Two laws of corporate spending

A budget is a pooled capital resource, and is therefore subject to the problems inherent in commons dilemmas. It is meant to be used for the group’s interest, rather than the interest of the individual who is trusted with the corporate credit card. We use a variety of heuristics to preselect such people for trustworthiness and intelligence like credit scores, college degrees, and so on, but there is always an incentive for individuals to favor business decisions that will boost their own careers. Particularly, there is a very strong incentive for trustees to spend their groups’ common capital in ways that will give them access to larger budgets, resulting in a vicious cycle. Therefore, we expect that the people with the largest budgets will be the most socially intelligent and ruthlessly self-interested, via selection. That is, sociopaths. This is the first law of corporate spending.

I suspect that such commons dilemmas are precisely the ecological niche that explains the necessary function of sociopaths within the human system, whatever that function turns out to be.

The second law is that pooled spending drives out individual spending, as seen in American health insurance or business-to-business goods and services. This relies on the fact that demand is a function of both need and purchasing power.

But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The needs of China today are incomparably greater than the needs of America. But its purchasing power, and therefore the “new business” that it can stimulate, are incomparably smaller.

Henry Hazlitt
Economics in One Lesson

For example, when people pool their money together to prepare against improbable individual catastrophes, like health insurance as a hedge against cancer, they do so because this increases the unlucky individual’s purchasing power and therefore the demand. Contra the classical model, this drives up the price because the need is still high. If you don’t believe me, look at the difference between auto insurance and health insurance prices. Most people want to buy health insurance, but most people would not buy auto insurance if they weren’t forced to. However, it is possible for customers who control large pools of money to negotiate volume-based discounts. The first thing I learned in the corporate world is that only mom and pop shops pay list price for anything. Large businesses prefer other large customers and suppliers with predictable, long-term contracts. So, the need for a particular machine may drive the list price of a machine up to 100k, but a large corporation that agrees to buy twenty machines per year for ten years will probably only pay 5k apiece. The consequence of all this is that mom and pop shops are at a severe disadvantage in acquiring capital.

The economics on that law is a little handwavy but you see this enough in real life that there’s no doubting it.

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About Aeoli Pera

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21 Responses to Two laws of corporate spending

  1. Ophiuchus says:

    Excellent post.

    #Frightened: Naming the Jew
    #Enlightened: Naming the SCALE

    #Scurvy: Understanding the second law of thermodynamics and the importance of its relation to the upper-limit of conversional efficiency of heat-to-work in a heat-based engine.
    #Worthy: Understanding the second law of thermodynamics and the importance of its relation to individual participational incentive within the upper-limits of increasingly-scaled, increasingly complex socio-technological systems.

    #Trivial: Building a strong resume to maximize one’s chances at success in the fast-paced, dynamically synergistic modern professional environment.
    #Convivial: Building a strong vault in one’s backyard to maximize one’s chances at survival in the impending, dynamically-irreversible contraction that inevitably follows the expansional period of the Faustian cycle of civilizations.

    #Expended: Unironically reading The New Republic and taking every word as gospel
    #Ascended: Unironically reading Vault-Co and taking every word as gospel

    #Awful: Wissenschaft
    #Colossal: Kenntnis

  2. Santoculto says:

    ”explains the necessary function of sociopaths ”

    They are not necessary.

  3. Santoculto says:

    Sociopaths maybe are necessary IN socially unfair/blindly competitive societies, in other words, in imperfectionist societies.

  4. Boneflour says:

    Comic idea, three thought jumps off topic:

    Panel One: Excited man – “After the Revolution, we can live like kings!”

    Panel Two: *revolution*

    Panel Three: Frowny man – *sits on uncomfortable chair listening to peasant’s cabbage trouble, holding todo list so long it rolls down the floor*

  5. Heaviside says:

    There’s nothing wrong with this post, but you’re still getting your economic education from those gay libertarian websites?

  6. Pingback: On politicians | Aeoli Pera

  7. Pingback: Price entropy | Aeoli Pera

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