We need to talk about profit

Accounting profit is necessary for publicly traded companies to survive; it's not a sign of extortion.

Profit is seen as a pretty ugly thing for public services to be dealing in. Take the Guardian's Terry Macalister in April (only picked because it's the most recent I can find):

The big six energy suppliers have been accused of "cold-blooded profiteering" after official figures showed they had more than doubled their retail profit margins over the last 18 months and were now earning an average of £95 profit per household on dual-fuel bills.

To be clear, the profit motive is a fair target. There's a real debate to be had over whether or not companies providing public services should be operating under a legal structure which requires them to try to maximise the amount of cash (over the long term) they can return to shareholders, rather than, say, maximising the quality of service provided for a given investment, or providing a set level of service at the minimum cost possible.

But given public services are frequently run by private companies, attacking the amount of profit they actually make is concerning, for one simple reason: money costs money.

It's a basic fact of the economy, one which explains why it takes so long to pay off credit card bills, why the bank pays you if you've got a savings account, and why Greece is finding things tricky at the moment.

But while we're all familiar with debt finance – the act of borrowing a sum, and then paying it back with interest – corporations have an alternative way of paying for the money they need: equity finance. Rather than paying interest on top of borrowed cash, they return a share of the money they make with their loans to the people who loaned to them in the first place.

That money being returned – the equivalent of the interest which we all have experience paying – is profit.

If companies don't earn some profit, then the shareholders are likely to cash out, safe in the knowledge that they can earn more by putting their money elsewhere – maybe by buying shares in another company, or putting it in a high interest savings account. The amount of profit that companies have to earn to stop this happening will vary based on the perceived riskiness of investing in them, as well as the value of investments elsewhere, and is known as the "cost of capital".

Power companies need to be able to make investments, frequently valued in the billions of pounds (Macalister quotes one industry analyst who estimates £50bn is needed just to hook up new gas supplies). It's only by making profit today – that is, by rewarding the shareholders who bought in to the companies before – that they can ensure that they have enough funding to carry on paying for investments tomorrow.

None of this is to say that there can't be such a thing as "too much" profit; if Thames Water were to suddenly make Apple-sized margins, we could be pretty sure that they were overcharging or underinvesting. But simply making accounting profit, even at the same time as pleading penury and raising prices, is not a sign of underhandedness. It's just a sign of a business working as normal.

Companies which deliberately and continually make no profit do exist. But they aren't traded on the open market, and have no access to equity finance. That's fine for some, but worrisome if they suddenly need to find large amounts of cash to invest – or to stave off the creditors.

Perhaps public services should be run as non-profits, or not be run privately at all; but if they are, attacking them for making profit is foolish.

Hinckley Point nuclear power station. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Richard Dawkins: We need a new party - the European Party

I was unqualified to vote in the EU referendum. So at least now we should hear from experts. 

It is just conceivable that Brexit will eventually turn out to be a good thing. I gravely doubt it, but I’m not qualified to judge. And that is the point. I wasn’t qualified to vote in the referendum. Nor were you, unless you have a PhD in economics or are an expert in a relevant field such as history. It’s grotesque that David Cameron, with the squalidly parochial aim of silencing the Ukip-leaning wing of his party, gambled away our future and handed it over to a rabble of ignorant voters like me.

I voted – under protest, because I never should have been asked to vote, but I did. In line with the precautionary principle, I knew enough to understand that such a significant, complex and intricate change as Brexit would drive a clumsy bull through hundreds of delicate china shops painstakingly stocked up over decades of European co-operation: financial agreements, manufacturing partnerships, international scholarships, research grants, cultural and edu­cational exchanges.

I voted Remain, too, because, though ­ignorant of the details, I could at least spot that the Leave arguments were visceral, emotional and often downright xenophobic. And I could see that the Remain arguments were predominantly rational and ­evidence-based. They were derided as “Project Fear”, but fear can be rational. The fear of a man stalked by a hungry polar bear is entirely different from the fear of a man who thinks that he has seen a ghost. The trick is to distinguish justified fear from irrational fear. Those who scorned Project Fear made not the slightest attempt to do so.

The single most shocking message conveyed during the referendum campaign was: “Don’t trust experts.” The British people are fed up with them, we were told. You, the voter, are the expert here. Despicable though the sentiment was, it unfortunately was true. Cameron made it true. By his unspeakable folly in calling the referendum, he promoted everyone to the rank of expert. You might as well call a nationwide plebiscite to decide whether Einstein got his algebra right, or let passengers vote on which runway the pilot should land on.

Scientists are experts only in their own limited field. I can’t judge the details of physics papers in the journal Nature, but I know that they’ve been refereed rigorously by experts chosen by an expert editor. Scientists who lie about their research results (and regrettably there are a few) face the likelihood that they’ll be rumbled when their experiments are repeated. In the world of science, faking your data is the cardinal sin. Do so and you’ll be drummed out of the profession without mercy and for ever.

A politician who lies will theoretically get payback at the next election. The trouble with Brexit is that there is no next election. Brexit is for keeps. Everyone now knows that the £350m slogan on the Brexit bus was a barefaced lie, but it’s too late. Even if the liars lose their seats at the next election (and they probably won’t), Brexit still means Brexit, and Brexit is irreversible. Long after the old people who voted Leave are dead and forgotten, the young who couldn’t be bothered to vote and now regret it will be reaping the consequences.

A slender majority of the British people, on one particular day in June last year when the polls had been going up and down like a Yo-Yo, gave their ill-informed and actively misled opinion. They were not asked what they wanted to get into, only what they wanted to get out of. They might have thought “Take back control” meant “Give control back to our sovereign parliament, which will decide the details”. Yes, well, look how that’s working out!

“The British people have spoken” has become an article of zealous faith. Even to suggest that parliament should have a little bitty say in the details is hysterically condemned as heresy, defying “the people”. British politics has become toxic. There is poison in the air. We thought that we had grown out of xenophobic bigotry and nationalistic jingoism. Or, at least, we thought it had been tamed, shamed into shutting its oafish mouth. The Brexit vote signalled an immediate rise in attacks on decent, hard-working Poles and others. Bigots have been handed a new licence. Senior judges who upheld the law were damned as “enemies of the people” and physically threatened.

Am I being elitist? Of course. What’s wrong with that? We want elite surgeons who know their anatomy, elite pilots who know how to fly, elite engineers to build safe bridges, elite athletes to win at the Olympics for Team GB, elite architects to design beautiful buildings, elite teachers and professors to educate the next generation and help them join the elite. In the same way, to decide the affairs of state, as we live in a representative democracy, we can at least hope to elect elite parliamentarians, guided and advised by elite, highly educated civil servants. Not politicians who abdicate their democratic responsibility and hand important decisions over to people like me.

What is to be done? Labour, the so-called opposition, has caved in to the doctrine of “the British people have spoken”. Only the Lib Dems and SNP are left standing. Unfortunately, the Lib Dem brand is tarnished by association with Cameron in the coalition.

Any good PR expert would prescribe a big makeover, a change of name. The “Euro­pean Party” would attract Labour voters and Labour MPs disillusioned with Jeremy Corbyn. The European Party would attract Europhile Tory MPs – and there are plenty of them. The European Party would attract a high proportion of the 48 per cent of us who voted Remain. The European Party would attract big donations. The European Party might not win the next election, but it would stand a better chance than Labour or the Lib Dems under their present name. And it would provide the proper opposition that we so sorely need.

This article first appeared in the 30 March 2017 issue of the New Statesman, Wanted: an opposition