no third solution

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What is Profit?

July 11th, 2009

This question comes up from time to time, so I’ll answer as best I can.  I choose to use the definition in its pure, unadulterated form, a close approximation of which is given by Investopedia:

A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses … needed to sustain the activity. [link]

This is quite close to the definition I recently used in Profit IS Justified by Entrepreneurial Risk: for any given interval, Profit equals Revenue less Expenditures. Incidentally, this is not that far off from Franc’s definition (you may recall that Franc vehemently disagreed with the position I took in the aforementioned post) given in a post about the Corporate profit motive, with which I agree at least somewhat [1] in spirit:

In a free society, where there is no exploitation, the profit you make on a given product is, in general, the material expression of how other people evaluate the worth of your product… individual profit [is] something we can understand and contend with in a free society.

You’d almost think he was channeling Mises.[2]  Although individuals may also experience “profits” by exploiting others (more on this, below), there is nothing either explicit or implicit in this definition about exploitation. Consequently, profit (or loss) is the end-result of all production, undertaken by anyone, within any socioeconomic framework.  Profit (or loss) is what remains after the bills are paid.  Therefore I conclude that exploitation is neither a necessary nor sufficient condition to bring about profit, and I reject the Trojan Horse definition, which smuggles the assumption that profit requires exploitation.

But what about the exploitation?  If your definition of “profit” includes this smuggled premise, in my opinion you are really describing an entirely different animal. I more closely associate the exploitative phenomena with economic rent (The Economist, for its faults, gives a very precise textbook definition):

[Economic rent] is a measure of market power: the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use… In perfect competition, there are no economic rents, as new firms enter a market and compete until prices fall and all rent is eliminated.

I’ve alluded to this in the past.  The invaluable functions of the price system (which have no corollary in a non-market economy), are its ability to send signals [3] to the market.  By following profits and avoiding (or cutting) losses, the tendency of a free economy (one where competition is as atomistic as possible) is towards equilibrium, and the existence of profit is a fleeting disequilibrium which signals to individuals, “Not enough of X is being produced!”

For if enough were being produced, there would be no profits to be had, and if instead too much were being produced, there would be mounting losses.

Production will increase in those spheres where profit is to be gained, the increasingly available quantity of product in this market will drive prices down to a theoretical minimum or perhaps temporarily even lower. At this “equilibrium” price revenues are just enough to satisfy opportunity costs. Accordingly, the experiences of “profit” or “loss” are the calculus used to right the economy when it’s out-of-whack — to coordinate the infinite array of human desires with the finite array of resources at our disposal.

At the very least then, the exploitation theory of profit would need to assert that non-exploitative profit is a catalyst for economic rents, in other words, it would need to negate everything we understand about perfect competition and economic disequilibria, and most of price theory, to boot.

Why Profit?

The “evenly rotating economy”, one with neither profit nor loss, (in which all needs are omnisciently forecast, and all resources are allocated in precisely the right quantities, times, and places, such as to satisfy those needs at the precise moments of their realizations) does not exist.

If, under the above definitions of profit, rent and competition, you’re still asking yourself why anyone needs to profit, you might as well be asking yourself, “Why does anyone need to eat?”  As the purpose of eating is to sustain life, the purpose of production (whether it be for your own use or another’s) is profit. Eating permits us to live another day, while profit allows for that day to perhaps be more enjoyable than the previous.

  1. c.f. Mike Gogulski’s reply for an accurate summarization of my objections thereto.
  2. c.f. Mises 1949, p.299. “Production for profit is necessarily production for use, as profits can only be earned by providing consumers with those things they most urgently want to use.” — h/t QuebecoisLibre
  3. Prices convey information about the magnitude and intensity of any of the infinite array of human wants, desires, and needs, and about how to best allocate the finite resources at man’s disposal, which can in no other way be conveyed as quickly, as precisely or with as little effort.

Comments

41 Comments

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  • DixieFlatline says on: July 12, 2009 at 12:18 am

     

    Great post DZ. I agree with your quote from Francois Tremblay back in saner times.

    • Francois Tremblay says on: July 12, 2009 at 7:25 pm

       

      Being a socialist doesn't make me insane, bigot.

