Is there any there there?

I learned the other day that some (a lot?) of the big box retail corporations--Costco/Sams/etc.--don't turn a profit by selling things to people.

This shouldn't be particularly large surprise, they sell goods at prices that undercut all of the competition, and probably aren't that much above the core cost of the goods (if that).

And yet the companies are profitable. How? My understanding is that they take their gross income and invest it in short term things--bonds, stocks, and the like--which generates enough income that the entire operation can turn a profit. In the mean time, to make sure that the trains run on time (ie. that they make payroll, keep the lights on at the retail locations, etc.) they borrow against their non-liquid assets, which are busy earning the profit.

Depending how widespread this is (and I'd be inclined to think that it's pretty rampant) we can explain a couple of phenomena with this understanding. First off, it explains why the market tends to move as a whole. Not because investors panic when they see the number dropping on the trading floor, but because they know that if company B doesn't perform at a certain level company A can't perform either.

That's pretty straightforward.

The more disturbing realization is that the entire basis of our economy isn't about the exchange of money for goods and services, but rather the exchange of money for other money. The hope being that by exchanging money a lot, it will somehow turn into more money. Which given the legal fictions of the banking industry, it does. More or less. Until it doesn't. Enter the present.

In the banking industry--the one that was recently bailed out by the federal government--we know this. Banks make money by charging interest on certain kind of transactions, and while this is kind of creepy and odd when you think about it, it's not surprising. The exchange of material goods, on the other hand is completely absurd and troubling.

The conventional wisdom for the last hundred years, or so, is that big corporations are able to be more successful because of economies of scale and standardization, the largest lesson that I'm taking away from this right now is that while big corporations might be more efficient, they might not--in a concrete sense--be more successful/profitable. Outside of the profits made by ridding the money-holding-financial game.

One of the reasons why I'm interested in open source software is because it proposes and requires a very different sort of "economic" (in the generous sense) perspective. Open source is very business centered, but the exchange of money is all centered around wealth-for-services, rather than wealth-for-money-holding, say. These kinds of alternate (and it's sad that it's the alternate) means of generating and distributing wealth are the inevitable conclusion to the current economic crisis. It's unclear how long the current system will linger and limp, but eventually something better/different will emerge.

This isn't the kind of subject matter that I typically write about on tychoish, and I don't want you to worry that I'm going to turn into some sort of political blog. Except insofar as I've always had a (lower case p) political side focus, I think it's interesting to think through these kinds of issues to try and figure out what's going on. While I think change is afoot, and a more authentic economy is on the horizon, this is a systemic change that will not come easily. [1]

Onward and cautiously Upward!