Profit, Entrepreneurship,


Material Capital and Equality





January 14, 1999




Outline


 


1.Profit in the Broadest Sense -- Subjective Profit


2.Money Profit


3.The Source of Profit


4.Profit and Material Capital


5.Profit and Equality





Profit, Entrepreneurship,


Material Capital and Equality


Profit in the Broadest Sense -- Subjective Profit


Properly understood, the term "profit" in economics refers ultimately to the gain from exchange. Every voluntary exchange is expected by the exchanging parties to yield a surplus in the sense that the satisfaction received is greater than the satisfaction foregone. That surplus is profit in the broadest sense.(1) We can use the term subjective to characterize this surplus since satisfaction is a subjective notion. The satisfaction that you receive from a good or service differs from that received by someone else in a way that we cannot measure. The exchanging parties can calculate the surplus in money terms and they may announce how much satisfaction they believe they received in these terms. However, they may also choose not do so. In any case, their announcements need not correspond to their subjectively-perceived satisfaction.



Money Profit


An exchanging party that employs modern accounting techniques, such as a modern corporation, always measures the surplus in money terms. In this case, profit is synonymous with the money profit of the corporation. We can refer to this as profit in the narrow sense. It is distinguished from profit in the broadest sense by the fact that the latter includes the gains in satisfaction that consumers of products receive (sometimes called consumers' surplus); the wages and salaries net of opportunity costs that are received by employees (sometimes called economic rent); the money profits received by the owners of material capital that the corporation rents or buys (material capital costs to the corporation net of the costs to the firms that supply the material capital); interest on loans that is greater than the opportunity cost to the lender; and, for good measure, any payments for natural resources net of the opportunity costs of providing them.



The Source of Profit


Where does profit come from? It comes from exchange or, more specifically, from the choices to exchange that are made by the exchanging parties. Profit would not exist if someone did not identify the potential gains from exchanging. In the market system we call such individuals "entrepreneurs."


In considering the corporate form of business, the most important entrepreneurs are usually the people who conceive of the corporation, its original stockholders, its hired managers, and as time passes, the people who come to replace them. However, it is important to realize that consumers of a corporation's products are also entrepreneurs and help to cause profit to exist. When they identify that they can gain a surplus from buying the firm's product and act on this new knowledge, they are entrepreneurs. The same is true of employees when they discover that they can earn more money than elsewhere and decide to accept employment. And so on for all of the suppliers of the factors of production and the lenders. Everyone who identifies and takes advantage of gains from exchange that are due to the corporation's existence is an entrepreneur and shares in the profit in the broadest sense. However, only the corporation's stockholders receive profit in the narrow sense.



Profit and Material Capital


Profit in both the broadest sense and in the narrow sense can exist without material capital. However, most profit in the narrow sense is received by corporations that employ material capital, the purchase or production of which can be financed either by borrowing or by an initial contribution of money capital by investor-owners.


Although the production of material capital is an integral part of the planning of entrepreneurs, the material capital the entrepreneurs have in mind is properly called private capital.(2) It consists of produced materials that each entrepreneur individually appraises. No economist or central planner can know the "value of capital." There are as many separate values of material capital as there are entrepreneurial appraisals.


The use of material capital does not make the continuing identification of new profit opportunities a mechanical process. The profit-entrepreneur system does not involve reproducing material capital, for example. Because only private capital is a meaningful concept in profit calculation, the idea of a capitalist system as an organism that reproduces itself through its reproduction of blocks of identifiable, social material capital makes no sense. Because all exchange opportunities must be identified and because the conditions under which exchange occur are constantly changing, the agglomeration of private material capitals at one point in place and time will never correspond exactly to, and may deviate substantially from, the private material capitals that exist at another place and time.


This idea - that material capital reproduces itself or that it must be reproduced for the profit-entrepreneur system to be maintained - appears to be an effort to transform what is essentially a very human process of identifying potential gains from exchange into a mechanical one. It looks at the profit-entrepreneur system as an aggregate of material driven by a mechanism to which the human beings are blind. The post-classicals, by way of contrast, viewed the system as interaction among a group of free and independently choosing human beings.



Profit and Equality


There is no relationship between profit in the broadest sense and equality. Everyone who participates in voluntary exchange and who does not make an error in his decision to participate earns profit in the broadest sense. However, (1) since profit in the broadest sense is largely subjective - that is, it consists of satisfaction benefits rather than money benefits - and (2) since it is the joint product of the entrepreneurship of the various exchanging parties; the notion of equality cannot be applied in any definitive way. Who can judge whether the baker gains more from his money profit than the consumers gains from their bread, the hired workers gain from their accepting paid employment, or the lenders gains from their interest?


Some observes look at equality from the angle of profit in the narrowest sense. They point out that in the case of the corporation, the stockholders are the only ones who receive profit in the narrow sense. They go on to assert that, on this basis, the corporation's profit is not equally distributed. This is correct. However, this point of view is too narrow to be useful in reaching any judgments about policy or morality, since it disregards the profit in the broader sense that goes to consumers, employees, suppliers of the factors of production, and lenders.




Notes


1. The idea of distinguishing between profit in a broad sense and profit in the narrow sense of business profit is described by Ludwig von Mises (1966: 289).


2. See Herbert Davenport (1904).



 


References
Davenport, H. (1904), "Capital as a Competitive Concept," Journal of Political Economy 13 (December): 31-47.


von Mises, Ludwig (1966). Human Action: A Treatise on Economics. Chicago: Henry Regnery Company.




Copyright © 2000 by James Patrick Gunning



Gunning’s Address



J. Patrick Gunning
Visiting Professor
U.S. Coast Guard Academy
Management Department
15 Mohegan Avenue
New London, CT 06320


Please send feedback:


Email: gunning@nomadpress.com
Go to Pat Gunning's Pages