    • David Gendron says on: July 13, 2009 at 8:23 pm

       

      Why did you say "back in saner times"?

  • Francois Tremblay says on: July 11, 2009 at 11:02 pm

     

    I wrote that before I became a mutualist. A low blow on your part. My position has been made very clear these past few days, and you are acting childishly in ignoring it.

    Let me make my position clear one more time: profit is the surplus revenue not given to the workers or the consumers by the ownership class. Profit is exploitation, and to support profit is to support theft.

    Profit is only related to the worth of a product in a capitalist system, where we are all forced to pay as much as we're willing to pay, in accordance with the myth of "offer and demand curves."

    "the purpose of production (whether it be for your own use or another’s) is profit. "

    Wrong. The purpose of production is to have products that one can use or trade.

    "Eating permits us to live another day, while profit allows for that day to perhaps be more enjoyable than the previous."

    If your enjoyment of life is predicated on exploitation, then you lead a sad life indeed. At this point, you probably need to get a new one.

    Please present a non-circular argument for the necessity of profit, without selective quoting, or admit that you're hopelessly lost.

    At this point, I've entirely written you off, but I'm hoping that you can at least snap out of it for your own sake.

    • nothirdsolution says on: July 12, 2009 at 12:10 am

       

      As an honest question, and expecting an honest answer if you ever return, what do you mutualists call the realization of value from the production and/or exchange of goods and services? Perhaps that is the term I ought to be using in lieu of "profit", since it is abundantly clear that we're using different definitions of the word "profit."

      I wrote that before I became a mutualist. A low blow on your part….you are acting childishly in ignoring it.

      Don't take everything so personally, or assume such malice, Franc. That post of yours is less than a year old, so I humbly apologize for miscasting whatever is your most-up-to-the-minute definition.

      the purpose of production (whether it be for your own use or another’s) is profit.

      Wrong. The purpose of production is to have products that one can use or trade.

      Now you're being obtuse. If you use it, you expect to profit from use thereof. If you trade it, you expect to benefit from the goods/services rendered in exchange, and the counter-party expects to benefit from use thereof. Therefore, the purpose of production, whether it is for your own use or another's, is profit. QED.

      I believe I presented a fairly straightforward argument making a clear distinction between profit (return to production) and rent (i.e., exploitation). If I have failed in that regard, and thereby you believe to have been personally insulted, well, there's nothing I can do about that.

      If your enjoyment of life is predicated on exploitation, then you lead a sad life indeed. At this point, you probably need to get a new one.

      Now you've just committed the exact same equivocation which I set forth in the OP, and managed to toss in a quite charming ad hominem… the last refuge of scoundrels. Honestly, Franc, I would've expected more from you.

      • Francois Tremblay says on: July 12, 2009 at 7:12 am

         

        "As an honest question, and expecting an honest answer if you ever return, what do you mutualists call the realization of value from the production and/or exchange of goods and services?"

        I wasn't aware that this was a concept isolated from the realization of value in general. I have no specific term for it.

        "Don't take everything so personally, or assume such malice, Franc. That post of yours is less than a year old, so I humbly apologize for miscasting whatever is your most-up-to-the-minute definition."

        Well, you're answering to my current position, so answer to what I write now instead of what I wrote a year ago.

        "Now you're being obtuse. If you use it, you expect to profit from use thereof. If you trade it, you expect to benefit from the goods/services rendered in exchange, and the counter-party expects to benefit from use thereof. Therefore, the purpose of production, whether it is for your own use or another's, is profit. QED."

        You're moving the goalposts now: you're using the term profit in the general sense of benefit. Of course I expect to benefit from it, but that's true of any of my actions, so your deduction is entirely trivial.

        "I believe I presented a fairly straightforward argument making a clear distinction between profit (return to production) and rent (i.e., exploitation)."

        And yet you don't see that they are both exactly one and the same thing? That as rent makes the rented object into an agent of production, so does profit make the means of production an agent of production?

        "Now you've just committed the exact same equivocation which I set forth in the OP, and managed to toss in a quite charming ad hominem… the last refuge of scoundrels. Honestly, Franc, I would've expected more from you."

