Hacker News

4 years ago by A_non_e-moose

Reminds me of the more adult 100$ debt riddle. Found it at econlib.org by David Henderson, but I've heard multiple variations before, so I have no idea where the original comes from.

"It’s a slow day in some little town…….. The sun is hot….the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich tourist from back west is driving thru town. He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night. As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill at the feed store. The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit. She, in a flash rushes to the motel and pays off her room bill with the motel owner. The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves. NOW,… no one produced anything…and no one earned anything…however the whole town is out of debt and is looking to the future with much optimism."

4 years ago by bartkappenburg

Hence the existence of a clearing house in the stockmarket: cross off debt and credit in the whole market. Every one in your story has 100 credit and 100 debt which makes them worth 0. Aligning that in the right way makes a lot of sense :-)

4 years ago by cgb223

This is a brilliant explanation of what a clearinghouse does

First time I’ve understood it intuitively

4 years ago by zanybear

Interestingly, the scenario does not include transaction costs. In the general sense that is money that stays in the cycle (economy) ?

4 years ago by MR4D

To recast this in accounting terms, everyone had $100 in accounts receivable and also had $100 in accounts payable.

To anybody who has ever had accounting (and nightmares of t-accounts), this balances to zero.

4 years ago by jameshart

But everybody also knew everyone else was broke, so they had mentally discounted the future value of their accounts receivable (though obviously not to the point of actually writing it off yet). So their subjective sense of their future worth was negative, until the stranger showed up and injected liquidity into the market.

4 years ago by brianpan

Shouldn't their future worth still be zero? Everyone has $100 owed to them (which is never coming) and $100 that they owe (which they aren't paying).

4 years ago by bo1024

Sure, but it's not stable or dependable. If one person goes bankrupt or dies or moves away, then everybody would go bankrupt one after the other. Compare to a scenario where everyone actually is at zero.

4 years ago by Red_Leaves_Flyy

This is how banks, and by extension - entire economies, implode when an over leveraged something fails, taking down all the other over leveraged players dependent on their success in a series of dominoes.

4 years ago by Rebelgecko

I saw an old PSA, maybe from the 50s or 60s, that had a similar situation (sans prostitute). The twist is, it's a paprr check instead of cash and the guy who wrote the check is broke. There's this whole chain of endorsements as the check is passed around town before it gets back to the guy who wrote it, saving him from the shame of a bounced check.

4 years ago by 867-5309

but a cheque has a giver and a receiver, the receiver cannot then give the check to someone else as payment since the giver and receiver printed on the cheque are different

4 years ago by thefringthing

Yes they can. By simply writing "Pay to the order of: X" in the endorsement area, the original recipient can create what's called a "third-party cheque". A bank would probably not accept this today, but it was certainly done in the past.

4 years ago by long11l

That almost sounds like it's endorsing check fraud

4 years ago by babaganoosh89

Makes sense, all the people in town had $100 in debt and $100 in outstanding invoices.

4 years ago by btilly

The one figure that this didn't quibble with is also wrong.

Net profit definitely adds to shareholder value. But suppose that I make $30 billion, reinvest $20 billion, and create something that is worth $90 billion. My net profit is now $10 billion. But I actually added $100 billion in shareholder value!

Jeff Bezos knows this, and knows this well. For many years Amazon ran at a net profit around $0 because it was reinvesting all of its profits in new businesses. So it was adding shareholder value like crazy! (And people who didn't understand this were walking around saying, "Why is Amazon worth so much? They don't even make a profit!")

Of course doing this calculation correctly includes estimating the present value of the thing I created. And that is notoriously hard. So the proxy used in the real world is market cap. However market cap is volatile and subject to change based on the emotions of speculators. Certainly Amazon's actions last year are not the whole story for why they added $600 billion in market cap!

So while net profit is the wrong measure, there is no measure that can be used which really is right for "added to shareholder value".

4 years ago by hinkley

The CEO class is still mostly old enough to remember corporate raiders, and of course we have the modern equivalent where groups buy companies, saddle them with debt, and exfiltrate the money long before the company goes bankrupt.

