Action attempts to exchange a less desirable condition for a more desirable one, and costs are incurred to achieve a goal. The difference between the value of the costs and of the goal is called profit.
Sometimes, action does not achieve its end. The result may still be an improvement, although inferior to the end aimed at - then there is still a profit, although a smaller one than that expected. But it can happen that the action produces a less desirable state of affairs. Then the difference between the valuation of the result and the costs incurred is called loss.
The subjective nature of profit
The difference between the value of the price paid (the costs incurred) and that of the goal attained is called gain or profit or net yield. Profit in this primary sense is purely subjective, it is an increase in the acting man's happiness, it is a psychical phenomenon that can be neither measured nor weighed. There is a more and a less in the removal of uneasiness felt; but how much one satisfaction surpasses another one can only be felt; it cannot be established and determined in an objective way. A judgment of value does not measure, it arranges in a scale of degrees, it grades.
Calculation is possible only with cardinal numbers. The difference between the valuation of two states of affairs is entirely psychical and personal. It is not open to any projection into the external world. It can be sensed only by the individual.
Profit and consumers
Profit is an indication that both producers and consumers have improved their well-being.
In short, by investing a given amount of money, producers have secured a greater amount of money. This, in turn, enables them to secure a greater amount of goods and services, which in turn promotes their lives and well-being. Likewise, consumers, by exchanging their money for goods that are on their highest-priority lists, have raised their living standards.
Criticisms of profit
Profits in general or "profiteering" (unreasonably high profits), have been criticized for a long time. One objection is, that profits, unlike other sources of income such as wages, rents, or even interest, are unearned. There is no honest labor or effort associated with profit making to justify the benefits. Most people do not understand the process by which profits are attained, and assume there is something untoward going on.
Another objection is, that such profits impoverish the rest of mankind. The notion is that there is only a finite amount of wealth available and if the profiteers get more of it, there is less for everyone else. Thus, not only are profits “undeserved” because they are “unearned,” but they actually harm people by diverting funds from the rest of society. It also appears to many that profits are earned by taking advantage of the helplessness or “from the misery of others.”
Causes and effects of profits
First, profits are earned by entrepreneurs who see and seize upon opportunities which are not readily apparent to other people. The opportunity grasped by the entrepreneur may vary from case to case, but in all cases people are offered trades which they hold to be in their advantage, and which would not be offered in the absence of the entrepreneur.
In the most usual case, the entrepreneur sees a discrepancy between different prices - for example prices in different places, or a price discrepancy between present goods and future goods. It may be also the prices of goods that have not yet been produced, and therefore have no prices at all. If there is no price discrepancy (no opportunity), the successful entrepreneur will not act.
What are the results of profit seeking?
One result is the collection and dissemination of knowledge. An obvious and dramatic example is the knowledge of hitherto unproduced products, but the profit seeker constantly brings to the market knowledge about price differentials. This knowledge is of great benefit to all concerned - they can buy and sell and enjoy new or cheaper goods - opportunities they would not have access to otherwise. What the profit seeker does is make sure that the effects of knowledge of prices in the different areas are felt.
It is perfectly true, that the profit maker takes advantage of the ignorance of other people, however, it is hardly reprehensible. Anyone whose function it is to sell a commodity must sell it to those who lack it. The fact that the lack is determined by ignorance does not make the lack - or the need - any less real. The profit seeker "takes advantage" of the lack of knowledge of his customers in the same way that the farmer "takes advantage" of the hunger of his customer—by providing that which his customer lacks.
The profits of the entrepreneur, therefore, are not made at the expense of anyone else. The entrepreneur creates the possibility of cooperation between disparate, and in many cases widely separated, groups. He is a broker or intermediary in opportunities. It is his function to see to it that mutually beneficial opportunities are not bypassed. In addition the profit seeker benefits people by offering them choices otherwise not open to them.
All entrepreneurial transactions are strictly voluntary. The people with whom the entrepreneur deals are just as free to reject as to accept his offers. If they accept, therefore, it can only be because they feel that they benefit from trading with him. They may regret their decision, and wish they had made their purchase at a lower price, or sold their goods at a higher price. But this does not alter the claim that the profit seeking entrepreneur offers a trade which, at the time it is offered, is considered beneficial by all the parties to it. This is an important claim, and it speaks well for the entrepreneur. It is a claim which cannot, for example, be made on behalf of government transactions because they cannot be said to be fully voluntary.
Another result of the profit making process is that after it is undergone in any given market, there is less scope for its continuation. Once the opportunity has been pointed out and fulfilled by the entrepreneur, his function is completed and he has move on to make other pastures greener.
The incentive behind the entrepreneur’s attempt to hold together the disparate parts of the economy is, of course, the profits he hopes to gain thereby. This is an excellent example of the beneficial effects of a profit and loss system. For the successful entrepreneur - the one who earns profits - holds the economy together by decreasing price discrepancies. But the entrepreneur who buys when he should sell, or sells when he should buy (who increases price discrepancies and disrupts the economy), loses money. The more mistakes he makes, the less able he is to continue in his error.
The possibility of profits is a sign that something is amiss in the economy, indicating that people are not taking advantage of mutually beneficial trades. The actualization of profits indicates that something is being done about these missed opportunities.
The possibility of profiteering signifies even greater gaps in the economic fabric. And if mere profits indicate an economic cure in progress, then profiteering is a sign that something of a substantial magnitude is operating to rectify the situation. Instead of moderate profits being acceptable, and profiteering being "exploitative," we can see that the greater the profits, and the greater the profiteering, the better off the economy is.
- Ludwig von Mises. "4. Action as an Exchange", Human Action, online edition, Chapter IV. A first analysis of the category of Action, Mises Institute. Referenced 2009-05-14}.
- Frank Shostak. "The Limits of Supply and Demand", Mises Institute, posted on 2002-09-04, referenced 2009-05-14.
- Walter Block. "Defending the Undefendable" (pdf), Ludwig von Mises Institute, 1976, p.185-195. Referenced 2010-11-26.
- Profit (accounting) at Wikipedia
- Profit (economics) at Wikipedia
- Profits by Lester C. Thurow at The Concise Encyclopedia of Economics
- Entrepreneurial Profit and Loss, Murray Rothbard's Man, Economy, and State, Chapter 8.
- Where Profit Comes From by George Reisman, January 2011
- Great Speech in "Home Town Story" a video explaining profit