§1. Profits in small and large businesses need to be calculated on a like-for-like basis. Small business owners often forget to deduct their “implied wages” from profits, which may actually be lower. Profits are smaller when it’s easy for competing firms to enter the market and larger when it is harder (e.g., lots of capital investment or expertise needed).
§2. The profits accruing to management will be greater if the labor/capital ratio is high (= more “management”), risk is high (= needs to be managed), or the manager is more skilled than average (= payment for “excess” returns). Profits are lower in high-capital, low-risk, commodified businesses.
§3. Average profits per annum will be similar across different industries. High turnover, low-profit/transaction industries can make the same annual returns as low turnover, high-profit/transaction industries.
§4. Some industries have “traditional” rates of profit, but these figures usually apply to profits on turnover (high or low), not annual profits.
§5. (A lack of) skill and/or (bad) luck can result in deviations from “normal” profits.
§6. Profits vary by more than prices or wages, since they are residual to income and expenses. A small price increase can heavily boost profits, just as a small price decrease can lead to big losses.
§7. Average profits in trade will hide the gains from those few who succeed and often miss the losses from those who fail (survivor bias).
§8. Profits from heavy (prior) capital investments are not the same as profits of (current) labor or (ongoing) natural talent.
§9. Higher profits to one participant in a static industry means lower profits to another participant. Profits can only rise for all if the industry is expanding in scope, scale or efficiency.
§10. The shares of profits between owners and workers (capital and labor) will depend on their relative bargaining powers.
This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.
One thought on “Profits of capital and business power, continued”
This book helped me a lot when I was an undergrad student learning basics of economics.
Thank you so much professor for bringing this up and reviewing. You are an inspiration! God bless.