PROFIT (OF., Fr. profit, from Lat. profectus, progress, increase, profit, from proficcrc, to ad vance. make progress, be advantageous, from pro, before, for + facers, to make). The excess in the selling price of goods above their cost of produc tion. The term has been variously used, both in common speech and in economic writings, ac cording to the conception of the elements enter ing into cost. Many of the earlier economists did not regard interest as a 'cost,' and home included it under the term profit. The rent of land, however, though not regarded as an ele ment in cost, has not usually been classed with profit, although the term 'agricultural profit' is not infrequently applied to it in popular writings.
Modern economists usually exclude from profit the normal or average return to capital, which is classed as interest (q.v.). Whatever an enter prise earns above interest, rent, and wages (in cluding normal wages of management) is profit. If this net income is due to an artificial raising of prices through manipulation of supply, it is known as monopoly profit, or monopoly return. Various theories have been advanced to explain the nature and causes of non-monopolistic profit. The oldest of these is the 'risk theory,' defended by Von Thiinen and many later German and some American writers. A business undertaker necessarily incurs a large number of risks which are of too indefinite a nature to be covered by insurance. Since the chance'of losing a certain sum is not compensated for by an equal chance of gaining the same sum, no one would under take the management of business unless it nor mally afforded a greater volume of gains than of losses. The net gain, in this view, constitutes
profit.
A second view, represented by Francis A. Walker, regards profit as a differential gain, im putable to superior management. Prices, it is held. are fixed in the long run by the cost to the least efficient managers who are able to continue production. All managers of greater efficiency produce at lower cost, thus securing a surplus analogous to rent (q.v.). A third theory. not differing from this in essence, ascribes profit to the scarcity of managers of the better grades. This theory sometimes confuses simple profit with monopoly return, through failure to dis tinguish between scarcity and monopoly values.
Finally, profit has been explained with refer ence to the dynamic elements that prevent in dustry from reaching an equilibrium. In this view, which is in the main that of J. B. Clark, labor and capital tend toward a state of uniform productivity, but, owing to friction and to tech nical improvements. may at any moment vary considerably in productive power. Since the pay of each unit of labor or of capital tends to equal the product of the unit least advantageously situ ated, those units which happen to be on the more productive situations yield a surplus or profit which the entrepreneur secures for himself. It would appear that the theories given are not mutu ally exclusive, but merely describe different ele ments in a composite form of income now commonly termed profit. See INTEREST; MONOP. OLT.