The Riversong Philosophy on Income vs. Profit
Almost all building professionals I have known insist that, to run a “sustainable” business, not only is a comfortable market-rate labor fee required but also some (typically considerable) markup for overhead and profit.
This is the conventional approach to business, and contributes to the “sustainability” of a particular enterprise. But, just as we have almost destroyed our one and only planet by ignoring the “externalities” of capitalism – such as pollution, resource depletion, social disruption, the individual or social harm caused by products or services, creation of artificial consumer demand through advertising (what used to be called propaganda), and the ruthless need to treat employees as just another commodity or “input” to the finished product and hence the exploitation or discarding of “labor” as the bottom line demands – if we think of a business enterprise in isolation from the planet and the cultural context which makes it possible, then nothing we do can be remotely sustainable in the Big Picture.
In my essay, Building (for) a New Paradigm, I ask a number of philosophical questions, including: Is it truly economic to consider land and housing as profit-making investments rather than as the basis of human need for sustenance and as the literal ground of essential enterprise?
The Background Story – Wages, Income, Profit & Taxes (Redistribution)
It was understood, in early agrarian America, that one’s labor and the fruits of one’s labor were one’s primary and essential property, and that a free man (I use the term in the old non-gendered sense) had the inalienable right to the fruits of his labor and to freely exchange such fruits with others. Thus, any non-tangible compensation for one’s free labor, such as money (merely a token of exchange for later redemption), was no different from a direct barter, and no less than 100% one’s own natural property.
It was only when one created surplus (profit or unearned income), or more value than one produced by one’s own labor, that one had economic “income” which accumulates into economic wealth (capital). Economic surplus (profit) can be generated only by the exploitation of the labor of others, by charging interest on a monetary loan, or reaping dividends from an economic investment. Or it can be generated by appropriating part of the natural commons for one’s exclusive use – land and its bounty – and charging rent to others who are thereby deprived of the rights of secure tenure. It is this latter form of “real property” (ironically named) that is purely a social invention and hence not inalienable.
True income (wealth accretion), being a form of theft from others, demands a return to society in the form of taxation, tariff or excise. It was broadly understood that a man’s wages belonged to him alone; but profit, interest, dividend and rental income belonged in part to everyone and could be legitimately re-distributed to redress the economic imbalance.
Barack Obama was hardly the first to say “You didn’t grow that business alone” (for which he took much flak in the 2012 election cycle).
This was, in fact, the view of Thomas Paine, expressed in his final revolutionary pamphlet, Agrarian Justice (1797), and shared by a number of great American thinkers, such as Henry George (the author of the most read book in America after the bible, Progress and Poverty, 1879). And it was for this reason that Paine proposed an inheritance tax to redress the imbalance once every generation and to fund a universal social security program, and that George proposed a single tax on land (the expropriated commons).
In a state of nature, the only way to generate a surplus (profit) is to either overhunt or farm the land (dirt mining), and both require cooperative effort, with agriculture demanding a more elaborate and hierarchical social nexus.
In society, enterprise beyond the subsistence level is made possible only by collective (government) investment in infrastructure, laws and courts to arbitrate contracts, and a money system to make trade (and wealth accumulation) possible. Thus private wealth is impossible outside of the social structure to which everyone contributes, and cannot truly belong to just the names on the business charter.
In its early history, not wanting to deprive the people of basic subsistence, the United States taxed non-essential luxury goods. From 1791 to 1802, the federal government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. The high cost of the War of 1812 brought the nation’s first sales taxes on gold, silverware, jewelry, and watches. In 1817, however, Congress did away with all internal taxes, relying on tariffs on imported goods.
In 1862, in order to support the Civil War effort, Congress enacted the nation’s first income tax law (and every subsequent war required additional income taxation, even though taxes to pay for a standing army was what the American revolutionaries fought against). It was a forerunner of our modern income tax in that it was based on the principles of graduated, or progressive, taxation and of withholding income at the source. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3% (the average skilled tradesman made less than $600 per year in 1860, while a common laborer made less than $300, so workers’ wages were tax-exempt). Those with incomes of more than $10,000 (the equivalent of about a quarter million today) paid taxes at a higher rate. Additional sales and excise taxes were added, and an inheritance tax also made its debut.
What profits a man if he gains the world but loses his soul?
– Mathew 16:26
Entrepreneurial profit is, technically, the excess income accrued to a person from the labor of others solely due to an ownership position, or “markup” charged on top of either labor or material costs (or both) . In other words, profit in the purest sense is unearned income. And anything unearned, or accrued merely from a position of economic privilege, is a form of theft from the client, the commons or from the labor of others less fortunate (but sometimes more skilled).