Having enough liquid assets to prevent a hostile takeover is not the most profitable thing short-term but it does protect you. Amazon is so big it doesn't have that problem. It's simply too big for anyone to get their teeth around.

I think this is another case of "you are not a FAANG, if you act like one it won't turn out the same for you."

4 years ago by adventured

The ownership position that Bezos had through most of its history was enough to make a hostile acquisition nearly impossible. That's how they survived the bad years post dotcom bubble without being acquired for relatively cheap. It's very hard to pull off a successful hostile takeover if you have prominent insiders with ~25-35% of the company and they don't want to sell. Certainly after they began reporting AWS results and the stock skyrocketed that was the end of any serious hostile acquisition risk (in the few years prior to the AWS numbers they were a $100-$175 billion market cap company, which eg Walmart could have afforded had regulators allowed it and insiders not made it nearly impossible).

4 years ago by jdmoreira

It was also compounding the money that would otherwise have to be paid in taxes if it were not reinvested. He is an excellent CEO!

4 years ago by B1FF_PSUVM

Well, there's number of users and ARPU, or equivalently how much money flowed through ...

I understand telecoms and others get warm fuzzies from that.

4 years ago by HWR_14

The people questioning why Amazon was worth so much, at least the ones I knew about, questioned the value of what Amazon was investing in and whether Amazon would be able to extract monopoly profits from eCommerce. Obviously, Amazon had some missteps (the Fire Phone was a huge sink of money), but their investments seem to have done well overall.

4 years ago by jdmoreira

I think this is a very smart piece. It exposes very clearly that money is not value.

You can bundle existing value from one side, add maybe an extra bit here and there and collect money for the process. But how much money you collected in the end has very little relation to how much value you added to the system. Especially since some of the shareholders did absolutely no value creation.

Jeff Benzos is a very smart person and an excellent CEO. He used to work for the Renaissance Fund as well. I really wish I could hear his honest opinion on this piece. He will most likely never read it but I hope he would and I hope he took the time to reply with honesty and no ego.

4 years ago by igorzx31

Jeff Bezos worked at D.E. Shaw not Renaissance Technologies. Different funds.

4 years ago by jdmoreira

Thanks! I must have mixed it up in my mind. Wetware Memory sucks.

4 years ago by MR4D

> that money is not value.

Very much so!

Money is a tool used for accounting, while value is a system for perception. They interact, but as you say, are not the same.

4 years ago by dools

I wish someone would change the dictionary definition of money to “record of value” rather than “store of value”. It would clear up a lot of economic misconception.

4 years ago by Kranar

I thought it was poorly written and fails to understand some simple financial terms. When people say value is created for shareholders, they don't mean shareholders created that value; they mean that the value of the thing owned by shareholders has increased.

I own shares of a company (I am therefore a shareholder), if the value of that company increases then the value I own as a shareholder increases, hence value was created for me as the shareholder. This is such a basic principle that the author failing to understand this is kind of embarrassing.

There are other basic things the article gets wrong, like saying that bartering doesn't create value which is patently false. Bartering does in and of itself create value by allocating resources to those who wish to consume it. When Alice trades an apple with Bob for a potato, it's usually done because Alice has a need for a potato and doesn't have a need for the apple, and vice versa for Bob, hence the allocation of apples and potatoes goes to where it's most desired. This increases the efficiency of resource allocation which in and of itself creates value. Furthermore the bartering in and of itself causes an incentive to produce more apples and potatoes.

Honestly this is really basic stuff and not worth writing an entire article bickering over semantics.

4 years ago by LeifCarrotson

This is a philosophical piece, the fact that it's really basic stuff is exactly why an entire blog post (better yet, a journal article or book) should be written to bicker over those semantics. Those financial terms are loaded with meaning and the author believes that meaning to be invalid; the semantics are the entire point.

What does it mean to 'create value'? As a passive shareholder who does nothing but own shares that increase in value, have you actually created anything? How can you have created value without creating anything? If Alice values potatoes at 1.01 apples and Bob values apples at 1.01 potatoes, and they trade, maybe they've created 0.01 apples worth of value but they certainly have not created two, they started with two and ended with approximately two. If they change their mind and trade back, they've not created 0.02 apples worth of value, they've revealed that the whole thing was a waste of time. If the value of your time is $14.95 an hour, and you get an Amazon job making $15 an hour, Amazon's addition to the economy is $0.05 per hour not $15.

