1.1 Profit in Traditional Argumentation Way
Profit can be defined as a form of income that may arise in an economy without a plan or a central authority that decides on the production and distribution of the social product. Profitâs definition does not end in only one conceptual category; rather, it is exposed to a variety of economic, social, cultural, and political uses and meanings. Any attempt to clarify the content of this notion removes the character of âabsolutenessâ and âneutralityâ by unifying it uniquely to a particular economic vision.
Economic science offers very different notions of profit, not only in relation to the economic and social relationships to which it refers, but also depending on the particular cognitive aim pursued from time to time, and the technique of analysis adopted.
Economic profit theory should answer many questions, but the debate on this subject is still lit, and this reflects a sense of uncertainty and stalemate that characterizes all the literature on it. Profit has always been a multidimensional concept, which does not fall into one economic discipline. Besides having various basic arguments, profit is also a source of numerous studies and business techniques that are often outside from simple accounting rules. Many, from the classical economists, have tried to approach the issue of profit and its assessment; others have governed just the accounted nature and added, in an already-busy contest, many theories and definitions on the subject. The evolution of knowledge of business, finance, and economics has allowed an increase in previous studies on profit. Firm and its management have become, over the years, the main focus of managerial analysis, assuming relevance that is both increasingly global and interdisciplinary. The rules and economic directives require continuous management apparatus, overwhelmingly, on the ability to persist over time, in conditions of economic and financial equilibrium. Changing the appearance and nature of the firm changes accordingly the approach of business manager and the role of profit management. Profit has always been analyzed as a residual item in the firm but it changes its shape, and is approached by most as a strategic financial variable.
Profit must be closely related to the concept of enterprise, and, in that sense, the very determination of profit justifies the existence of all the firmâs production equipment and is considered indispensable and underlying any business activity. At a firm level, profit is considered as a goal to itself or, alternatively, in connection with other goals such as growth or efficiency.1
Before analyzing all the literature and theories of economists who have debated the notion of profit,2 it is necessary to clarify how and through which mechanisms the search for profit can influence the business behaviors, and, finally, it is appropriate to dissolve some inherent nodes both the role of profit as an economic category and its nature.
From these initial considerations, it is understood that, in the first place, the subject of the profit should be identified. The need to differentiate, in a theoretical way, the profit from the workerâs wage, from the natural resource ownerâs income, and from the interest generated by the liquidity loan, manifests itself at the same time as the historical process of capitalist division of labor.3 In this case, the historical recalls are fundamental: on the one hand, the progressive fragmentation of trades into specializations, the fragmentation of craftsmanship, and the expansion of the merchant system have prompted the making of entrepreneurs-merchants, concerned about buying the products to bring them to the markets and to sell raw material to every single producer, gaining a profit. On the other hand, the separation of workers from work tools, the organization of work in the factory, and the continuous technological changes have overwhelmingly overlooked the overproduction of production, creating new problems with regard to its appropriation and its intended use for purpose consumption or accumulation. In parallel, a new social structure emerged, in which a classâthat of entrepreneurs-producersâtook the power to decide how, what, and how many to produce.4
The literature clearly dictates the shift from one to another definition of profit: one being purely âsubjectiveâ and the other âobjectiveâ. The first trend concerns a vision linked to the primary remuneration of the entrepreneur, in favor of an âobjectiveâ view, where profit is the remuneration of the enterprise first.5 In order to reasonably interpret the concept of such a profit, it is necessary to clearly distinguish the function and role of the enterprise, always maintaining a link with the profit itself. The function that has always been attributed to the enterprise is that of the transformer and economic generator suitable to increase tangible and intangible assets and monetary wealth. It does not only aim to increase quantitatively the economic wealth, but the broader one to generate wealth in quantity and quality capable of generating consensus on a large number of subjects.6 The firmâs function in the market system is, therefore, to produce goods and services for exchange, in the formation of adequate employment opportunities for system resources, and it concretizes itself in the creation of value under economic conditions. The role of the firm is the form that historically has responded to the motivations of production: with profit, the enterprise produces wealth, and profit-making parties can achieve greater and/or better satisfaction of the needs.7
Historical analysis shows that profit is one of the most powerful reasons for production and, thus, one of the most important âendogenousâ factors of productivity. Profit, on the one hand, drives individuals to risk their capital, investing them in productive activities; on the other hand, it is the strongest motivation for creating new business. Profit becomes a means to both ensure remuneration and capital maintenance as an instrument to increase labor pay and produce satisfactory interest on the loan capital. One last thing to point out to the profit-enterprise relationship is that the latter, as an institution, presents itself as a historically determined reality, objectively related to its function.8 The pursuit of such a model, inspired by specific technical efficiency requirements and valorization of marketed production, allows the regeneration of the means used in the previous production cycles, thus making it possible for the firm to repeat its business. In the instrumental sense, the enterprise, providing a significant contribution to the process of generating economic wealth, gets legitimacy to exist and continue to operate. The growing consensus that the community has attributed to the enterprise has allowed it to be institutionalized, ensuring its stability and permanence within the framework of social institutions. Alongside the function and related objective (technical and economic) conditions of its operation, however, the enterprise is characterized by being a âsocial systemâ. In it, the subjective element contributes to defining the specific, general, and partial objectives that guide the evolutionary dynamics, conveying the way in which the instrument is actually used.9
Over two centuries of theoretical reflection, economists have kept the focus of attention and study on entrepreneurship, formulating a wide range of responses to the issues mentioned about profit.
The conducted analysis presents some of the most significant theories of profit in their historical succession in order to highlight the progressive refinement of elaborations on the studies and referring them to the conceptions of the economic and social organization to which they are connected.
Profit, as we have seen, is among the most intuitive and, at the same time, controversial notions of economy and enterprise management. The doctrine agrees to reenter the profit in the general logic category of âincomeâ.10 Historically, the profit is coupled with the entrepreneurâs income: it is considered as a real remuneration of the entrepreneurâs abilities (organizational, managerial, decision-making, etc.). As we will see later, differences emerge in the articulation of the elements that make up the profit. By briefly reviewing classical economic theory, and then deepening it further into the subsequent paragraphs, it is possible to note that, for Smith, Ricardo, and Stuart Mill, profit represents the total amount of remuneration of the capitalist entrepreneur. Neoclassical authors, however, in making the classic concept of profit as the remuneration of the capitalist entrepreneur, identify two distinct components in this remuneration: interests, which remunerate the entrepreneurâs capital, and the salary intended to reward the entrepreneur himself for his work of direction and coordination of production factors. In other words, starting with the income of the entrepreneur, designated as âgross profitâ, the neoclassical theorists come to isolate a ânet profitâ after having eliminated from the first the interests of the funds lent and the directional salary.11 The necessary corollary about the link between risk and profit is then the attribution of profit, understood as âresidualâ to the subject that endures this kind of risk, namely the entrepreneur. Along the stages of capitalist evolution, above all with the affirmation of the great enterprise, successive authors, both Anglo-Saxon and French, begin to lay the groundwork for moving from a conception of profit as the entrepreneurâs remuneration (both gross and net) to the remuneration of the corporate firm.12 Such a move is already anticipated by Zappa, who, considering the profit as a composite entity, states, â[âŠ] the profit of the enterprise is not the typical remuneration of the âentrepreneurâ but it is a composite income that is compounded by a single and complex set of remuneration of many factors that together in the production of a business contribute to the formation of profits or operating losses.â13
Rewriting the purely economic theme of the study, as extreme terms, it is possible to propose some opposing views of the economic system14: (a) the economic system as a market economy; (b) the economic system as a capitalist economy, that is, as a society...