Todays’ Business Model, Fifteen Years Ago

Media companies switching to unpaid student labor.

As head editor for the local chapter of an online food-culture publication, Brogan Dearinger spent most mornings last fall coming up with story ideas, editing submissions and checking the performance of articles.

But there was no money in it—at least not for her.

Ms. Dearinger, then a senior at Indiana University Bloomington, was among about 8,000 unpaid college students working for local chapters of Spoon University Inc., a for-profit media company.

“They are always pushing us to publish more,” Ms. Dearinger said. “Since writers don’t get paid for their articles, sometimes it’s hard to motivate them to write more articles.”

That’s one way around those $15/hour minimum wage laws!

This is, of course, the model that Shot In The Dark and the NARN have used from Day 1.

9 thoughts on “Todays’ Business Model, Fifteen Years Ago

  1. In a truly free market, profit = cost.
    It doesn’t cost $0 for Dearinger to do her work. Who is paying the cost?
    If labor is free, why do we pay for anything?
    This The Economist article, “Why Do Firms Exist?”, in an oldie but goodie:
    http://www.economist.com/node/17730360

  2. In a truly free market, profit = cost.

    Huh? I guess I am not awake enough yet to comprehend this statement. The rest I get, but this?

  3. “Huh? I guess I am not awake enough yet to comprehend this statement. The rest I get, but this?”
    Adam Smith and Bastiat.
    Costs include everything, including the cost of unique or special skills to create a product. If you try to charge more than that, a competitor undercuts you until profit – 0. Profits above cost are called “economic profits” and are usually the result of controlling a market, e.g., the seller can set the price. The monopoly price is limited by substitution cost, meaning Microsoft can’t charge whatever it wants for Windows because at some point consumers will switch to Apple or Linux.
    If the seller can’t control the price — if he has to match a market price — he is selling a commodity.
    Nobody wants to be in the business of selling a commodity.
    My main argument with many so-called “free market” conservatives is they want labor to be priced as a commodity, but support barriers to competition for businesses, so businesses pay commodity costs but can charge monopoly prices.

  4. OK, my head is spinning. But the most confusing aspect is still why “free market” is equated to profit=cost? Who on earth in a free market would anyone, anywhere would want to sell at cost and not generate any “economic profit?” That is not free market to me, but more “from everyone according to their means, to anyone according to their needs” type of market. Is Smith/Bastiat definition of the free market that different?

  5. That is the Smith-Bastiat model of a free market.
    Take a simple case. You buy t-shirts for $5 and sell them for $6. Why wouldn’t one of your buyers buy one at the $5 price? Answer: they would. There goes your business.
    Unless you can add $1 of value, somehow. You might buy in bulk or negotiate a good deal with the suppliers, so, in fact, your $6 price is the lowest price for a single t-shirt. It is your business, but the skill you used to buy a t-shirt for $5 and sell it for six is called “entrepreneurial talent.” It is a cost, you can sell your entrepreneurial talent or buy (hire) entrepreneurial talent if you lack it.
    Another way you can add $1 of value is branding and advertising. Make people want to buy one of your t-shirts badly enough that they will pay $6 for a $5 t-shirt. If you print them with a trademark or copyrighted emblem, only you can sell them.
    Branding is a big deal because of this. You can sell for over cost.
    You make Glossy brand shampoo. Shampoo is pretty generic stuff. You add a few special ingredients (that do nothing) and claim you have a special formula. You get celebrities with nice hair to endorse your shampoo.
    Both you and Suave shampoo pay the same factory the same amount to supply nearly identical products that cost the same to produce. They can only charge $5 a bottle for Suave shampoo, but because you have leveraged advertising and trademarks, you can sell your shampoo for $10 a bottle. Because you own the trademark, no one can undercut the price of your shampoo.
    The profit you make above costs is called an economic profit or rents (not the same as renting an object).
    When I took economics a decade ago, the Current Theory was that “free market” models showed that all industries would be dominated by oligopolies, because this leveraged branding, economy of scale, and a few other factors to produce the most efficient production of goods in a free market framework.

  6. Thanks, MP. I think I got it. It is indeed the battle of definitions. What I call “profit” is part of Smith-Bastiat “cost”. “Economic profit” is the part of profit related to “value” or monopolistic upsell. As such, I cannot see how a free market economy in the Smith-Bastiat sense can survive. It leaves no room nor incentive to improve one’s products, only drive cost down to the lowest common denominator.

  7. Mammuthus Primigenius: You are a million times smarter than me but I think the Austrians would say ***value is subjective*** it’s not based on cost or cost plus etc.

    It’s pretty easy to get youtubes or whatever of this concept.

  8. Two economists are strolling down the sidewalk. First economist says “Hey! Look! There’s a $20 bill laying on the grass!”
    Second economist says “Don’t be ridiculous. If there was a $20 bill laying on the grass, someone would have picked it up by now.”

    That is the only economics joke I know.

  9. When I took economics a decade ago, the Current Theory was that “free market” models showed that all industries would be dominated by oligopolies, because this leveraged branding, economy of scale, and a few other factors to produce the most efficient production of goods in a free market framework.

    Tell that to Nokia. They were part of the oligopoly until some innovation came along (Apple) with a racially new idea for the same product that displaced the incumbents. It seems to me that such a model works, but only in a mature market where no disruption or innovation is allowed, i.e. government regulated and mandated monopolies.

    A “free market” exists when new players can enter and create new and innovative products that meet the needs of the customers, even those that aren’t “reasonable” as defined by professors of economics. That professors have a hard time with innovation and new, disruptive phenomena should hardly be surprising :). To put it simply, most professors of economics agree with Bernie: fundamentally there’s no need for more than two types of deodorant since eventually everyone will wise up and just buy “the best”. The real world disagrees with them. It’s a b*tch when what you’re trying to model varies so very much in personal preference and in how they value something. To wit: I have a set of hames that nobody else would value at above maybe $20 because they’re old and worn. But to me, they’ve priceless because they were used by my grandfather and great-grandfather when they were kids to work in the family quarry. To an economist, my valuation of those hames is insane and unsupportable, but it still doesn’t change how I value them even if it breaks their models.

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