No, it's the farmer who starts with dirt, water, sunshine and diesel and grows the apples and potatoes who is creating value. "Efficiency of resource allocation" are a lot of big words that do little more than justify the speaker diverting a little of the revenue stream to themselves.

Money is only very loosely connected to value creation, because there are two separate factors that tie them together: The amount of value your work adds to society, and your ability to extract money from society.

The whole point is that no human, not even Jeff Bezos, can generate 200 billion dollars worth of value by working. Not by carrying a lot of boxes really fast, nor by thinking really hard, nor by working long hours; not even if he pushes even more boxes while thinking really bright ideas while saving time by peeing in a bottle instead of going to the bathroom, he's simply not that many orders of magnitude smarter or stronger or more dedicated than other humans. And yet his net worth is close enough to $200B that it makes sense to round up about $1.7 billion dollars worth of value, while other people are carrying boxes for $15 an hour and are orders of magnitude away from rounding up to a net worth of $0.1 billion dollars.

The disparity between value generated and money extracted is the core injustice that the open letter glosses over with casual semantics and that the article seeks to understand and expose by being unconventionally precise.

4 years ago by skybrian

It’s a bit easier to see the value of trade when there is some schlepping involved. Buying fish off the boat and selling it in the grocery store provides a useful service for the people shopping at the grocery store, since they don’t have to go to the docks. Reversing that would be nonsensical and destroy value; nobody needs more fish at the dock.

Just because it’s the same commodity doesn’t mean it’s worth the same amount at every time and place. Transportation and storage are technologies that add value by taking surpluses and moving them where they are needed more. This is still true when the cost of transport is very cheap.

Amazon is clearly doing something very useful with its warehouses and delivery. This is all about getting stuff to people whenever they want it.

How much this is really worth is unclear. You can’t take prices at face value. A monopoly could charge higher prices than other companies would charge for the same service in a competitive industry, and the difference is how much of the value goes to the company versus the buyer. But doing calculations using prices is often the best we can do.

4 years ago by simonh

>they've not created 0.02 apples worth of value, they've revealed that the whole thing was a waste of time

If you select an example with almost identically substitutable goods, no wonder you miss the point. Lets use oranges and sausages in the example instead. Now we're trading meat for fruit. What's the value to you of not dying of scurvy or protein deficiency?

Identifying imbalances in supply and demand, and working out how to resolve them creates huge value, otherwise all trade would be pointless.

That's where investors and business owners come in. They identify an imbalance in supply and demand between the labour of employees and the needs of customers. Sure the employees could do that themselves, and that's fine. It's not as if it's illegal, good luck to them. Power to the people. But the point is somebody has to do it and it absolutely creates value.

4 years ago by Aunche

The money made by holding Amazon is value created, not value extracted. In 2000, Bezos, early employees, and investors could have decided to cash out by issuing dividends or buying back their own shares with Amazon's profits. Instead, they chose to reinvest that profit into Amazon in the form of new fulfillment centers and new workers. This gave Bezos even more potential profit, but again he chose to reinvest it in the company. This compounded for two decades, so now Amazon is a trillion dollar company. Without someone holding the stock, Amazon would not have grown to the extent that it had. Even if Bezos sold his shares to someone else, that other person needs to decide to reinvest Amazon's potential profits back in the business.

4 years ago by makomk

Do you know how much those potatoes are worth to the farmer who starts with dirt, water, sunshine and diesel and grows them if the supply chains and infrastructure aren't there to get them to consumers? Zero. We saw this with the pandemic when the normal supply chains were disrupted and farmers literally ended up plowing their potatoes back into the fields because there was suddenly no way to sell them all. In fact, technically it's negative - the fuel and time to dispose of them costs something. (Of course, all the left-wing activists blamed some capitalist conspiracy for this, as though the potatoes would magically fly from field to plate if we did away with capitalism.) The core of the modern economy is specialization - instead of everyone growing their own food, a much smaller number of people grow food for everyone, freeing up a bunch of time for other things beyond just basic sustenance - and the actual multipliers involved are pretty huge.

