The Concept and Origin of Profit

Profits and wages are the two major sources of income in capitalist society, and therefore are generally recognised as essential categories of economic analysis. However, whilst orthodox economics reaches unanimity in treating wages as the price of labour1, consistent treatment of the nature and source of profits is notable by its absence. In this essay, in Section 1, we construct an orthodox theory of profit by following the development of general equilibrium theory from its foundations in the microeconomic theory of the firm. This is a paradoxical exercise because we find that the concept of ‘profit’ has many lives. In 1(a), profit is defined for the firm as the difference between revenue and costs, only for this to disappear as a result of the competitive industry. In 1(b) profit is redefined as the price of capital. This, however, is found to identify profit with rent in the static economy. Finally, in 1(c), profit reappears in the dynamic economy as the outcome of the reward for forgoing consumption and the productivity of capital over time. This is subject to a radical critique in Section 2. This begins by posing an alternative explanation of profits in terms of the class nature of capitalist society. Then the alternative implication of this for analysing the determination of the level of profits is considered. Finally, the role that orthodox theory plays in ideologically justifying capitalism is revealed.