< A Story of Three Builders (Taken from "Running a Successful Construction Company," by David Gerstel, Taunton Press 2002)
Three Builders put up identical small additions. Each of them worked 125 hours at project management and carpentry. After paying for labor, materials, and subcontractors, each had $5,000 remaining, but they viewed their $5,000 very differently.
The least experienced divided his 5k by 125 hours, came up with $40/hr and concluded he had made a "good profit" on the job.
The midlevel builder looked at the $40/hr and concluded "at least I broke even." He figured that, though he had made no profit, at least he had $40/hr to show for his work on the project.
The veteran builder looked at the 5k and concluded, "I lost my butt on this one." He realized that he had lost money three ways:
#1 The $40/hr was $20 less than he would have had to pay (in wages and labor burden) to a good lead to work in his place on the job. Therefore, he had lost about $20 of the value of the labor for every hour he had worked.
#2 He had incurred $1,000 in overhead, none of which he had recovered.
#3 He had no profit to show for the job. He had taken on all the risks and responsibilities of building the addition without any compensating profit at all.
Though only the veteran builder recognized it, all three builders had lost money three ways. They had lost part of the value of their labor, their overhead costs, and a fair profit.>
The first time I read this, I got hung up on the “least experienced” builder scenario. The guy made $40/hr, what’s so bad about that? I finally figured it out and moved on. I was knee-deep in business management, and Gerstel made sense. It still makes sense, but only if you assume this “profit” idea.
Let’s do the math a different way. 5k minus 1k for overhead (cell phone, office, truck, license, etc) = 4k. I will grant Gerstel the overhead point, you need to charge for that. So, let’s add the 1k in overhead and say he charged 6k for the project. 6k minus 1k= 5k/125 = $40/hr. That covers all the expenses that the builder had, and means he took $40/hr home (before his taxes). If he made that wage 40 hrs/week for 50 weeks out of the year, he’d take 80k home for the year. Almost no matter where you live, 80k is nothing to sneer at. It is a very, very nice income.
And here’s another thing, there was a directly proportional relationship between what was done and the money that it cost the homeowner to have it done.
Let’s do the math again, Gerstel’s way. If the guy charged the $60/hr for the wages + labor burden he would have had to pay a good lead, he would be at 7.5k. Then he would need to tack on overhead, 7.5k+1k=8.5k. Then he would need to figure in his profit. Gerstel offers a range of percentages for different types of construction, but 10% is on the low end of his recommendations for the sort of work this project entails. 8.5kx1.1=9.35k.That means that this project, if the veteran had charged what he ought to have charged, he would have taken home $66.8/hr. Do the yearly math again, and you get 133,500k/year.
And the other thing; there is an indirect relationship between what was done and the money that it cost the homeowner to have it done.
The reasons for charging profit, Gerstel says, are:
1 Estimating errors
2 Project delays and disruption due to:
A Extreme weather
B Man-made and natural disasters
C Loss of key employees
D Subcontractor failure
3 Equipment failure and loss
4 Uncharged or unchargeable change order
5 Callbacks and warranty work
6 Difficult and labor-consuming clients
7 Litigation
8 Management errors
9 Recession
When I read this list, several thoughts come to mind. I am a contractor and I know the risks we take first-hand and they are real. But honestly, I just can’t get the risks to justify the profit numbers. #’s 1,5 and 8 are mistakes the builder made, not the homeowner, as is #2D. #’s 4 and 6 are risks that the contractor can either mitigate or simply charge to the client if and when they occur. #’s 2B (the first part), 2C, 2D (Whatever isn’t covered by the above mentioned 2D) and 7 are almost entirely avoidable by certain business practices. That leaves us with #’s 2A, the latter half of 2B, and 3, acts of God and broken tools. In an alternate setup, those could be charged to a customer if and when they are realized. But let’s not think about that yet.
So let’s figure those in. The guy that made 80k could lose 10% of that/year and still make 72k/year. In reality, the guy that made 133,500k/year is going to either: lose 50k of that in the risks Gerstel mentions and still clear 80k or get smart, minimize his losses, and take home 120k (after he loses 10% due to the acts of God and broken tools).
Hot Damn, I want to be a builder! Really though, how can we justify this idea of profit-beyond-wages if we can’t justify it with risks? Why am I entitled to more money than my wages? What is this idea of profit? Where did it come from and why is it built-in, assumed?