4 years ago by jakubp

You are wrong about apples and potatoes - the blog post author does mention your story just under different term: utility, which is a standard way to express the notion you touched: the total utility of an apple and a potato in the right hands is higher than utility of them in the wrong hands. So barter increases utility, but economy as a whole isn't any more valuable because of it (externally it'll trade the same). It's also echoed in OP's point about utility of money (and a question whether Amazon actually increases or decreases total utility in the economy).

Bezos claims he created 310 B of value and you say "as shareholder I care about value of the company", but you and other shareholders who own (together) 100% of Amazon didn't get 310 B of value, did you?

That's the thing. Neither did the economy "gain" all this value. If I work for 10 hours and earn a 1000 uSD, my employer didn't create 1000 USD worth of value. We traded my time/effort/exhaustion for money. Maybe there was some actual value created through that work for us or economy/society, or maybe it was meaningless work (and we even stole value from the society by e.g. burning me out).

4 years ago by dodobirdlord

> So barter increases utility, but economy as a whole isn't any more valuable because of it

Many things factor into the value of a good, including where it is and who owns it. If the bartering involves the apple and the potato trading places it’s easy to see how value is created, as the value of a good depends on its location and transporting it to a location where it is more highly valued creates value. (Otherwise transportation as an industry could never create value, in which case, why would anyone ever transport anything?)

It’s more rare that ownership will factor into value, but it comes up sometimes. An example is when the whole of something is worth more than the sum of the parts, like buying the last missing piece of a city block so that you can put a full-block development on it.

4 years ago by MattRix

Maybe you need to read the article again, because in this comment you are conflating different kinds of “value” as if they are all equally meaningful.

4 years ago by burkaman

> When people say value is created for shareholders

From the Bezos letter:

"Summarizing:

Shareholders $21B

Employees $91B

3P Sellers $25B

Customers $164B

Total $301B"

This article is criticizing "employee value" and "customer value", not shareholder value.

4 years ago by bombcar

If you care more about the dollar than Amazon:

https://www.mathsisfun.com/puzzles/where-did-the-dollar-go--...

>When the Waiter returns 3 dollars, the 3 friends had paid $25 to the Cashier and $2 to the Waiter. $25+$2 = $27 = 3 x $9.

4 years ago by bentcorner

Rewriting the question as if the room was supposed to be free also makes the bad math clear:

> Three tourists stop at a hotel, and the manager tells them that a shared room will cost $30. Finding the price agreeable, they pony up $10 each and retire to the room. Later that afternoon, the manager, who is honest, realizes that the room was meant to be priced at $0. The manager orders the bellhop to return the excess $30 to their guests. The bellhop, who is not honest, takes $30 from the register and return only $1 to each tourist, pocketing the remaining $27.

> Now, each of the three tourists has spent $9, for a total of $27. The bellhop has retained $27, which brings the total to $54. Where did the other dollar go?

4 years ago by neogodless

When you word it that way, I get a bit angry when I read "which brings the total to."

4 years ago by mister_tee

Yes, that phrase is definitely doing some work here :). The followup might be "the total of what?" +1 to sibling post on proper bookkeeping but we can also sum inflow/outflow for each of the entities. There isn't a node where it makes sense to add +$27 and +$2.

The customers collectively are at -10*3 + 1*3 = -$27. The hotel is at 10*3 - 5 = $25 The bellhop is at 5 - 1*3 = $2

And those sum to zero for the system; no money was created or destroyed.

Or, thinking in terms of physical bills, the bellhop's two dollars are a subset of the 27 the customers paid out and adding them is double-counting. The real math behind the problem is just 27 = 25 + 2.

4 years ago by StevenWaterman

It clicked for me when I allowed negative balances

  Customers: 0 -30 -30 -27
  Hotel    : 0  30  25  25
  Bellhop  : 0   0   5   2
  Total    : 0   0   0   0

4 years ago by Joker_vD

"The bellhop, who is very nice, takes $5 from the register and return $2 to each tourist, paying $1 from his pocket— the guests don’t have to fuss over uneven change that way.

