What Is Profit?
08 August 2017 | Pago Pago, American Samoa
This question has befuddled many for a long time. Here are some of the answers people have come up with:
--an accounting category
--the return on capital
--a compensation for business risk
--extra compensation to attract resources into that industry
--a catch all category to hide perloinings
--what's left over after all variable and fixed costs
All have an element of truth, but three. It is not a return on capital because that is a factor cost that has its own separate compensation, usually as interest, regardless of how badly the books are kept. It is not a compensation for business risk, because the higher it is, the less risk there is. It is not simply an accounting category because that tells us nothing about how it is arrived it.
To be sure it is a theft category to hide what is 1) stolen from labor by fiat, by monopsony returns and by other means; 2) by monopoly returns extracted from buyers by various means, 3) as rents extracted from finite resources, principally land, and 4) as gains extracted from the public by externalities which socialize some costs while privatizing all gains; and by other such perloinings.
The economic function of profit is to flag industries doing well and needing additional resources to be brought into them until that profit is driven to zero and disappears. But that is a function of profit, not what it is.
A better read should be it is what is left over after all variable and fix costs are properly accounted for and paid. As an industry flag for entry, it should drop to zero in the perfectly competitive model as the optimal quantum of resources come into the industry. That is the economic analysis.
The reality, much more these days, is profit is significantly a theft category to hide what is improperly taken from others that does not drop to zero by natural means but remains and can grow as more is improperly taken from others.