This arrangement looks a lot like an insurance policy that the homeowner is paying for. The money all goes into the builder’s pocket until something happens, then it goes to any number of other parties listed in Gerstel’s risk lineup. Let’s say it’s a given that something does happen and the builder loses all that insurance money every year. That’s 50+k every year going to something that has nothing to do with the homeowner’s addition. In this scenario the cost of doing business far exceeds the cost of building. It just seems downright wasteful.
Gerstel’s other point that I get stuck on is #1 in his story. The fact that it would have cost you $60/hr if you hired someone else (I desperately need to figure out how to do italics in this posting setup) = you should charge $60/hr for yourself, even though it does not cost $60/hr for you to do the work. YOU are doing the work, so charge what it costs YOU. Unless this whole thing is based on you not wanting to actually do the work, but to sub it out. If so, then we create a beast where the best-paid guy is the one who figures out how to get other people to do work he could do himself. That beast devalues the worth of the guy who actually does the work. Hmm, this sounds way too familiar. What’s more, in this scenario a sizable chunk (30-50%) of the $60/hr goes to parties that have nothing to do with building (insurance, taxes, workman’s comp, payroll, etc).
Someone will no doubt object to my saying that the builder pockets 70k or 120k. He won’t pocket it because he will take his wages out of that amount and then put the rest back in to the company. That sounds right, but the company is him and he is the company. Otherwise there is this entity out there that Chris described as “pathological,” it has no one’s interests in mind and does no one’s bidding. It’s just out there, making money for itself. This just isn’t the case. Companies make money for people.
So, how about this for a setup: I work for a homeowner, building him an addition. I arrange with him to build it for 10k. I came up with 10k by figuring out how long it will take me to build it at a wage that will support my family, and the materials/subs it will take to complete the project. I also arrange with the owner that he cannot take over my project, and I will charge more if he does. If acts of God slow us down, he pays for it. I also stick to my bid, if he changes anything, I charge for it. But, if I screw something up, I eat it. This means that if I’m good at what I do, I will bring more money home at the end of the job. In a scenario like this, the homeowner doesn’t pay for something he doesn’t get. If it doesn’t snow and take me longer, he doesn’t pay for it. If it does snow and I take a day longer because of it, he pays for it. This setup still gives me incentive to work hard and get better at what I do. The faster I complete the job (due to skill and hard work), the more I make per hour.
I only bring this scenario up to provide an alternative. Maybe it’s not a good one, but I’m sure there are others.The main question I have is the notion of deserving profit-beyond-wages.
It occurs to me that we could use a set of theses on localism. Food, economic justice, what have you. My conversations have been bogged down by not clarifying my presuppositions. So I’m going to try to write something up.
He says that the subdivision of property make it impossible for everyone to farm indefinitely. This is irrelevant to the discussion, because there’s more than enough room for everyone to farm if they want. But we aren’t arguing that everyone should farm (and I don’t want to!), we’re arguing that our food system oppresses the poor here and abroad and needs a complete overhaul.
There is much to deride in so-called sustainability. Permanence or tradition might be a better word with less baggage.
Time for less reductios and straw men, and more engagement with the economic and political issues that under-gird this discussion.
This is a clever idea, and could serve as a stepping-stone to public acceptance of a local currency project. Here are two articles about the same idea:
Sometime in the past year I started using the term “social justice” and “localist” in non-ironic fashion. I’m not sure how that happened, and I’m trying to put together the steps.
First you acknowledge a moral component to your economic actions. Example: If someone treated their employees poorly, shopping at their store would enable them to continue.
Then you realize that component is still there even when you don’t know about it. Ex: Target may source their garments from a factory where employees are forced to live in unsafe housing nearby, we just don’t know about it.
You realize how difficult it would be under our current system to make these sorts of determinations, and it bothers you. It feels, by example, like as an entire culture we are handing our money to people and saying, “We don’t care how you do it, get us what we want at the cheapest price possible.”
You also realize that this hurts the poorest the most. The only unskilled labor still available is in the service sector, since we moved all our manufacturing out of sight and out of mind.
I’m still working on this, but I thought I’d post what I had so far.
Sorry, I got waylaid by health care debates. I should have known better, particularly since I never have anything constructive to say about that topic. Back to Medaille (where at least I’ve achieved a degree of level-headedness).
