbers of financial houses (such as private equity, hedge funds, financial boutiques, etc) have been coming on the scene.  Over the longer term, there thus seems to be a progression towards more individual service providers.

However, the big question — the one I asked myself in my posting yesterday — is how is investment going to take place in the new postcapitalist era?  While investment (via the usual method of individual saving) in manufacturing of consumer goods will tend towards a fixed limit in the future — as fewer ultra-large global firms become locked in competition making the same limited number of consumer goods or necessary production tools — necessary investment in personal services will grow substantially because, as specialities become more sophisticated, personal education will take an increasing numbers of years — or at least education efficiency will have to grow — and both of these will require increasing investment.

There are two strands to the necessary investment in a fee-dominated economy.  One is the cost of scientific research.  The cost of individual research projects is highly variable and require careful assessment — more than any individual can make.  Some projects will be highly expensive — more than any individual could ever bear.  So governments will be increasingly required to pay for scientific research, particularly as manufacturing firms are spending less and less on R&D, more or less sponging on ideas for improvements from elsewhere.

The other is that those who are prepared to pay high fees for education and health of children are parents followed to a lesser extent by the wider family and their social group of friends, and for health the individual alone.  Both of these will depend on the fee income or salary income of the (mainly) parents or the individual (or partner) for individual health alone.

As far as parents are concerned and for both education and health, and the decisions as to how much to invest in individual children, this will also depend on the genetic constitution of the child.  The brighter the child the more that parents will want to invest (undoubtedly thinking of their own possible needs in old age).  Accurate intelligence tests can now be set for two year-old children and, as neurophysiological research progresses, they will be applied to younger and younger children, even to a new-born child no doubt in due course.  So these tests will give guidance to parents as to how much to invest in the education of their children.  As to health, the genetic constitution of the child at birth (or even before birth) might reveal a handicap then decisions as to affordable fees will also have to be taken according to the nature of the handicap (if it’s curable, of course).

By way of summing up I think all I need to say is we are already seeing clear signs of diminishing consumer goods growth (in the advanced countries at least) in the GDP and proportionately higher spending on health and education.

4 thoughts on “The changeover from profits to fees

  1. Prevocative proposition, Keith.

    However, while ‘profit’ may be / have been the driver for merchant traders, I’m not sure this was/is the case for entrepreneurs wishing to produce their product or service. It is probably the cas that once an enterprise had been established,it then takes on a life of its own for which the profit becomes the raison d’etre for its continuity.

    The same may alo be true of entrepreneurial service providers, although as they grow they also fall prey to the profit motive, as much as anything to be able to pay the increasingly high ‘fees’ (salaries) demanded by ‘professionl’ staff.

    Such consideration suggest that profit and fees are opposite faces of the same coin. The question then is what drives both individual and collective ‘fee’ / income / wage earners to demand ever higher ‘rewards’ and whether altruism has any relistic place when pitted against both greed and status.


    1. Michael,

      Whatever the motivations of entrepreneurs, subsequent profits are necessary as the only possible source for future investment. Furthermore, the nature of the production of physical goods means that future returns can be more or less accurately calculated.

      Not so with personal services. Not only is the training of personal service providers expensive — sometimes taking many years — we can’t possibly estimate in advance just how valuable an individual’s personal services will turn out to be. Investment can’t be calculated in advance.

  2. Keith, you write “I think all I need to say is we are already seeing clear signs of diminishing consumer goods growth.”

    In my opinion, this thesis of yours is wrong. It is as wrong as the claim that everything has been invented and therefore the patent offices should be closed; and everything has been discovered, so the age of discovery has come to an end; or that evolution will now stop because lots of species are around and we don’t have any need for speciation any more.

    It’s as wrong to say, “I have learned everything that I needed to learn. So it is time that all educational institutions be closed down. No one else needs to learn anyway. End of learning has arrived” as “I have all the consumer goods I need. Many other people also have all they should have. So the factories are going to shut down. Besides, all profits are gone and so no one would have any reason to build factories anyway.”

    I think that this thesis of yours rests on a misunderstanding of what money and profits are. Perhaps you take a Marxian view of value and cost. I believe a rethink would be in order. May I recommend this book by James Buchanan — Cost and Choice: An Inquiry into Economic Theory. (Please click on the link for the full text of the book in the Library of Economics and Liberty.)

    Please pardon my frank opinion on this. I get impatient with basic reasoning errors. I think your obsession with the notion that economic growth will slow down or capitalism will change or no new consumer products will be invented or the whole economic structure of the world depends on new consumer goods, etc, are not reasonable.

    1. Atanu,

      I have never said that scientific development and economic progress will stabilise. There’ll be more new discoveries and products than ever before in future years. All I have said is that what now seems to be the ‘standard kit’ of status goods (house, car, furnishings, entertainments, annual holiday, etc) of the typical urban dweller is now pretty well complete. The only substantial growth will be in personal services.

      I have been developing this argument for many years while writing on the net and, so far, no single suggestion has ever been made to me as to what new mass production consumer item might be in the offing. You charge me with being unreasonable. It would be reasonable of me to ask you to give me any examples of consumer goods that modern customers in advanced countries are calling for.

      As to patents, 95% of them are improvements or alternatives to existing methods or products.

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