As a professor of mine, James Sturgeon, is fond of saying, there’s more than one way to make money:  You can…

• Steal
• Extort
• Accept a bribe
• Speculate on the financial or real estate markets
• Inherit
• Con
• Or, perhaps failing all of the above, you could earn it

For our purposes here, this can be interpreted as a rather cheeky way of saying that different businesses have different business models–that is, different ways of making money in a market (or several markets).  And, while they might all be treated with the utmost abstraction as combining inputs to produce outputs of greater value, heterodox economists are inclined to believe that not every way of making money is the same.

Breaking down all of the means by which modern businesses make money is far beyond the scope of this chapter (though the odds are good that the reader is taking this course to fulfill a requirement for a business degree for which she or he will be spending plenty of time doing just that).  Instead, we’ll borrow from Karl Marx’s extensive work on how capitalist economies function to create a simplified picture, Figure 4, of what a business enterprise does.  And from there, we’ll look to institutional economics to understand qualitative difference in how businesses generate their earnings.

In Figure 4, M represents an amount of money and C represents a commodity (for instance the lumber and other building materials a construction company may use to build a house).  P represents the production process that converts the commodity C (building materials) into some other commodity C’ (for instance, a house) to be sold for some amount of money M’.  This process can be treated as a shorthand depiction of what any business does, with the requirement that if the business is to remain in business M’ must be greater than M.  Take a moment to review the chapter “Cost and Industry Structure,” specifically the definitions of firm and production therein.  How does Figure 4 differ?

The difference may not be obvious, but it is important.  In the neoclassical tradition in economics–indeed, in the classical tradition which Marx was critiquing–production by businesses is treated as a C→ C’ process.  That is, all business activity is part of converting commodity inputs into commodity outputs which are of greater value, ultimately, to consumers.  Clearly, Figure 4 is more than that: it treats money and commodities as distinct things.  This allows us to look at the step-by-step process by which money is converted into commodities, production creates new commodities, and money is created by sale of those new commodities.  The whole process of turning money into commodity inputs and ultimately selling commodity outputs for money we’ll call monetary production.  The full implications of these distinctions for Marxian (or radical political) economics would require its own course.  For now, we can use this shorthand description of how a business enterprise works to think about different types of business models.

The three numbered arrows in Figure 4 represent three different ways that managers, engineers, markers, and others within a business enterprise can influence the process of monetary production.  The first arrow, following M to P, indicates something close to the traditional way of thinking of a business: money is invested into a production process that turns inputs into outputs for sale.  This could include building a new factory or setting up a research and development (R&D) team to design new products and more efficient production practices.  What is significant here is that the focus is on producing something–turning stuff C into stuff C’, presumably with the hope that people will be willing to pay more for C’ than was paid for the C necessary to produce it.

The second arrow indicates a different business model–that is, another way the monetary production process could be influenced to make money.  Here, you will notice, the initial money invested is going not to production, P, but to the produced commodity, C’.  This is meant to indicate investments made to change the perceived value of the product the business sells.  Of course, one way to do this is to improve the product itself, which would be indicated by the first arrow.  With arrow 2, however, we’re dealing with changing the perceived value of the product without actually changing the product itself; and you’ve probably already guessed the most salient way this can be done: advertising.

Here, the founder of institutional economics, Thorstein Veblen, is worth quoting at length:

The end sought by the systematic advertising of the larger business concerns is…a monopoly of custom and prestige.… The great end of consistent advertising is to establish such differential monopolies resting on popular conviction…. The cost, as well as the pecuniary value and the magnitude, of this organized fabrication of popular convictions is indicated by such statements as that the proprietors of a certain well-known household remedy, reputed among medical authorities to be of entirely dubious value, have for a series of years found their profits in spending several million dollars annually in advertisements.  This case is by no means unique.

It  has been said, no doubt in good faith and certainly with some reason, that advertising as currently carried on gives the body of consumers valuable information and guidance  as to the ways and means whereby their wants can be satisfied and their purchasing power can be best utilized.  To the extent to which this holds true, advertising is a service to the community.  But there is a large reservation to be made on this head.  Advertising is competitive; the greater part of it aims to divert purchases, etc., from one channel to another channel of the same general class.  And to the extent to which the efforts of advertising in all its branches are spent on this competitive disturbance of trade, they are, on the whole, of slight if any immediate service to the community. (Veblen 1904, pp. 55-7, Public Domain, emphasis added)

Veblen’s inimitable prose may be a bit irksome to read, but reference to the italicized bits above should be enough to understand the argument.  ‘Custom and prestige,’ and the ‘fabrication of popular conviction’ suggest that businesses are competing through persuasion rather than production of something of value.  The second paragraph, then, considers whether these activities are actually of value to society (or perhaps, in the terminology of orthodox economics, whether or not they’re ‘welfare enhancing’).  For the most part, they are decidedly not.  They may create a pecuniary (that is, money) value for the business–the perception of C’ is improved and M’ increases as a result.  But, to society in general they amount to little more than a needless shifting of buying habits and consumption patterns.  As Professor Sturgeon notes, there’s more than one way to make money.

We should pause to consider the usefulness of this model. Separating money from commodities in the monetary production process has allowed us to consider different business activities as essentially different things.  The abstract firm in standard neoclassical theory might lead us to treat anything that makes a business more money as part of the production process (C…P…C’), suggesting that advertising was just another commodity in the production process improving the value of the product to be sold.  By implication, then, the advertising added value to society.  Yet, treating production and advertising as two different activities allowed room for the argument that, in fact, the advertising was generally wasteful.

business model

a particular way of organizing a business including strategies for making money in a market (or several markets)

monetary production

the process of turning money into commodity inputs and ultimately selling commodity outputs for money