Medaille kicks off talking about how economists have longed to make their craft (economics) a “perfect” science. He quotes Friedman:
As Milton Friedman puts it, “Positive economics is in principle independent of any particular ethical position or normative judgments. As [J. N.] Keynes says, it deals with ‘what is,’ not with ‘what ought to be.’â€
I start with this because I think it’s important to qualify that most of the Christian free market capitalists I know would strongly disagree with Friedman here. In fact, this is something my father taught us early on in life: economics alone doesn’t save you, nor can we live as if economics can’t be touched by our biblical worldview.
Why is this important? Because here we come to one of the downsides of adopting a general label (like “capitalist” or “Reformed” etc.). Labels, as Davey and I have discussed, are inevitable and certainly not all-evil. But I think it’s important to remember that these labels we fight over and try to define are never to be accepted wholly. They must always be accepted with exceptions, because the world never fits in any of those little boxes. Should we even bother with labels? Of course! As Davey pointed out to me, to try and make for yourself an independent patchwork quilt of beliefs is a fruitless and even dangerous exercise. But when we seek to defend such labels, we should do so while noting their weaknesses, while noting where our life experience or other influences have persuaded us to disagree.
Conversely, when we seek to attack another label, we ought to employ the same tactics. Take, for example, my attacks on socialized medicine. Take them as an example NOT because it’s a good one, but because it’s the opposite. I would have been better off focus on specific criticisms, specific things instead of spouting off. (And no, this isn’t an invitation to revisit the topic. Please no.)
Back to the article.
I don’t have much to contribute about the rest. His point about statistics (that they involve judgments and can’t be trusted as objective numbers) is a good one. The final conclusion? Every “humane” science must be concerned with the end of man, which is to say, before we try and decide what economic system is best, we must first wrestle with the question of what is the chief end of man.
Nothing new, and I might add that this isn’t something that the Christian free market capitalists I know would disagree with. (Again.) Perhaps the next post will bring something more controversial.
And finally, we can note that nearly all of modern economics, whether neoclassical, Keynesian, Socialist or Austrian, is built on a mistake about science; in the attempt to make their discipline “scientific†in the mold of physics, they abandoned the only thing that can make a humane science “scientific,†namely the principle of justice and particularly distributive justice.
I was struck by this quote, because it reminded me of Eugen Rosenstock-Huessy’s essay (originally from Out of Revolution) “I Am an Impure Thinker.” In it, ERH contends that much of modern science—specifically physics and metaphysics, the “foundations” of modern science—are concerned solely with dead things. They fail to interact with our world in a “lifely” way. His answer to this problem is simple: “To veer between Ego and It is the secret of man’s soul.” In other words, the key to making our way in science (or in any endeavour) is to find a balance between making it personal (Ego) and studying it in the abstract (It).
I begin with this because, to be honest, I like what ERH says about science better than what Medaille says. Perhaps it’s because I quite understand his claim that “the only thing that can make a humane science ’scientific’ … [is] the principle of justice.” Perhaps it’s because I don’t know what “distributive justice” is supposed to mean. At any rate, I’m uncomfortable with the groundwork that Medaille lays at the beginning of this post. (Not in a “I hate justice!” kind of way, but just in a “I wish I knew more clearly what he meant” kind of way. I promise I’m not being purposefully dense. Here in Canada, for example, we have something called the Human Rights Tribunal which seeks out justice for the victims of “hate speech” and seeks to punish individuals who voice politically incorrect opinions. In their minds, that’s justice.)
Indeed, the theories of Hayek have been tested just as much as have the theories of Karl Marx, and with about the same results: more government power, less economic freedom; under neither did the state whither away, but became an all-encompassing behemoth.
I can buy that, for now. I’m sure that capitalists could offer objections to this, but I’m not well-read enough to do more than accept Medaille’s assertion. However, I do know that Christian economists—even the capitalists (*gasp!*)—would be quick to point out that there is no economic system that can lead to freedom on its own. Without the Gospel, any form of economic planning or justice will quickly lead to slavery. Which is why, I think, Eugen declares we must veer between Ego and It.
In Keynesian states, people cease to be citizens and become mere clients of the state, where even their most ordinary needs are the subject of one or more governmental bureaucracies, and where even ordinary local problems are pushed up to be the responsibility of the most distant levels of government.
Aha! Canada! (Enough said.)