Now, each of the three tourists has spent $8, for a total of $24. The bellhop has spent $1, which brings the total to $25. Where did the other 5 dollars go?"

"The bellhop, who is very much not honest, takes $10 from the register and return only $1 to each tourist, pocketing the remaining $7— the guests don’t have to fuss over uneven change that way.

Now, each of the three tourists has spent $9, for a total of $27. The bellhop has retained $7, which brings the total to $34. Where did those other 4 dollars come from?"

4 years ago by rthomas6

As an aside, this shows the value and reason behind double entry bookkeeping. More setup in the beginning, but ultimately much less confusing.

4 years ago by undefined

[deleted]

4 years ago by massung

This was my first time seeing said puzzle, and when I got to the end I instantly was thinking? WTF you need to subtract $2 to get to the price of the room, not add to try and get to some imaginary amount of money spent.

The room is $25. Everyone paid $25 for the room + a $2 "tip" to the bellhop.

That said, I'm going to have fun emailing it to my parents. ;)

4 years ago by munificent

The puzzle is a lot simpler once you merge the 3 tourists into a single unit since there is no reason to treat them separately. Then it's:

1. A three-headed tourist gives $30 to the hotel.

2. The bellhop takes $5 from the hotel.

3. The bellhop gives $3 to the tourist.

Now it's clear that the tourists are down $27, the hotel is up $25, and the bellhop is up $2.

4 years ago by chmod600

"In a typical transaction, no value is created. If I give you an apple and you give me an orange, the total amount of fruit in the economy remains constant. We can’t create fruit by bartering with it. We can only do so by foraging or cultivating an orchard."

That seems wrong. If I trade, that means I value whatever I get more than what I gave up; and likewise for the counterparty. Isn't that a net positive even though nothing was physically created?

4 years ago by aidenn0

Shortly after that he does acknowledge that collective labor may be more valuable than individual labor.

However we can all agree that Amazon doesn't create $91B of value when it buys something for $91B in cash. The entire supply chain behind creating the thing Amazon buys, plus the raw inputs, creates something of value that Amazon then consumes.

You could maybe argue that in a market without Amazon, the workers may have been paid only, say, $85B, so Amazon has transferred $6B from consumers to workers. Even then, the value of transferring $6B from consumers to workers is unlikely to be $6B.

If I tighten the last bolt on a car that is worth $20k, I have not created anywhere near $20k in value.

4 years ago by chmod600

I agree that the overall value that amazon is claiming is dubious at best. It's conflating consumer/producer surplus with net profits and conflating both of those with wages.

But the whole point of the article is to debunk these distortions and add clarity. Adding its own confusion and distortions is not a good way to start.

4 years ago by grecy

The best explanation I've heard:

If I pay you $10,000 to eat a pile of horse manure, then you pay me $10,000 to eat a pile of horse manure we have:

Created $20,000 of "value" for the economy and increased GDP $20,000. That's all great for PR!

In reality we both just have s--t eating grins.

4 years ago by chmod600

While funny, that doesn't really apply here. We're exchanging an apple for an orange. That is a very reasonable barter transaction and I see no reason that it doesn't create value.

In fact, the value is likely to be undercounted by GDP. People are taxed on income, so casual transactions like the orange-for-apple trade are likely to be left out of GDP simply because they are unreported.

Your example is the opposite: over-counting GDP and the participants paying thousands of dollars in taxes.

4 years ago by khazhoux

This actually creates 1BTC.

4 years ago by skybrian

So okay, fraudulent transactions exist. That doesn’t tell you whether a particular transaction is fraudulent.

The shipping industry is useful and using it to ship bricks for some fraudulent scheme doesn’t change that. The value of a physical action isn’t inherent in the action itself, but rather depends on what purpose it serves.

4 years ago by robocat

And unless you both pay your tax on your $10,000 income, you are defrauding the IRS (assuming you are in the US).

4 years ago by Pfhreak

There are colloquial usages of 'value' that make this conversation more complicated. We might describe the value as the utility or desirability of the object -- use value -- where I value food because I can eat it.

