Profit and Value

Though I am trained as an economist, I have begun having some doubts lately a certain principle: that profit is a function of value.  For a long time, I have thought the two usually go together, except for the occassional con-artist who separates people from their money.  Standard economics says that when entrepreneurs create value, they will be rewarded by profit in our system.

Yet after thinking about the subject more, I believe it is likely that the two don't go together, and if they do interesect, it's by coincidence.  Let me give a few examples. 

The easiest domain to start is work.  Here in Las Vegas I have run into a number of people who are really producing nothing of value, yet are doing well financially.  This may be because customers perceive the product to have value, or they are getting work due to favoritism, or they are in an organization where they can do nothing but still receive a paycheck.

On the other end of the spectrum, you have dedicated teachers making very little money.  There's probably also an army of coaches who work with young people yet receive a paltry income for it.  There are plently of other examples of people doing valuable work but receiving low pay.

On the false value front, real estate is a prime example of an arena where a person can make money but literally produce nothing of value.  During 2004-2005, real estate investors were making a killing in Las Vegas because housing prices increased by 50%.  In many cases, people bought a property then flipped it a few months later for a profit.  But nothing about the property had changed: the house was the same as when it was originally bought.  No value was created.

As far as products sold, I also am seeing less and less of a tie between profit and value.  Look at all these bogus weight loss and exercise products out there.  Are they creating any value?  No.  But many of them are certainly profitable.  A big factor driving purchase decisions is the perception of value or the expectation that the product will be valuable.  But in the end, many goods fail to live up to this.  However, they are profitable and continue to be for years.

I thought about this when I was in the bookstore the other day.  All these books are fighting for readers' attention, claiming they are valuable.  But how many truly are?  Probably very few, but the rest all sell on the false hope that they will be of value to the person purchasing them.