Profits are derived from risks
Profits are derived from successful management of risks.
Over the years, I have studied so many theories about labor value, economic profit, and financial return. All of these theories have short-comings. I feel economic value, or business profit, or financial return are derived from successful management of risks.
For a person in an isolated island, his survival is full of risks. The person has risks of being hungry, being sick, being attacked by animals, being too cold or too hot, being attacked by natural disasters. His survival depends on his successful management of these risks. If he is not careful in managing any one of these risks, his survival is becoming a problem.
That the risks can happen to a person on an island is true to a tribe, to a community, to a society, to a nation, to a business, or to any person on the Earth on different scale. Survival is a triumph of avoiding risks.
A government has to manage its domestic risks and international risks as well. A government can be overthrown by its people or can be destroyed by a foreign invasion. So the most important forces for any government are its police force and its military power. The police power and military power are the fundamental basics. Above them, there are socio-economic risks a government has to deal with every day. There are risks of natural disasters, disputes among different interest groups. The value for any government is its long time survival. So the government by itself has no other goal. If a government fails to manage these governmental risks, it is destine to be replaced by another new government.
A business firm is established for the only purpose of making profits. For a firm to be successful, it has to manage its work force (human capital), its financial assets (capital), and its products and/or services. There are risks in hiring people. There are risks in managing its work force for productive activities. There are risks in the financial capital markets. At some critical moments, it might not able to secure enough financial resources to overcome financial shortage. In producing goods or services, there are even more risks. The customers may not like its products or services and return the products or cancel the services. In order for the firm to making a profit, it has to be successful in managing all these business risks.
A person is to live for a good life. To have a good life, one has to make enough money, to have a healthy body, to have a good family, to have good friends. In order for the person to have a good life, he has to manage the risks of losing a job, the risks of being sick, and the risks of having a difficult spouse, the risks of loosing friends. If the person is successful in managing all the life risks, then the person can have a good life, otherwise, it can be a bad life or not have a life at all.
So overall, all the value, profit, stable government, and good life are derived from successful management of risks.
Over the years, I have studied so many theories about labor value, economic profit, and financial return. All of these theories have short-comings. I feel economic value, or business profit, or financial return are derived from successful management of risks.
For a person in an isolated island, his survival is full of risks. The person has risks of being hungry, being sick, being attacked by animals, being too cold or too hot, being attacked by natural disasters. His survival depends on his successful management of these risks. If he is not careful in managing any one of these risks, his survival is becoming a problem.
That the risks can happen to a person on an island is true to a tribe, to a community, to a society, to a nation, to a business, or to any person on the Earth on different scale. Survival is a triumph of avoiding risks.
A government has to manage its domestic risks and international risks as well. A government can be overthrown by its people or can be destroyed by a foreign invasion. So the most important forces for any government are its police force and its military power. The police power and military power are the fundamental basics. Above them, there are socio-economic risks a government has to deal with every day. There are risks of natural disasters, disputes among different interest groups. The value for any government is its long time survival. So the government by itself has no other goal. If a government fails to manage these governmental risks, it is destine to be replaced by another new government.
A business firm is established for the only purpose of making profits. For a firm to be successful, it has to manage its work force (human capital), its financial assets (capital), and its products and/or services. There are risks in hiring people. There are risks in managing its work force for productive activities. There are risks in the financial capital markets. At some critical moments, it might not able to secure enough financial resources to overcome financial shortage. In producing goods or services, there are even more risks. The customers may not like its products or services and return the products or cancel the services. In order for the firm to making a profit, it has to be successful in managing all these business risks.
A person is to live for a good life. To have a good life, one has to make enough money, to have a healthy body, to have a good family, to have good friends. In order for the person to have a good life, he has to manage the risks of losing a job, the risks of being sick, and the risks of having a difficult spouse, the risks of loosing friends. If the person is successful in managing all the life risks, then the person can have a good life, otherwise, it can be a bad life or not have a life at all.
So overall, all the value, profit, stable government, and good life are derived from successful management of risks.
posted by Unknown at 7:13 PM
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