Profit In Everyday

Profit In Everyday

Profit, in everyday language, a surplus of income over outgo ('expenses'); more generally, 'profitable' means 'worth doing' or 'paying'; in economics, profit is given a more precise meaning.

Profit was regarded by some nineteenth-century economists as the wages paid to the entrepreneur for his work; by others as the rent paid to Mm for his special knowledge; by yet others as the interest on his capital. In accounting the profit shown in, say, a shopkeepers or farmers profit and loss account may include elements of all three kinds of payment or price.

The early classical economists tended to explain profit as the recompense for risk-taking. This is still an illuminating theory (see below); the difficulty is that ownership is often divorced from control, and it is not easy to say how the risk is divided between the shareholders, who receive what is left after paying all costs, and the entrepreneurs, who traditionally are the risk-takers but who even as directors are essentially salaried servants of the enterprise. A second difficulty with this theory is that many risks can be foreseen and therefore discounted, or that large numbers of similar risks can be grouped together and each one converted into a known cost by insurance.

Alfred Marshall regarded profit as the reward of enterprise or 'the earnings of management'. But in this sense profit is a form of wages paid for a special kind of labour.

The American economist J. B. Clark came nearer to the true nature of profit when he explained it as the result of change. He argued that in a static and perfectly competitive economy the prices of commodities or services would cover their costs (including management) and no more. But change would upset this equality because the effects of, say, increasing population or income would take time to spread throughout the economy. In the meantime prices in some sectors would exceed costs as defined, giving rise to 'true' profits (or costs would exceed prices giving rise to the opposite, losses).

Another American economist, Professor F. H. Knight, took up the theory from this point and argued that change as such could not explain profit because some changes could be anticipated and so could be allowed for before they happened. If there were perfect foresight, all changes would be foreseeable, and change could then not bring about profit at all. The cause of profit was therefore unsteady: profit arose not from change itself but from the unpredictability of change.

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Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this site is therefore not a final statement of economic doctrine.

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