Market

Why Do We Need Unprofitable Industries? How Do They Function?

unprofitable industries why and how

Production unprofitability or “wastefulness” is an indicator of deep contradictions between the character of production and institutional organization in the framework of the economic system. Nowadays, the world is dominated by the so-called market-oriented organization of production. Profit is its purpose. Profit generation takes place in the field of marketing. It is not determined by the nature of production and objectivization of utility produced, but mostly by the characteristics of the money and valuables circulation.

Market pricing has specific properties. Demand (sales volume) is inversely proportionate to price. Seller’s gross income appears to be equal to the product of sales quantity and price. Profit is the difference between gross income and expenses. Last fall into two parts: constant (not dependent on the value produced quantity) and variable (proportionate to the amount produced).

In reality, the dependence of demand on prices has a complex character. Up to a certain point, the demand is not falling as fast as the price increases, but then begins to fall faster than the price rises. Therefore, industry (business) gross profit is at its maximum at this very moment. If one continues to increase the price, income falls as demand falls faster than the price grows. If one decreases the price, than income falls as well as demand grows more slowly compared to price reduction.

This maximum income point is not always higher than the costs amount of this or that industry. There are many industries where the fixed costs (infrastructure) volume is sufficiently high to make optimum achieved at minimum loss, but not the maximum profit (in this case, profit remains out of question at all).

Such are marketing pricing properties. The pricing itself is set by the ratio of the spontaneous, stochastic demand and supply. This framework does not allow to take into account factors other than short-term and individual.

By virtue of the market nature, industries that produce value, which cannot be objectified in personal consumption, but by the scale of society or community, cannot exist in the free market.

Subsidized Industries As Examplified in Europe

If one allows a market economy in Europe, at least for the rail transport, it will collapse because of the fact that the market institutionally underestimates the railway services. The equilibrium price, at which the maximum income of the industry is reached, has to be below cost. That’s why economic regulation needs anti-market, voluntarist, institutional plan component. That means propping the rail transport from the budget of the community or the state, subsidizing for the part of the value created (ridding the city of traffic jams and gas concentration), which cannot be estimated within the free market.

40% of the so-called infrastructure industries in the developed countries function this way. The market is able to evaluate only a part of their total value produced, objectified by utility that is currently understandable for individual consumer. If they are not subsidized, they will collapse. But loss from those industries collapse for society as a whole is greater than the amount of subsidies by an order of magnitude. Therefore, they are subsidized, partially offsetting the part of utility produced for society, which can not be evaluated by private consumers.

Due to this fact, the Western economy is not merely a market, it is institutionally regulated by an average of 60%, and only a minority is functioning under free market. Industries subsidies are only a part of the institutional regulation. If Europe introduced the free market, its economy would not be limited within those 60% to collapsing within a year or two. Since these industries are infrastructural by their nature, their collapse would hit the other industries and levels of wealth. The level of living in Europe would fall to a level that occurred during the dominance of the free market, that is, in the 18th century.

Conclusion

Monopolies and infrastructure industries cannot simply impose their prices because current pricing mechanism is unable to adequately assess their usefulness and scope of what they cost. But their usefulness is appreciated better at the level of the alternative, anti-market (institutional) mechanism of public control. But there can be no monopoly dictatorship, as they have to deal with the most powerful monopolist – government that is ready to provide them with just a living minimum cost only – a subsidy. This subsidy is still not a full appreciation of their usefulness. It does not give them profit, but allows to stay afloat.

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