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| Chart from Business Processes, Prof. Nishida, Carey Business School - Johns Hopkins University |
I've been paying a lot of thought to this chart over the last few days, trying to understand its implications. It is a chart of relative economic profits across various industries. Economic profit, oft confused with accounting profit, takes into account the opportunity costs involved in a transaction, i.e. when you buy something, it doesn't just cost you the money in your pocket, but also the best option you had for using that money. In some cases, this is easy to calculate. For instance, going to grad school for two years doesn't just cost you the $100,000 tuition, but the $200,000 you would have made if you were working all the while you were in school, so the economic cost is $300,000. Economic profit is revenue minus accounting cost minus opportunity cost.
This chart bothers me for a number of reasons. I can see how, within industries, one could have opportunity costs inherent in running a business, do you expand your warehouse space, or not, do you expand production capacity, or not. But I fail to see how the opportunity costs between industries can be compared. The chart is basically saying that power companies are better off investing their profits in soft drinks than themselves.
I wonder what the chart would look like if social benefit were taken into account. The top industries in terms of economic profit, like tobacco and soft drinks would have a much lower value. At the same time, those industries without which our world would not function, power, telecom, steel, railroads and air transport, would be much better off.
How to quantify social benefit is possibly the most difficult puzzle for accounting to solve, there's no such thing as a social balance sheet. And yet, if the economic profit of some industries is negative, how is it that they have hundreds of billions in equity. It points to the consideration of social factors which are not captured when considering economic profits alone.
