Businesses aren’t Consumers

On the list of popular conceptions that dumbfound economists is the notion that business decisions are analogous to personal consumption decisions.  Regularly businesses are described as being "rich" and various business decisions are attributed to businesses being "rich" or not being "rich."  That is simply not a sensible way to think about business decisions.  

As a strong first approximation, an investment will be made if it is expected to yield greater savings, or greater revenue, than it costs.  Whether or not the company is “rich” in any meaningful sense is entirely beside the point.  Even if a business isn’t particularly liquid, we have a very efficient corporate finance industry that will be able to loan the money necessary to make investments that will yield lower expenses or higher revenue in the future.  The best one can say is that corporate wealth might help incumbent managers hide inefficient investments from outsiders.   

John Siracusa is one of the most astute and assiduously logical commenters on the web, which is why his extended comments on Apple’s solar power initiatives, about 3 minutes into this podcast, are so peculiar.

At one point, Siracusa asks "Why doesn't every company use solar power?”  His answer is that solar power costs a lot of money.  

Not a good enough answer.  The question is “Does solar power hold the possibility of reducing electric bills by more than the solar power costs?”  The answer has to include costs.  Focussing only on the cost of solar power leads to the business decisions are made because businesses are or are not rich fallacy.  

Embracing the fallacy, Siracusa asks who can afford to make huge capital investments  if you can make it back slowly over the next 20 years, and answers Apple, because they have lots of money.  The economists' answer:  “Businesses who think it will save more that it will cost.”  Apple may be one of those companies, but the fact that it has $X billion in liquid(ish) assets doesn’t really have anything to do with it.  

Here’s another intriguing observation:  “Walmart’s razor thin margins wouldn’t let them think about doing this because that have to watch every penny.”  (Like every quotation in this post, this is a paraphrase).  Does Walmart’s "razor thin margins” say anything about whether employing solar power in their stores (or anywhere else) will lower their electric bills by enough to justify the investment?  I don't see how.

In fact, since Walmart's business model seems to revolve around exploiting every possible economy, they would be the first organization I'd expect to invest in solar power, if one of Siracusa's other assertions were true, namely, that the will make it back slowly over the next 20 years.  

Now, if they don't think it will pay it self back over 20 years, that's another matter.  Siracusa seems to think (although he doesn't come right out and say it) that Apple's solar power investment is a good thing even if it doesn't pay itself back.  Maybe, but what solar power enthusiasts (an environmentalists in general) don't seem to recognize, is that the effort and material that goes into building, installing, and maintaining solar panels are resources too, just like the electricity from the power grid that the solar panels is expected to replace.  

Too much of the solar power discussion seems to treat prices as some sort of arbitrary hurdle place in the way of the good guys trying to fix the world.