        Why? You've known me long enough. I don't play nice.

        • nothirdsolution says on: July 12, 2009 at 2:35 pm

           

          You're moving the goalposts now: you're using the term profit in the general sense of benefit.

          No, that's been the goalpost all along – at least as far as my series of posts is concerned. Take away oppression, exploitation, Capitalism, fascism, etc., and at the end of the day, our productivity makes our lives more enjoyable.

          And yet you don't see that they are both exactly one and the same thing? That as rent makes the rented object into an agent of production, so does profit make the means of production an agent of production?

          And you're accusing me of making circular arguments? This is nonsense. "Rent" or "Profit" doesn't cause a thing to be productive. It is exactly the opposite: productivity allows a thing to profit or (or under certain circumstances) earn economic rents.

          • Francois Tremblay says on: July 12, 2009 at 7:25 pm

             

            "No, that's been the goalpost all along – at least as far as my series of posts is concerned."

            So, your total misuse of the word "profit" aside, your basic proposition is apparently that making money is good. Wow. You must a genius: no one's ever thought of this before.

            "And you're accusing me of making circular arguments? This is nonsense. "Rent" or "Profit" doesn't cause a thing to be productive."

            … that's exactly my point. Thank you for being on my side, I guess?

            This conversation sure is taking a turn for the revolting.

          • nothirdsolution says on: July 12, 2009 at 9:28 pm

             

            The purpose of all human action (including 'labor') is to satisfy human desires.

            Insofar as our labor succeeds in satisfying those desires, we benefit from our labor. These benefits are a form of profit.

            "Rent" or "Profit" doesn't cause a thing to be productive."

            … that's exactly my point.

            Then why did you say the exact opposite?

          • Francois Tremblay says on: July 12, 2009 at 9:50 pm

             

            "Insofar as our labor succeeds in satisfying those desires, we benefit from our labor. These benefits are a form of profit."

            Yea, if you use "profit" in a trivial way.

            "Then why did you say the exact opposite? "

            Because I was attributing it to you. I was explaining the logical consequences of your position. Now you say it's not your position.

          • nothirdsolution says on: July 13, 2009 at 1:49 am

             

            The logical consequences of my position (viz., that profit and economic rents are not the same things) is that profit and economic rents are the same thing. Surely, you jest?

          • Francois Tremblay says on: July 13, 2009 at 7:16 am

             

            No, I've just explained it to you. That as rent makes the rented object into an agent of production, so does profit make the means of production an agent of production. This is a pretty standard argument from Tucker, if you had read Instead of a Book you'd recognize it.

          • nothirdsolution says on: July 13, 2009 at 11:38 am

             

            Three comments ago you agreed that rent or profit doesn't cause a thing to be productive, then you said that you did say those things, only that you were attributing them to me as the consequence of my position, now you're saying that you didn't say them, Tucker did. I'm thoroughly convinced that you have no idea what you're saying, at this point.

            I think we're done here.

          • Francois Tremblay says on: July 13, 2009 at 8:13 pm

             

            It's very simple.

            If your contention is that rent does NOT make the rented object into an agent of production, then profit equally cannot make the means of production an agent of production.

            If you can't understand such a basic concept, then why are you arguing about something you can't understand?

            If you can, why are you trolling me?

            Either way, please never contact me again.

          • nothirdsolution says on: July 13, 2009 at 10:01 pm

             

            I'm unclear of what you're trying to say, in the context you're trying to say it. Specifically, what you mean by "agent of production". I read that as, "Rent causes something to be productive" which is quite clearly nonsense. If you meant something different (as I presume you might've) try stating the idea differently.

            My contention is that an objects rentability or saleability does not cause its productivity. That's about as basic as it gets – an item is either productive, or capable of productivity, or it is not. Rent or profit have nothing to do with that, whatsoever.

            Please give a page citation in Tucker's Instead of a Book, where I might find a more thorough elucidation of this "basic concept".

            As for trolling, this is my blog, and you're the one who keeps returning here.

    • nothirdsolution says on: July 12, 2009 at 1:12 am

       

      profit is the surplus revenue not given to the workers or the consumers by the ownership class.

