In a previous post I asked advocates of “economic justice” to respond to a set of questions. These were:
1. How often do you buy something and not think it is worth at least what you paid for it?
2. How do business owners come to “control the means of production?”
3. Who pays the salary for the CEO of corporations?
4. How much money does the average McDonald’s employee make for the company per hour?
5. If the salary of the CEO of McDonald’s were split equally among all employees, how much of a raise would they get per hour?
6. What return on investment do current shareholders of McDonald’s get?
7. How does the salary of the CEO affect the salary of the workers?
So far none have taken up my challenge. Note that this is a critical issue for debate since economic justice is a buzz word you’ll be hearing a lot about in the coming election cycle. The idea is that the poor and middle class are being taken advantage of by the wealthy and that the government needs to step in, take some of the wealth from the wealthy, and distribute it more fairly. Remember all of the “1%” talk from last year.
I want to have an open and frank discussion of the merits of their arguments from a simple logical perspective. Thus the reason for my questions. Since none have chosen to defend the economic justice side, let me provide what I see as the answer to the first question: How often do you buy something and not think it is worth at least what you paid for it?
There are times when you feel ripped off when making a purchase. An example is the $7.00 bucket of popcorn at the movie theater. In that case, however, the theater owner has set up a monopoly where, if you want to have popcorn, you’ll need to buy it from him. I’ve also noticed that some theaters have taken out the drinking fountains so you’ll need to spring for a $4.00 soda or $3.000 bottle of water if you don’t want to drink from the bathroom sink after eating all of that popcorn. A monopoly causes prices to be set at the level at which consumers will pay if it is a choice between having something and not. A bottle of water in the desert that would save your life might go for $1,000 or $1,000,000 if there is one supplier.
In most cases, however, there is no monopoly and different vendors are competing for your business. In that case the prices are set at the minimum level the suppliers of the item are willing to receive, i.e., at the price where they can cover their costs and still make enough money for it to be worth the trouble. Food is a critical item, and yet the profit margin on food in grocery stores is about 2% because there is so much competition. Competition also drives the cost of items down over time as suppliers find ways to cut costs. Look at where the price of computers and pizza have gone over the last ten years!
So personally, I would say that most of the time I feel what I pay for an item is fair. In some cases I can’t believe I am able to get an item as cheaply as I get it. Case in point, there is a Chinese buffet near me that charges $12.00 for a dinner that includes all the crab legs you can eat. I don’t know how they do it.
So how do these business owners get so wealthy if they aren’t ripping people off? The answer is they serve a lot of people. A grocery store may only make $3.00 on your hundred-dollar grocery bill, which does not seem to be worth all of the trouble of renting the building, stocking the shelves, and advertising and cleaning the place. But they serve millions of people each year, so they make millions of dollars. They also provide hundreds of thousands of jobs in doing so, including both those who work at the stores and in the corporate offices and those who provide the products for the stores.
So, strike one for the economic justice crowd. Maybe the huge inequity they site will lie in one of the other questions.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.