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Operating Margins

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Re: Operating Margins

#101

Post by takinola »

Swenrekcah wrote: post #97
takinola wrote: post #90

Earlier quoted context omitted.

> Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth. OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact…

These entities facilitate value creation yes, but they do not create much value and certainly not in proportion to the profits they extract. I have met people who sincerely seem to believe that if an entity makes money then it must be societally useful because otherwise the market would not reward them with profits. This seems to me like a self-help belief for people in these lucrative but ultimately not very meaning…

The Mafia makes (made?) a ton of profit but are a net negative on society. The better heuristic may be to consider what would be lost if the industry did not exist. Anything beyond subsistence agriculture would probably be impossible without financialization. There's a reason you had banks even in the middle ages when the average person was poor.

Re: Operating Margins

#102

Post by didibus »

zackmorris wrote: post #73

This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.…

Why doesn't competition drive their margins to be smaller? That's what I'm curious about.

Article says Unit Economies or regulatory monopoly, but I'd be interested in something that goes deeper, specifically around financial services.

Re: Operating Margins

#103

Post by tomjakubowski »

hiAndrewQuinn wrote: post #89
tshaddox wrote: post #87

Earlier quoted context omitted.

> This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Of course, this pretty closely matches the basic Econ 101 explanations of competition and free markets. The entire goal of competition is to reduce prices, specifically to get the market price of a good to trend down towards the marginal cost. The thing that's supposed to be good fo…

I was about to say "Wait, you want to live in the world where gene therapy is as heavily marked up as toll roads?" in the same spirit as this. Low profit margin is the good outcome, not the bad outcome.

You seem to be in agreement with the top-level poster, then. "Margin is inversely correlated with value to humanity" corresponds to "low margin is the good outcome", presuming that you see value to humanity as the good outcome.

Re: Operating Margins

#104

Post by pinkmuffinere »

zackmorris wrote: post #73

This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.…

> stock exchanges, banks, toll road operators, financial services and asset management are in … rent-seeking.

This is an absolutely insane take. If you truly believe it, then I propose two tests:

1. You should start a business that provides the same services without rent seeking. If they’re really these low-value things that are just charging high prices, then you should be able to setup very attractive alternatives, make a ton of money yourself, and improve the world in a big way.

2. If you don’t have the energy or willingness to start them yourself, you could limit your use of them to the absolute bare necessity. If you believe they extract value, you could probably do better for yourself by using them less.

Re: Operating Margins

#105

Post by versteegen »

takinola wrote: post #90
zackmorris wrote: post #73

This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.…

> Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth. OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact…

Obviously the financial sector provide a lot of value, but they also extract a LOT of value and probably even worse employ a LOT of the smartest people (I recall the rebalancing of Iceland's economy after its banks failed), and couldn't we get nearly the same benefits with far less of the global economy being dedicated to financial services and trading (which neither I nor it seems the OECD categorise under "services")?

For example according to the OECD [1] 25% of Luxembourg's GDP (excluding interest and trading profits [2]) and 10% of employment is due to financial services! For comparison, for the UK and USA it's 8.8% and 8.3% of GDP.

In particular it's hard to me to see how market trading activity that provides a price for equities to the second, instead of say holding auctions every hour (which would probably greatly reduce profits for day traders and HFT), helps any drug development or aircraft leasing company to raise money. Financing deals don't happen on the market, and if market price is involved, typically something like the last month's average daily closing price is used.

We might call middlemen parasitic if they extract more value than they provide, but as you say, without finance the global economy wouldn't function. Let's instead consider the marginal utility of more of the economy being dedicated to finance. I'm convinced it's negative.

[1] https://www.oecd.org/en/publications/2025/04/oecd-economic-s...

[2] Quote from [1]:

> In the national accounts, financial services output is measured as the sum of financial intermediation services indirectly measured (FISIM) and fees, for instance on account keeping, credit cards, brokerage, financial advice and asset management. ... Trading profits and other interest income, for instance on bonds and derivative products, are excluded from the national account measure of financial services output.