Or the exchange value, ie, how many apples is this iron worth.

Or the labor value, ie, how much labor went into producing this item.

Or the price, ie, how much is this item worth in money.

It seems that in reading this sentence, the author is talking about the labor value of the fruits. The various parties may have different ideas about exchange values, prices, and use values, but the labor value doesn't change because the items have exchanged owners.

4 years ago by chmod600

Doesn't it take labor to facilitate the matchmaking, transportation, and transaction costs associated with barter?

4 years ago by Kalium

It makes sense if you believe value to be an objective thing, where each good has a fixed value that is a fact.

In a slightly more complicated model - or the real world - the value of a good or service is informed by things like control and location. Value is not objective, but subjective. Value can be and often is created by moving good from a location where they are values little to a location where they are valued highly.

4 years ago by chmod600

"It makes sense if you believe value to be an objective thing"

Does any serious economic philosophy actually believe that foolishness?

4 years ago by Kalium

In feudal times, merchants were often derided for supposedly charging a price different from the "true price" of products.

So perhaps not in any serious modern economic philosophy, but people definitely arrive at this idea in naive ways.

4 years ago by seiferteric

> Every single dollar of compensation paid out is done transactionally: it is used to purchase labor.

This is my gripe whenever I hear about my employer "covering" part of my health insurance or other benefit etc... No, I pay for EVERYTHING with my labor.

4 years ago by Pfhreak

Including the profit your employer retains -- employers necessarily pay you less than the value of your labor.

4 years ago by robocat

> employers necessarily pay you less than the value of your labor.

Untrue. Employers aim for that but they often fail.

The Credit Suisse employees that lost $5 billion due to Archegos were overpaid.

Alternatively if I am the only person that can do a particular necessary job for a business, I should be able to reap the majority of the profits due to my monopoly.

Finally, for some professional jobs productivity is hard to measure, yet you may employ many people because in aggregate they make a profit. At an individual level, the profit margin can vary from negative to positive.

4 years ago by cmeacham98

> Untrue. Employers aim for that but they often fail.

> The Credit Suisse employees that lost $5 billion due to Archegos were overpaid.

Edge cases. Most people work for businesses that make a profit, and those businesses' profit comes from the difference between the value its employees create and the salary it pays to them (at least in aggregate).

> Finally, for some professional jobs productivity is hard to measure, yet you may employ many people because in aggregate they make a profit. At an individual level, the profit margin can vary from negative to positive.

You're confusing what is meant by the "value of your labor". Of course what GP meant is "the value of your labor as seen by your employer". If everyone could create the same value they create in an organized business while working solo then nobody would work a job as it would just be losing money.

4 years ago by dragonwriter

> employers necessarily pay you less than the value of your labor.

That’s not true “necessarily” unless you assume all employers are sustainable, in idealized competitive markets, and that all of their inputs are also purchased in idealized competitive markets such that they don’t have monopsony savings they can spend on surplus wages without impacting sustainability.

Obviously, even with idealized market assumptions, one reason an firms fail is paying more total for inputs than the value they produce, and lots of firms fail.

4 years ago by Pfhreak

Ok, that's fair, I was painting with a broad brush. I acknowledge that yes, employers can pay employees more than the value they bring in, but it's likely that doing so isn't sustainable long term.

And I dodged entirely around worker coops and other arrangements where the excess value is distributed back to employees.

4 years ago by rafd

This only follows under the assumption that a company only derives value from the labour of its employees, ie. “there is only labour”.

But there are many other kinds of assets - cash, brand, real estate, natural renewable resources etc.

One could have a zero labour company that is profitable.

4 years ago by seiferteric

That part is fine and understood when you take a job with a for profit company. I just don't like it when employers think that are doing you some sort of favor.

4 years ago by iudqnolq

I found this a very good point. You can almost make a point that Amazon should get credit for the entire value created by every business on AWS, even if it's almost certainly technically wrong. If you then add on the money they paid you, it becomes absurd. They paid you the value (to them) of the thing they bought.

