July 19, 2002 (Ira Pilgrim)

Business Ethics

High finance isn't burglary or obtaining money by false pretenses, but rather a judicious selection from the best features of those fine arts.

Finley Peter Dunne

To begin with, the difference between morals and ethics is that morals are what you were taught is wrong as a child, while you can make your own ethics. What's more people can have different ethics for different situations. There are people you can trust with your wife, but not with your money and some where it is the other way around.

My father was a merchant. During the depression, he dealt in second hand goods. There were no fixed prices and buyers were expected to bargain. Nor was there a fixed markup. When I was in Nigeria, everything in the market was bargained for, including food. A rule of thumb was that when a merchant told you the price, you would offer a third and settle for half.

When you see that a department store has a half-price sale, it is highly unlikely that the store is losing money. I suspect that when an item is on sale for $30, it is likely that the store might have paid less than $10 for it. There are a lot of things that go into pricing an item besides the cost of the item itself. The cost of the item might, in many cases, be the smallest factor in the price of it. This isn't true with regard to the price of a semi trailer, but it may be in the price of a shirt or a watch. What are the other things that affect the price? There is the cost of the building, display people, clerks, advertising, floor sweepers and a whole slew of people involved in the chain that runs from the manufacturer to the buyer. Last, but certainly not least, is the amount that goes to the owner or manager. If it is a public company, some goes to the shareholders. If money is borrowed to build a building, then there is interest on that. In other words, it is much more complex than when my father priced something. He got what was left over after he had paid the rent, taxes and the cost, to him, of the item. It was enough to feed us and pay the rent on our apartment. My toys came from the store. I learned to repair my second hand bicycle. I once got a pair of new roller skates, but that was the only new toy that I ever got.

The main factor in setting the price of something is probably competition. If a person is selling an item where there is no competition whatever, such as a Rembrandt painting, the merchant can charge anything that he thinks that the traffic can bear, and he does. This accounts for the outlandish prices charged by art dealers, which bear no remote relationship whatever to the cost of producing the item. Rembrandt was well compensated for his paintings in his time, but it was pennies compared to what one of his paintings would cost today.

Then there is what I think of as the "sucker trade," where there is no product at all. In this category are the gambling casinos and lotteries. Their investment is in equipment and people. The take can be enormous for a relatively small investment. In the same category is the stock market. When a company issues stock, they are basically borrowing money and they will pay dividends for its use in much the same way as a bank pays interest for the use of your money. If that was all that there was to it, it would be a simple transaction, but it isn't. If a company does very well, the stock may split several times and buyers of the stock may pay a lot more than the original cost of the stock. If you bought a substantial number of shares of Coca Cola when the company just got started, you would be wealthy today. In other words, what started out as a simple way to finance an enterprise becomes a high-stakes gambling game.

There are people who sell themselves. No, I am not referring to prostitutes; I refer to celebrities. These are people who can attract a paying audience or paying sponsors. They are basically entertainers, even if they do nothing more than hit a baseball. That is a business that I am not only not familiar with, but I have no desire to be. However, in my youthful innocence, I did want to be famous.

Then I grew up.

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