      And I'm speaking in general terms, so you can assume that what I say would apply equally in a classless society. In such a society, there is no surplus revenue being withheld from the workers by an "ownership class" therefore it stands to reason that all revenue goes to labor, from which I conclude that after labor has paid their bills (which they surely do) that whatever remains is profit. I don't honestly give a damn whether you call it "zoop" or "qorgm" or whatever. I call it profit, and it's profit, sans exploitation.

      If you prefer for the sake of clarity that I refer to this phenomenon differently in the future, I will take it under advisement. But not knowing how else to call it, I choose to call it "profit."

      • Francois Tremblay says on: July 12, 2009 at 7:14 am

         

        "And I'm speaking in general terms, so you can assume that what I say would apply equally in a classless society. In such a society, there is no surplus revenue being withheld from the workers by an "ownership class" therefore it stands to reason that all revenue goes to labor, from which I conclude that after labor has paid their bills (which they surely do) that whatever remains is profit."

        Yes… my definition was a bit limited, I agree. I agree that that is profit also, of course.

        A more generalized way to say it would be to scratch the ownership class and simply refer to "an ownership class or ownership group."

        "I don't honestly give a damn whether you call it "zoop" or "qorgm" or whatever. I call it profit, and it's profit, sans exploitation."

        It's profit, and exploitative, like any other form of profit.

        • nothirdsolution says on: July 12, 2009 at 2:38 pm

           

          ?

          You agree that "net income" (for the sake of clarity) accruing to the laborers in a classless society is profit, but you conclude that it is "exploitative, like any other form of profit." Who, precisely, is doing the exploiting in this circumstance?

          • Francois Tremblay says on: July 12, 2009 at 7:25 pm

             

            The laborers against the consumers, obviously.

          • nothirdsolution says on: July 12, 2009 at 9:22 pm

             

            If the workers don't receive the full product of their labor, then some egregious wrong has been put upon them (probably by the capitalists or "ownership class"), and they've been exploited. If the workers receive the full product of their labor, then they're exploiting the consumers?

            So, what ought happen to the full product of labor? Who receives it in such a manner that would satisfy Francois Tremblay?

          • Francois Tremblay says on: July 12, 2009 at 9:51 pm

             

            "If the workers receive the full product of their labor, then they're exploiting the consumers?"

            No… that's not what I said. I said anything more than their full product is profit.

          • nothirdsolution says on: July 13, 2009 at 10:02 pm

             

            Now you're making up replies to things that I didn't say, under the auspice that I did say such things. Foul play, indeed.

    • David Gendron says on: July 13, 2009 at 8:22 pm

       

      "the myth of "offer and demand curves.""

      I don't think it's a myth, but i Think Price Theory could use other premisses than capitalist ones.

  • c.t.mummey says on: July 12, 2009 at 1:42 pm

     

    suppose profit was called equity – that may be a more neutral term. suppose a worker cooperative has $10,000 worth of equity while the one down the street in the same business has debt of $10,000. wouldn't both of you agree there wouldn't necessarily be exploitation afoot? in fact its more likely w/the latter cooperative. the company i work hasn't make a profit in years, but there are individuals who are working the system.

  • David Gendron says on: July 13, 2009 at 8:05 pm

     

    In fact, I don't see any profit, to the exception of natural monopolies or oligopolies, that can occur in a anti-capitalist free market.

    But you're a proprietarian anarchist, so profit can occur in a proprietarian free market

  • David Gendron says on: July 13, 2009 at 8:07 pm

     

    "A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses … needed to sustain the activity."

    NEEDED TO SUSTAIN THE ACTIVITY, i.e TO INVEST IN THIS ACTIVITY, not to enrich fat cats like in the current capitalist system!

    • nothirdsolution says on: July 13, 2009 at 10:12 pm

       

      I don't disagree with the essence of this position, David.

  • David Gendron says on: July 13, 2009 at 8:12 pm

     

    "Although individuals may also experience “profits” by exploiting others (more on this, below), there is nothing either explicit or implicit in this definition about exploitation."

    In an anti-capitalist free market system, the only way to create profit is criminal exploitation of individuals OR exploitation of natural monopolies or oligopolies.