> The point is, when you purchase a service from Amazon, the future value created by your usage of the service belongs to you, not to Amazon. Even if it seems like Amazon should get some credit, there’s no reasonable way to measure such things, no scheme for attributing “value creation” fairly between the producers of every good and service you may have consumed on your way to running a business. Anyway, Amazon has already been credited for providing those services since they made money off the deal. Every business relying on Amazon contributes to that $21 billion in profit Amazon made.

4 years ago by ikeboy

>The most egregious misrepresentation of value creation in the letter is the $91 billion figure that Amazon has paid out in compensation to employees. This is patently ridiculous. Every single dollar of compensation paid out is done transactionally: it is used to purchase labor. In a typical transaction, no value is created.

This is just wrong. The employer gets value because they make more (in expectation) from the worker than they pay; the worker gets value because they get paid more than the the minimum they'd be willing to work for. There's surplus on both sides in most transactions.

The article makes some correct points. But it's frustrating to see it combining those with nonsense.

4 years ago by intergalplan

How's it nonsense? If I buy $499 dollars at face-value and sell them for $500 there's no possible justification for the claim that I created $500 of value. Perhaps I created $1.

Paying for labor is absolutely as transactional as paying for other inputs to your business. Because you (hopefully) create marginal value on top of that comp doesn't mean the total comp is your value creation.

You can't just add total employee comp to your "value created" pile. There's maybe some marginal value creation you could kind-of claim in that your presence increased employee comp over some hypothetical world where you didn't exist—but that's getting well into bullshit territory, since there's no way to know some competitor you crushed wouldn't have ended up creating more total value and paying their employees even more. It's pure fantasy.

4 years ago by ikeboy

To be clear, I object to this sentence as nonsensical:

>In a typical transaction, no value is created.

As I explained, in typical transactions value is created for both parties.

4 years ago by antisthenes

> As I explained, in typical transactions value is created for both parties.

The value created in a transaction is orthogonal to the total sum of money exchanged in the transaction. That was the meaning of the criticism.

You are correct though in that the author worded it very unfortunately, which undermined the critique.

4 years ago by kfarr

I was also surprised by this assumption and the lack of discussion or validation: "in a typical transaction, no value is created"

From my econ 101 high school days I remember a super simple example of 2 islands, 1 with only oranges and 1 with only pineapples. Simply by trading 1 orange for 1 pineapple (and vice versa) value is created since both parties get to experience different resources which offer them economic utility.

4 years ago by fighterpilot

Trade almost always creates value for both consenting stakeholders. It should be the default assumption and anyone arguing the opposite is talking nonsense.

In rare edge cases it can be argued that trade doesn't create value for consenting stakeholders:

(1) Information asymmetries that don't rise to the level of fraud, which cause one counterparty to make an uninformed decision.

(2) Trades that appeal to the dopamine system but otherwise work against the individual, e.g. with social-media doomscrolling, gambling, drugs, fast food. In this case the individual has diminished agency to make the best decision for themselves in all cases.

Anything else? [I'm ignoring externalities here]

4 years ago by InitialLastName

I don't think TFA would dispute that transactions create value. The argument being disputed is that the value created by a transaction is meaningfully measured by the value transacted.

To use the pineapples and oranges island metaphor, imagine that on island A (which has lots of oranges but no pineapples) pineapples are valued at $1.1 and oranges are valued at $1, and v.v for island b, where oranges are $1.1 and pineapples are $1.

If you and I trade an orange on island A for a pineapple on island B, we both went from having $1 in fruit to having $1.1 in fruit on our islands. The value created by that transaction isn't $1, $1.1 (or $2.1 as Amazon appears to be double-counting some of the value between revenue, profit and wages), it's $0.2, which is the value we added to the fruit by moving it between islands.

4 years ago by kixiQu

There is a directly following paragraph about how this exchange is not exactly zero-sum, but so far from being representable by the dollar value changing hands that it doesn't matter for the purposes of identifying the value as $91 billion.

4 years ago by mckeed

The value the employer gets is double-counted later as part of the profit.

The value to employees is tricky. Without Amazon they might make more from a competitor with less market power. Without the industry, they might make more selling or transporting things directly.

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