Re: Operating Margins

#106

Post by squirrellous »

zackmorris wrote: post #73

This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.…

Agree with the general point. I’d maybe add that a lot of times it’s the scale of the profit that makes something a net negative for humanity, not the percentage based margin. A lot big tech started small and in the early stages created a ton of positive value, sometimes with a respectable margin, but once they are at billions of market capitalization and starts chasing profits for investors, the positive societal value gets eroded.

Re: Operating Margins

#107

Post by James_K »

takinola wrote: post #90
zackmorris wrote: post #73

This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.…

> Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth. OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact…

Banks do not provide capital. When I buy 50 tons of steel, no bank has sold it to me. The smelters and miners have provided that capital. Banks allocate capital. It is management, not provision.

With that in mind, there are two types of productive financial work: actuarial services and accounting. Actuaries act as the managers of society's resources, ensuring that net profit is made and risk well distributed, and accountants determine what those resources are. It is clear that many of the people in finance are not qualified to provide either of these services and simply leach profit out of the rest of the economy.

Notice that neither of these rely on capital markets and speculation. Speculators have been repeatedly proven to be horrible managers, performing worse than random chance. History is clear on this: if left to their own devices, speculators will destroy the economy. Only by means of strict regulation can they be forced into doing the productive actuarial and accounting work for which they are hypothetically employed. Yet for some reason, we still allow these people to operate without oversight in many cases and to extract massive profit beyond the value of their work.

Re: Operating Margins

#108

Post by James_K »

takinola wrote: post #101
Swenrekcah wrote: post #97

Earlier quoted context omitted.

These entities facilitate value creation yes, but they do not create much value and certainly not in proportion to the profits they extract. I have met people who sincerely seem to believe that if an entity makes money then it must be societally useful because otherwise the market would not reward them with profits. This seems to me like a self-help belief for people in these lucrative but ultimately not very meaning…

The Mafia makes (made?) a ton of profit but are a net negative on society. The better heuristic may be to consider what would be lost if the industry did not exist. Anything beyond subsistence agriculture would probably be impossible without financialization. There's a reason you had banks even in the middle ages when the average person was poor.

>Anything beyond subsistence agriculture would probably be impossible without financialization.

This is patently not true. The USSR had no financial markets and engaged in the production high value goods. Whether it did so more efficiently than its capitalist competition is another matter, and I believe the answer is likely no, but it clearly did more than subsistence farming.

Re: Operating Margins

#109

Post by KK7NIL »

versteegen wrote: post #105
takinola wrote: post #90

Earlier quoted context omitted.

> Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth. OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact…

Obviously the financial sector provide a lot of value, but they also extract a LOT of value and probably even worse employ a LOT of the smartest people (I recall the rebalancing of Iceland's economy after its banks failed), and couldn't we get nearly the same benefits with far less of the global economy being dedicated to financial services and trading (which neither I nor it seems the OECD categorise under "services…

You imply in your argument that finance mainly makes money from HFT("it's hard to me to see how market trading activity that provides a price for equities to the second") but this is simply not true, HFT and quants make up a very small portion of financial staff or profits.

My understanding is that the majority of big finance's income is from private equity or debt deals (pairing companies who need money with investors who have money), not from trading (there's very few people who we can confidently say are net winning traders and they don't scale).

Re: Operating Margins

#110

Post by AnthonyMouse »

zackmorris wrote: post #73

This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.…

> Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.

You're missing how the calculation works.

Suppose you work in a lab doing genomics etc. You get paid, say, $100,000/year, and you require some equipment which costs another $100,000/year to pay off and which goes to pay the salaries of the people who invented or manufactured it. Then your lab has $210,000/year in revenue, which means $10,000 in profit and a margin of ~5%, which isn't super high.

That's good! It means the people paying for your services aren't paying a huge margin on top of your salary to receive your services so more people can afford it. Or it means you're getting paid $100,000 instead of $60,000, the latter of which would have quintupled the investors' profit but reduced your incentive to do that work, reducing the quality of the people they can attract to do it.

Whereas industries with high net margins are the ones that are the most dysfunctional or captured by incumbents. It's no surprise that all the finance stuff is there at the top since that's the most thoroughly captured industry in the country. But that doesn't mean you want other things to be like that, it means you want those things to be more competitive so the money is going to customers as lower prices or workers as higher wages instead of going to fat cats as higher margins.

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