Sunday, February 10, 2013

Exchange and Profits

Exchange increases output through division of labor. We defined profit above (p. 6) as a surplus of output over input. We showed that in the case of the single producer an increase in output can never be considered a profit, because his entire output of goods is always the exact result of his input of labor, regardless of the size of the output per unit of input.
We are now dealing, however, with more than one producer, so that the problem of the distribution of the output between them arises. The term profit could now have two meanings: (a) it could mean a surplus accruing to the whole two-man community of producers, a profit for their national economy, so to speak; (b) it could also mean a surplus accruing to one of the producers by an altered distribution of output, a private advantage for one individual producer over the other.
An increase in output as such cannot be considered a profit for the entire national economy, just as an increase in output cannot be considered a profit in the case of a single producer. The economy, as a whole, is nothing but the sum of all individual producers. It does not make any difference whether the increase in output is due to greater productivity of individual producers or to exchange and division of labor. Therefore exchange, too, cannot lead to a profit for the national economy as a whole.
But how about the increases in the income of the individual producer-consumers resulting from a changed distribution of output among them? Such increases do exist, but not all of them are profits. If an individual producer-consumer's share of the total product rises because his own output increases, this cannot be called a profit—at least not if we are to distinguish profits clearly from other forms of income earned by the factors of production. Profit is only that form of income which accrues to one individual because another individual fails to receive, in certain special circumstances, the entire output to which the “demand curve of nature” entitles him, according to his productivity.
Profit is a slice of somebody else's output. We shall often come back to the question of how such profits arise and how they disappear, because this is of fundamental importance for many other problems. We shall see that profits are children of change and uncertainty and that they are temporary in character. Here we only wish to stress that exchange, as such, does not lead to private profits.
It is true that in our example producer A obtains more pears through exchange with B than he could have produced himself at the same expenditure of work-hours. But this only means that his output per unit of input, his productivity, has increased, even though only indirectly. Nothing accrues to him to which he would not be entitled by his work. And nothing is withheld from B, who retains more apples than if he had not entered into exchange with A.
It is furthermore true that A receives more pears for his apples than would be needed to make the exchange worthwhile to him. But this, too, is not profit. It is an advantage comparable to the advantage that accrues to the isolated producer to whom nature yields a greater return for his intramarginal working hours than would have been necessary to overcome his tendency to do nothing. Such an advantage in exchange does not mean that one receives more than one gives. It means only that one receives more than the minimum necessary to make the exchange possible.

Common Sense Economics

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