So, in the end I’m willing to buy Medaille’s argument that capitalism does not work. However, I’m not really buying it on the merit of his argument: as a blog post, his examples are necessarily truncated and I’m quite sure that many objections could fairly be made by someone more familiar with the topic than I. The reason I’m willing to buy it is because, in the comments, he describes himself as someone who doesn’t want to ignore history:
But I like to delve into things. I would like to know why a system like Keynesianism gets better results than pure capitalism, when it shouldn’t work at all. Yet work it has, and you and I have lived our whole lives under it, in a time of not only great prosperity and peace, but relative equality (until the last 10 years or so.) This is remarkable. You keep telling me that capitalism works, and I keep asking “When?†“Where?†The system you praise might not ever have existed, but the closer we get to it, the more misery results.
Count me as curious, then: I look forward to seeing distributism explained.
Since I consistently thrust myself into the bad books with my economics posts, I thought I might as well do so with vigor. So here is the first entry of a new blog series, Blogging Through Medaille (HT to Davey for these articles). My thoughts will not be academically sound or intellectually rigorous. Just my thoughts, which Davey seems to value, therefore so should you.
Life in Circle Six
A post on usury that begins by comparing usury to the commercialization of art. Huh. But I like it. Dare I say that Medaille has won me over?
We no longer think it unusual that art is subverted to commercial and political propaganda, while much “serious†art defends itself by becoming unintelligible.
Moving on to our topic, I don’t really disagree with Medaille at all here. Usury has long had a bad name (I’m thinking of Merchant of Venice here), and he makes a fantastic point about how the boom of credit cards and financing has actually led to a decline of serious investing. (To invest no longer means to invest in a person, but rather in a conservative mutual fund, which is just about as abstract as it gets.)
The only sticky spot for me is towards the end, when Medaille starts talking about unions. But to be fair, my dislike of unions is really a dislike of bureaucratic unions—those for the garbage collectors, postal employees, and school teachers up here in Canada think nothing of going on strike and inconveniencing thousands of people. I’ve seen it happen several times, and in each case they’re actually hurting the innocent instead of the “oppressors.”
A separate thought: can I justly claim that the key to economics is serving? I like this better than jumping straight into Augustine, as good as he is. For one, it’s much more concrete: it brings up specific mental pictures and specific memories. Moreover, Augustine can nicely fill out what it means to serve, while the vice versa doesn’t work quite so cleanly. (By the time you get to the concrete “serving” part, you’re either lost or asleep.)
So, I have been prodded and poked out of silence. Here goes.
It appears impossible to escape economic discussion these days. I write this with a sigh, because I happen to find economics a dull topic. Sure, it’s important and worthy of discussion, yadda yadda yadda. I just dislike it. Kind of liking visiting the dentist and flying, economics is one of those things I talk about just because that’s what grownups do.
I don’t have anything profound to say, except that I remain suspicious of both “sides” of the discussion. They’re both so impersonal. And touchy.
Take the capitalists. If you suggest that a businessman is noble for giving something away that he could justly sell for profiit, this camp immediately assumes you’re a devoted follower of Marx and Lenin and all of those horrible people who think that collectivism actually works.
The other side isn’t guiltless either. If you dare talk about wealth as a blessing or the desire to live in a nice house, send your kids to college, or save up an inheritance for them, they immediately assume you’re a selfish middle class wannabe who lacks all compassion.
Yes, these are both slightly exaggerated generalizations, but I’ve met both responses in real life conversations. It’s not that both sides are evil; it’s actually quite the opposite. The people I’ve talked to are very sincere in their desire to make the world a better place. They just happen to emphasize certain things—things they feel have been lost or wrongly condemned—and that unfortunately blinds them from seeing the good and fair points from the other side.
Finally getting around to reading Chesterton’s book, “What’s Wrong With the World?” (on the Stanza iPhone e-book reader!) It didn’t take long to find something very helpful. This is from the dedication, to an apparently skeptical friend:
Why then should I trouble you with a book which, even if it achieves its object (which is monstrously unlikely) can only be a thundering gallop of theory?
Well, I do it partly because I think you politicians are none the worse for a few inconvenient ideals; but more because you will recognise the many arguments we have had, those arguments which the most wonderful ladies in the world can never endure for very long. And, perhaps, you will agree with me that the thread of comradeship and conversation must be protected because it is so frivolous. It must be held sacred, it must not be snapped, because it is not worth tying together again. It is exactly because argument is idle that men (I mean males) must take it seriously; for when (we feel), until the crack of doom, shall we have so delightful a difference again? But most of all I offer it to you because there exists not only comradeship, but a very different thing, called friendship; an agreement under all the arguments and a thread which, please God, will never break.
