Profit, Loss, and Entrepreneurship

Week 9 of the Mises Institute’s Home Study Course in Austrian Economics includes one audio lecture and three book chapters dealing with profit, loss, and entrepreneurship.

  1. Profit, Loss, and Entrepreneurship” by Joseph Salerno: Salerno says that all action is entrepreneurship in a sense in that every action carries the possibility of psychic profit or loss. In the market economy, he distinguishes the role of entrepreneur from that of capitalist; the former makes profits or losses, whereas the latter receives interest. The same person may occupy both roles, but economically they are distinct. Salerno cites the American manufacturing of large automobiles in the years after 1973 as an entrepreneurial error leading to Japanese inroads into the domestic auto market. The entrepreneur is the residual claimant of revenue after all costs have been deducted, so his income is not known in advance. Managers are “junior partners” of entrepreneurs and cannot have negative incomes. CEOs and other corporate managers are ultimately disciplined by their firm’s stockholders. Owner-operators who finance their own businesses need to separate out their personal labor cost, interest, and any foregone rents in order to get a true picture of their profits or losses. There’s repeated reference to the question of ordinal vs. cardinal ranking in decision-making.
  2. “A Place Where Nothing Ever Happens: On the Employment of Imaginary Constructs in Economics” (Ch. 6 of Gene Callahan, Economics for Real People): This chapter is only a few pages long. Callahan distinguishes between a “plain state of rest,” which occurs regularly in markets when all potential buyers and sellers have had the opportunity to transact at the current price, and a “final state of rest,” in which the economy reaches perfect equilibrium. The latter never occurs. Plain states of rest never last because new information constantly enters markets, and people’s wants change. Nevertheless, economists can use the imaginary “final state of rest” as a tool to abstract from reality just those factors that are relevant to a given analysis.
  3. “Butcher, Baker, Candlestick Maker: On Economic Roles and the Theory of Distribution” (Ch. 7 of Gene Callahan, Economics for Real People): Much of this chapter is spent breaking down the kinds of income each economic role receives. We saw this in Salerno’s lecture and also in Ritenour’s textbook. Entrepreneurs receive profit and loss, capitalists and landowners receive interest, and laborers receive wages. Often individuals fill multiple roles at the same time. And all of us are consumers. Consuming now or in the future is the function for which all production takes place.
  4. “From an Evenly Rotating Economy to the Real World” (Ch. 7 of Thomas Taylor, An Introduction to Austrian Economics): Much of this chapter reiterates the ideas mentioned above. However, there’s a section on the social role of profits that bears a closer look. Taylor emphasizes that the entrepreneur’s profit is only temporary because other entrepreneurs follow his example and enter the market, driving down prices and reducing those profits. The ultimate beneficiary of the system that allows these temporary profits to exist is the consumer. Profits are the result of an entrepreneur’s identification of a misallocation of resources. After that identification happens, the market’s inexorable movement toward equilibrium leads to more efficient allocation.


About Dr. J

I am Professor of Humanities at Faulkner University, where I chair the Department of Humanities and direct online M.A. and Ph.D. programs based on the Great Books of Western Civilization. I am also Associate Editor of the Journal of Faith and the Academy and a member of the faculty at Liberty Classroom.
This entry was posted in Books, Economics and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s