    In a proprietarian free market, pure entrepreneurial profits are possible.

    • nothirdsolution says on: July 13, 2009 at 10:05 pm

       

      In an anti-capitalist free market system, the only way to create profit is criminal exploitation of individuals OR exploitation of natural monopolies or oligopolies.

      David, try using a broader definition of "profit" which I've defined above in general terms, as a benefit accruing to the productive individual, viz., if I combine flour, eggs, sugar, and butter and heat, my revenue is a cake. Insofar as I enjoy the cake more greatly than the sum of its constituent parts, I have profited. And I have exploited nobody.

      All I'm trying to say is that "profit" can exist in an anti-capitalist sense. I'm not sure why this is such a square-the-circle proposition for Franc.

      • David Gendron says on: July 14, 2009 at 6:13 pm

         

        "David, try using a broader definition of "profit" which I've defined above in general terms, as a benefit accruing to the productive individual, viz., if I combine flour, eggs, sugar, and butter and heat, my revenue is a cake. Insofar as I enjoy the cake more greatly than the sum of its constituent parts, I have profited. And I have exploited nobody."

        If you call it "profit", I accept that.

        "All I'm trying to say is that "profit" can exist in an anti-capitalist sense. I'm not sure why this is such a square-the-circle proposition for Franc."

        Only with criminal exploitation, natural monopolies or oligopolies, or "material profit" that you described here.

  • David Gendron says on: July 13, 2009 at 8:14 pm

     

    "In a free society, where there is no exploitation, the profit you make on a given product is, in general, the material expression of how other people evaluate the worth of your product… individual profit [is] something we can understand and contend with in a free society."

    François was right, in a proprietarian anarchist point of view. But he became a mutualist, and you knew that!

  • David Gendron says on: July 13, 2009 at 8:19 pm

     

    "As the purpose of eating is to sustain life, the purpose of production (whether it be for your own use or another’s) is profit. Eating permits us to live another day, while profit allows for that day to perhaps be more enjoyable than the previous."

    Capitalist bullshit! I agree with François when he said: "The purpose of production is to have products that one can use or trade. If your enjoyment of life is predicated on exploitation, then you lead a sad life indeed. At this point, you probably need to get a new one."

    • nothirdsolution says on: July 13, 2009 at 10:09 pm

       

      I surmise that english may be your second language (as French is my second language), however, you could do better by avoiding excessive exclamation points, and overuse of the word "bullshit" to emphasize your opinions.

      Capitalist bullshit!

      Again, using the definition of profit that I broadly outlined in the OP (and in the cake example, above) how is this "bullshit"? And how is it "capitalist"? It's not. And you know it.

      Now, if you think that I'm using the word "profit" incorrectly, and that there is a better, more accurate, mutualist definition for the phenomenon that I'm describing, by all fucking means, tell me what that word is so that I may use it, and put this topic to rest, once and for all.

      If I need to "get a new life" so badly, what does it say about you & Franc, who are spending nearly as much time on my blog as I am? Not much, apparently.

  • David Gendron says on: July 14, 2009 at 6:29 pm

     

    "Again, using the definition of profit that I broadly outlined in the OP (and in the cake example, above) how is this "bullshit"? And how is it "capitalist"? It's not. And you know it."

    But when you said this: "As the purpose of eating is to sustain life, the purpose of production (whether it be for your own use or another’s) is profit. Eating permits us to live another day, while profit allows for that day to perhaps be more enjoyable than the previous.", you used the same rhetoric used in statist-capitalist propaganda. That's why I call it "Capitalist Bullshit", not because you're a capitalist. But, in the "material profit" sense that you described in the cake example, it could be acceptable.

    "Now, if you think that I'm using the word "profit" incorrectly, and that there is a better, more accurate, mutualist definition for the phenomenon that I'm describing, by all fucking means, tell me what that word is so that I may use it, and put this topic to rest, once and for all."

    François, or other mutualists, knows better that me about that. Maybe the profit debate isn't so important after all. Maybe we should focus on the "property vs possession" debate, cuz the position in the profit debate depend widely on the position in the property debate.

    "I surmise that english may be your second language (as French is my second language), however, you could do better by avoiding excessive exclamation points, and overuse of the word "bullshit" to emphasize your opinions."

