Retained earnings

An indication of moral compass?

Snow White adores her Apple. Hope she didn’t bite the wrong half. (Thanks to wallpapercave.com.)

When were retained profits invented? “Invented? Were they invented?” It’s been a while since I asked myself such a strange question. But I think its answer involves a bit more than simply a look at the history of accountancy.

Retained profits (or earnings) – I want no misunderstanding so I’m citing Investopedia – are defined thus: Retained earnings are the cumulative net earnings or profits of a company after accounting for dividend payments. As an important concept in accounting, the word "retained" captures the fact that, because those earnings were not paid out to shareholders as dividends, they were instead retained by the company.

In the world of business, retained earnings are good. They act as a nest-egg for when fortunes take a turn for the worse; they can always be distributed as dividends at some future point; they can be used to launch new products or new product lines. They are an application of the prudence principle, because, when push comes to shove, we never know for sure what the future will bring. But, where do they come from? To try to explain that, I need to delve into a few side topics, like dietetics, and rub a fair number of people up the wrong way.

A dietitian can tell you, within a fairly narrow range, the number of calories you need in order to survive. Consume less than that number, and you will fade away to nothing due to malnutrition. Consume more, and your body will lay down as fat the excess over what is needed to survive; building fat is a prudent and necessary process for many creatures, including humans, to allow them to survive if they hibernate or remain active over periods when there is less food around. Not only inside the body, but outside it, such as squirrels hording hazelnuts, and humans canning fruit and making jam with the season’s bounty. We eat what we need to and we save a little for when there’s nothing to eat.

We can make enough jam that we know will last beyond the next winter and into the next summer, perhaps even longer. This is either very prudent indeed, based on a fear that there could be no fruit at all in the next year, or it can make commercial good sense: we sell the excess production in order to enrich ourselves. But what do we then do with the income from selling our surplus jam?

We make jam with fruit that we do not eat when it is in season. Anyone buying our surplus jam may well do so because the fruit they wanted to eat themselves was unavailable to them: either our jam is made with fruit that would have otherwise been lost, or we make it with fruit that others could not access and they buy our jam because they are hungry. We call that “cornering a market”.

Monopolies are economic structures that sequester a resource and prevent others from accessing it other than through a given supplier. They are frowned upon, because, if the resource is a basic necessity to life (and not, say, a leather handbag), there arises a situation called “exploitation”. These situations may likewise be frowned upon but they exist, whether due to legislation (such as in the water sector), abuses of legislation (inter-corporate pricing arrangements), or enterprise instruments such as patents (over the duration of the patent protection, that is).

The fewer the number of suppliers in a given market, the more each of them will be able to manipulate the market, especially if they collaborate in doing so. Free market economics demands that every supplier will eventually reach a price for his goods or services that tops out, and beyond which nobody is prepared to purchase what he sells. Even if he isn’t selling anything.

Take the fine for breaching the rules that regulate Brussels’ low emissions zone. I wonder whether anyone has ever sat down and actually calculated how much muck is deposited – in the air and on the ground – when a car passes you by. However much it is, it’ll likely have a figure expressed as 10 to the minus whatever, and it will likely be, by some gargantuan factor, less than a paper handkerchief. Breaching the low emissions zone is a minuscule offence by comparison with dropping a paper handkerchief, but it attracts a very big fine and, unlike paper handkerchiefs, finding out who done it is comparatively easy: they take your picture. Because my car is an old gas guzzler that pumps out fumes like billy-oh, I am exempt from the charge (it’s so old that an exemption was negotiated by the Historic Vehicles Association, an erudite body peopled on the whole by rich wannabees who toddle around blocking the road system at weekends with their ancient Jaguars and Daimler buses, whilst they cruise past you in superfast Teslas the rest of the week). The charge runs to nothing less than 350 euros. It’s an interesting figure. Not 100. Not 500. 300, and fifty for good measure. What measure?

It’s the measure of taking a motorist over your knee and giving him a good thrashing with six of the best. It’s the measure of sending him back into the playground that Belgium’s road network is with his backside smarting and grumbling at the injustice of teachers, sorry, lawmakers, generally. He vows never to do it again, not to placate any ANPR device but simply for the sake of his equally hurting wallet. I guess it works. But, then again, 500 would also work and, for some folk, 100 would work. In fact, for some, a sharp rap over the knuckles would work, without having to tell them to bend over, boy.

So, why is it 350? Because it can be. It has nothing at all to do with the size of the dirt compared to that of a paper handkerchief. It has everything to do with the size of what is conveniently called “the problem”. There are lots of cars. Not so many people drop paper handkerchiefs. So, because it’s more of a problem, each miscreant is treated severely. It’s not half bad for the motor industry either.

That is supply and demand economics. The more people need something or the more they can’t avoid needing it, the higher its price goes. And Brussels city council fines non-compliant cars in its LEZ based not on the muck they produce but on its gritty determination to see them cast into purgatory. It identifies an act that it finds objectionable and then punishes anyone who commits the act. But the act is not “littering” or “fly-tipping” – yes, those are proscribed too: what is the difference between burning oily rags and driving a car? The charge can be what it wants to be – I shan’t be paying it ever again; to that extent I am exempt. But the fines levied on littering differ wildly and yet the offence is the same. It’s discrimination and discrimination is all around us because governments like to tell people what to do and what not to do, and it tells different people different things by varying its fines. What 350 euros says is: you’re an easy catch.

In the market place for goods and services, there are also easy catches, and not just at the fishmonger’s: there are some things you need that you cannot stop buying, no matter how high the price goes. Like electricity. But not like leather handbags.

There’s always a danger that a supplier will lose custom to other suppliers whose prices are lower. And that’s where pricing arrangements come in, and it helps if you’re one or two of only five that supply a market in, say, food. The notion that food markets have nothing at all to do with pricing arrangements is probably slightly less believable than the Tale of Snow White.

But, where do all these suppliers get their stuff from to price out of our pockets? Well, many of them are able to exercise similar limitations and forces on who they buy from. Because they’re the biggest, so they have the biggest clout.

A family member of mine once talked to me about price setting. “When you start out, you think 1,000 and yet find yourself saying 800. When you know your worth, you think 1,000 and say 1,000. You’ll know you’re really worth it, however, when you think 1,000 and say 1,200.” I don’t think saying 1,200 is when you know you’re really worth it. That point is reached when you say 1,000. What you know when you say 1,200 is that you’ve lost your moral compass.

Trickle-down economics has it that the more a company makes, the more jobs it will create and the more it’ll pay those it employs. That may be so, but many don’t benefit from trickle-down economics, they benefit from seep-across economics, where the more money you save for a corporate client, the bigger the fee you can charge them for telling them how to cheat their workers, society and the taxpayer.

Companies retain earnings in order to gloat over the extent to which they have succeeded in manipulating and extorting their customers. Customers should be livid. And the workforce too. The difference between 1,000 and 1,200 is 200. The difference between a fair price and a high price. Between a fair wage and a miserable wage. And it is 200 of retained earnings. No one will ever question a corporation’s moral compass, even if it’s there for all to read in their annual reports. Just as the Tale of Snow White is there to read to children, which children also never question.

Sleep tight.