[This is why I have argued against a contractor calling himself a builder if he’s only hiring other skilled labor to do the actual work, and why I’ve refused to consider myself a contractor rather than a builder or skilled tradesman – one who trades his skill for something of similar value, whether barter or cash.]
Business overhead is something entirely different, and each business is organized differently, has different fixed and variable costs, and re-invests income in different proportions. So there is no standard for an “appropriate” overhead markup , and a mathematical average would be meaningless, since averages are skewed by the extremes (and there are far too many extremes in this business – at both ends).
A business owner, who is also a laborer in the business, deserves a reasonable wage as well as enough income to cover modest overhead with perhaps enough to invest back into the venture (though his workers must use their wages alone to re-invest in tools and work clothing). That additional is often referred to as “profit”. But, if it’s re-invested, then it’s actually a capital expense which reduces net business income.
With re-investment, the question becomes: How much is it appropriate to charge a client or customer to build one’s own business? Or, is it appropriate at all?
There are three types of true profit:
- unearned income accrued from the privilege of business ownership
- interest and dividends from financial investment (another privilege of wealth, which contributes nothing of value to society but creates constant inflation and cyclical recessions)
- the unearned economic appreciation of “real” property, typically due either to social investments or to speculative pressures (neither of which are created by the “owner”)
In all cases, profit is unearned by one’s own efforts and hence illegitimate (if not immoral) – particularly profit on land and other natural resources which were granted by the Creator of the Universe for our collective use and stewardship, but which can never be rightfully owned, exploited or sold.
LAND, n. : A part of the earth’s surface, considered as property. The theory that land is property subject to private ownership and control is the foundation of modern society. Carried to its logical conclusion, it means that some have the right to prevent others from living. – The Devil’s Dictionary, 1911
Riversong Philosophy of Economic Trade
As a skilled tradesman, offering my years of experience, wealth of knowledge, breadth of skills as well as the use of my extensive cache of tools and equipment in return for an equivalent value, my preference and practice has been to charge a reasonable wage for my labor – somewhere in the lower range of market rates – that covers both my time and the depreciation of my tools.
If there are non-durable items needed for a particular job, such as saw blades or sanding discs, those will be charged along with building materials to the client, with no markup or overhead fee.
One argument for marking up labor and/or material costs, is to cover “insurance” for call-backs to repair, replace or re-do mistakes or work that did not meet either industry standards or the understanding with the client (the “contract”).
I minimize my exposure to call-backs by – not only doing high-quality work – but sharing the general contracting responsibilities with the client, or home-owner, having them take out builder’s risk and general liability insurance for the project (while I carry my own contractor’s liability policy), as well as taking responsibility for paying subcontractors, permit fees, trash hauling, temporary toilets, etc.
Since I do not markup material costs, my liability for repair or replacement is limited to my own labor, while the client/home-owner covers any material replacement cost.
Just as any additional skilled or semi-skilled tradespeople I might hire for a project have to cover the cost of their own basic tools and work gear, I cover those costs for myself out of my own hourly wage (and try to buy at least one new tool with each job, so as to “build out” my enterprise at my own expense).
I prefer to work for clients who similarly live simply and without avarice, who have limited resources and a real need for simple, affordable housing or house repair. Now that my work is limited largely to design and consulting services, I will set my fee proportionate to the cost and complexity of the project (and secure a retainer before beginning and a payment schedule based on deliverables because, unfortunately, I have been burned a few times).
My Bottom Line
What these choices have meant for me, and because my “work” in the world extends well beyond the cash income jobs I take on (and the ones I turn away because they don’t meet my standards, or are excessive) – including many hundreds of hours doing community service, researching and writing the essays in my three “blogs”, and helping others to build community (the only real “insurance” that any of us are entitled to) – is that I live at a subsistence level, with enough cash income to cover my basic needs, though only by keeping my needs small.
In 1966, anthropologist Marshall Sahlins speaking at a symposium entitled “Man the Hunter” in Chicago, said that hunter-gatherers did not suffer from deprivation as had been previously assumed, but instead lived in a society in which “all the people’s wants are easily satisfied”. He called this the “Original Affluent Society”.
Sahlins argued that hunter-gatherer societies were able to achieve affluence by desiring little and meeting those needs/desires with what was available to them, which he calls the “Zen road to affluence”.
Though I can’t live a life as simple and ecologically-balanced as that of our ancient ancestors, I’ve tried to travel the Zen road, or – as another advocate of simple living once said, The Road Less Traveled.
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If you need project consultation or design services, contact me directly at
HouseWright (at) Ponds-Edge (dot) net.