Questions about the limits and nature of profit

Economics Economics Questions
1

Ya’ll,

I’ve asked a related question here (Profit and inflation question - #6 by Telemachus) and I found this (Profits in a progressing economy - #2 by Catalan) somewhat enlightening, but I’m still a bit stymied by something: is profit a zero-sum game, and is it possible in a perpetual fashion?

Let me clarify.

(1) Marxists, socialists, etc., believe that profit is only possible by (paraphrasing obviously) “a few gaining at the expense of the many.” That is, profit goes into the hands of the “winners” in a market economy, and the “losers” are left with less, and so… well, fill in your preferred result here: people are less able to feed themselves, cloth themselves, etc, and therefore only injustice and inequality results from markets.

Now it seems to me that there is some truth to this, if superficial. Obviously not all competitors can profit equally from market interactions. Some producers produce in a superior fashion and so reap higher profits from their activities. The losing competitors must find some way to stay afloat. However, Marxists and the like overlook the fact that superior products are now available to everyone, including their competitors, and everything tends to even out over time (quick answer).

This is all pretty clear to me, and it doesn’t bother me one wit, because the fears of the Marxists have never been borne out except through the meddling of the State in the market. Now, can someone confirm all this for me by pointing me to some specific theoretical works that justify this, or am I off base and misunderstanding the nature of profit?

(2) More troubling to me (or maybe it shouldn’t be) is the idea that profits are inherently impossible after a certain point. What I mean is, say you have a population of 10 people “on an island,” and one of these people currently owns 50% of the wealth of the island. My question is, how can this one person expect to profit any further by investing back into the economy? At some point, there won’t be anything left to gain, correct? What then? Again, specific theoretical works on this would be appreciated.

Best Regards,
Tele

2

If this were true, then why to workers continue to be employed. Why don’t they quit? Don’t they realize that by not dividing labor that they can produce and keep 100% of that production? Doesn’t the baker realize that he is equally capable of making a shoe as the shoesmith? Doesn’t the seamstress realize that she if equally capable of manipulating iron as the ironsmith? Or do we need the wise Marxist to enlighten them?

3

The simple definition of profit is satisfying a want, ex if my friend and I swap video games for a week we are profiting from the transaction by satisfying our wants for novel toys.

The more narrow use of profit has to do with the money that one makes. Money makes things more confusing, partly because of the religious stigma attached to it as the “root of all evil”.There are two types of this profit, normal and monopoly.

Normal profit is just the market value of the value one adds to the exchange. A worker is compensated based on how he uses capital to produce something that the consumer wants. A capitalist is compensated according to their ability to assume and manage risk, and their general enterprenuerial ability. This is the type of profit that economic actors earn in a competitive free market. If one side feels “exploited” or ripped off in an exchange, they go to a competitor who will provide a better deal.

Monopoly profit is what is received by criminals, governments, and businesses abusing government powers. They use violence to restrict the market and force others to take their price. A good example of this is that you have to pay property taxes to pay for the police, even if you choose to defend yourself or hire your own security guards instead of depending on the police. Then they can exploit people by geting a higher price for their service (in most cases, nonservice) than what they would get in a competitive free market.

4

Profit and Loss.

5

The best sources of articles that are not too long are the search functions on the Mises and Fee websites. But you get my one paragraph on this:

Profit is the difference between the value consumers places on production and the value the producer places on production. Most (Nearly all) of profits are SAVED and put back into the same venture or into new ventures. The purpose of being in business is to create profits. Those that fail to do this can not stay in business as consumers place less value on their production than the producer does. There is hope for less profitable businesses, consumers have enormous variation in their desires even for similar things. It is simply not possible for one supplier to satisfy all consumer desires. So there is plenty of other things to do.

The problems of labor come from mal-investments caused by fractional reserve banking sending false market signals to businesses. Eventually these businesses become unprofitable and must change their products or simply go out of business. In either case labor must change their product (Reduce the price or vary the product) to continue making sales to the same or other employers.

Profits are always available as human desires are virtually limitless. The individual with 50% would want to increase his wealth and would have one of two means to do so: 1. Invest the wealth into increasing capacity of current products or new products, or 2. Trade some of that wealth to the product/s of the other folks.

6

First of all, you’re misrepresenting Marx’s positions. He claimed that the capitalists are only able to make profits at the expense of his workers; this is known as the exploitation theory of labor. The capitalists take machinery (fixed capital) combine it with their workers (variable capital) and produce products, with the goal of creating something Marx called “surplus value.” Marx claimed that you cannot exploit the machinery; therefore, you must exploit your workers in order to make a profit. He then goes into how capital is self destructive, and how unemployment rates must continuously rise, also known as his “labor reserve armies.” The reason why Marx is wrong is very simple; he adhered to the labor-theory-of-value. That is, to the belief that a products value, or its worth, is determined by how much labor went into the production of that product. Marx saw value as something categorically determined, universal; and that the “value” must equal its price. But value is not categorical; value differs from one individual to the next. I may value a baseball card enough to pay $1000 for it, but you may not value it at all (marginal utility theory). Likewise, our value scales differ over time, and can change at any moment. One minute you may not desire water at all, you wouldn’t pay 10 cents for it; the next, you may be willing to pay a dollar for it. If you go long enough without water, you may be willing to pay $10 for it. People also value goods now more than they do goods in the future, or what is called the “time preference.” A person doesn’t value an apple now the same way he values an apple 1 year from now, or 100 years from now. Now since Marx believed that the value of the capitalist’s commodities are determined by the labor that went into them, he then naturally assumes that the capitalists must be exploiting his workers for profit. But in reality, the capitalist is able to make “profit” because he’s offering goods now to the public, rather than later. For example, the car producer needs steel, he goes to the steel producer and pays $1000 for some steel; but the steel producer created that steel at a cost of $900. He does this because he wants the steel now, he doesn’t want to create the steel himself. Then there are real profits, or entrepreneurial profits, which are earned by the skillfulness of the capitalists. The way you define this differs amongst the various economists.

Value is never measured, it’s only graded. It’s an ordinal scale.

7

Profit is the money capitalists earn by correctly anticipating consumer demand. It’s nature is self-limiting, because “windfall gains” are diminished by new capitalists entering the market and making competition.