Profit In This

Profit In This

Profit In this sense profit is present in all kinds of economic activity, not only entrepreneurial activity. It is not a separate category of income so much as an element that enters into the rewards of all factors of production to some extent, although it is most easily illustrated in the earnings of enterprise. In an economy in which there was no risk, every factor of production would have some minimum price at which it would be attracted to each occupation: if its reward fell below this 'supply price' it would not be supplied. The presence of uncertainty in real life increases these minimum supply prices by a risk premium the size of which will depend on the individual attitudes of the owners of factors to the risks of various occupations, and the expectation of which must be forthcoming before the factors will be made available to any use. In businesses the complex of such expectations constitutes the 'normal' level of profits to which competition will in the long run be edging the earnings of enterprise. But innovation and change are constantly causing revision of expectations, short-run profits may surpass or fall short of expectations, and monopolistic practices try to perpetuate positions of economic advantage, so that profits at any one time in real life are likely to comprise a number of elements of which 'pure' profit is only one.

This view of profit as a risk premium is illuminating for two reasons. First, it suggests that in the absence of monopolistic practices the cost to society of risk-bearing is unlikely to be large. Secondly, it indicates that profit in the sense of a risk premium is likely to be present in any kind of economic system, whether based on private enterprise or on state ownership and planning. As long as there is uncertainty about output or the performance of labour, management or any other factor of production, state planning has to take it into account in its decision-making. The only way in which it can abolish profit is by preventing change so that wants can be foreseen without uncertainty.

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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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