    Interesting. And you can read my blog? You're right about the exclamation points.

    "If I need to "get a new life" so badly, what does it say about you & Franc, who are spending nearly as much time on my blog as I am? Not much, apparently."

    I don't know about Franc's opinion on this, but this is not a problem for me, and I don't think that you have to get a new life, but I think you should reconsider some of your premises. But you have the freedom to think like you want.

    • nothirdsolution says on: July 15, 2009 at 4:08 am

       

      "Interesting. And you can read my blog? You're right about the exclamation points. "

      I've read it from time to time – my French is quite rusty, although I can still read & write it, fluency in speaking/listening troubles me.

      "I don't know about Franc's opinion on this, but this is not a problem for me, and I don't think that you have to get a new life, but I think you should reconsider some of your premises."

      Glad to hear it – as for my premises, they are always subject to further review/revision.

      I agree that the "property" vs. "possession" debate is probably far more important than this "profit" nonsense we've been wasting so much time on the last week or so. Our opinions regarding property and possession are probably much more in agreement.

      • David Gendron says on: July 15, 2009 at 7:21 pm

         

        "Our opinions regarding property and possession are probably much more in agreement. "

        I hope so, but generally, it's a disagreement in the property debate that causes a disagreeement in the profit debate.

        "I've read it from time to time – my French is quite rusty, although I can still read & write it, fluency in speaking/listening troubles me."

        And the main problem for your understanding is the fact that my blog presents concepts in a Quebec local point of view. I have the same problem about speaking English.

        • nothirdsolution says on: July 16, 2009 at 12:56 pm

           

          "I hope so, but generally, it's a disagreement in the property debate that causes a disagreeement in the profit debate. "

          In this case, I think it's mostly a semantic disagreement :)

          As for the question of property, I probably fall somewhere between Proudhon and Locke. Perhaps it seems a wide spectrum, but I believe it's possible to merge the concepts of possession/property, and homesteading/abandonment.

          This is a topic for another post, one that I've been thinking of writing for some time now. In any event, I hope you'll offer your opinions in response to that post (wherein we agree and wherein we may disagree) whenever I get around to actually writing it.

  • db0 says on: July 17, 2009 at 5:53 am

     

    I've had quite a few discussion on this lately and it seems we're using a different definition of "profit". Indeed my definition of profit is much closer to what you called economic rent. The difference is that I consider wage-labour, to be a form of this economic rent, specifically an economic rent of capital.

    However I will point out that the perfect equilibrium that economic textbooks talk about does not and cannot exist, so it's silly to talk about what the markers naturally do in this context.

    • nothirdsolution says on: July 17, 2009 at 4:48 pm

       

      Of course markets can't achieve equilibrium – even if they did for one second, circumstances would change and a new disequilbrium would exist. Unfettered, however, the idea is that they tend towards equilibrium.

      Now, perhaps wage-labor is a form of economic rent. Let us assume that it is, and further let us assume that this is widely recognized and that wage-labor as we know it has ceased to exist. Whatever the owner-laborers receive in exchange for their wares is their revenue, and insofar as their revenue is sufficient to cover opportunity costs and living expenses, then the owner-laborer (by the product of his labor) is enjoying the net increase in human prosperity brought about by a greater abundance of goods and services than those which existed ex ante.

      If the owner-laborer is unable to justify the time, effort, and other resources he expends on the production of his wares with the revenues he receives in exchange therefor, he exits that (unprofitable) venture in search of another, better opportunity which he can justify.

      • db0 says on: July 19, 2009 at 2:33 pm

         

        Unfettered, however, the idea is that they tend towards equilibrium.

        This is unargued. In fact, its based on what an unrealistic model of a market economy would do.

        I would argue that Unfettered a free market would tend towards disequilibrium as inequality rises.

        Let us assume that it is, and further let us assume that this is widely recognized and that wage-labor as we know it has ceased to exist.

        Stop right there. What you're talking now is Mutualism, not Capitalism. Once as you take wage-labour away, you stop having a Capitalist system.

        Is your goal to remove wage labour? At this point I'm a bit unsure on what you're suggesting.

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