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The concept of profit refers to the financial benefit an organization realizes when the revenue acquired from various business activities is greater than costs, expenses, and taxes combined for sustaining the activity. Profit is often used when it is needed to describe the business activity as it denotes the reward that business owners gain for investing in their further operations and processes. It has also been differentiated into such types as gross profit, operating profit, and net profit (Leon 2016). Gross profit refers to the first level of profitability and denotes the funds that result from extracting the cost of goods sold from sales. Operating profit represents the second level of profitability and is calculated through deducting operating expenses from gross profit. Therefore, gross profit considers profitability from the perspective of direct expenses while operating profit looks at profitability after expenses that went towards the operation.
These range from administrative to general costs and can depend on the scope and the size of a company. Net profit is the last level of profitability and denotes the income that has been left after all expenses an organization had to pay out, including interests and taxes. Net profit is determined through deducing taxes and interests from the operating profit. It is the most accurate representation of how much money a company is making because it considers all possible expenses needed to operate a business successfully.
Sources of Profit
For decades, profit has been considered the main driving force behind capitalism. This is so because if the profit cannot be made, goods cannot be produced regardless of how many consumers value it subjectively. While the question of where does profit come from may seem easy to answer, it considers many details. In order to make money from the business, it should be transformed into capital, which refers to human resources, equipment, workplaces, and other capital goods. However, by itself, capital cannot produce anything because it can only become productive with the help of the labor force when workers use the capital that was assigned to producing a profit. Within the capitalist framework, workers do not only create sufficient value for an organization, such as produced commodities for maintaining existing capital but also deliver a surplus. It is usually expressed through having a surplus of goods, which means that there is an excess of commodities in comparison to the number the wage of a worker can buy back. Thus, the price of all goods produced by a company is greater than the monetary value represented by the wages of workers as well as available raw materials and overheads such as the wear and tear on equipment.
It should be noted that pro-capitalist economics do not agree with the theory of arising surplus. However, in order for profit to be generated within capitalism, it is required to achieve two things. The first thing is the group of employees to work the available capital. The second thing is the production of value that is greater compared to the value they are paid in wages. Therefore, profit plays an important role in capitalism because it represents the monetary reward to both owners and shareholders of a business. In a capitalist economy, profit is needed for creating incentives for entrepreneurs and businesses.
Comparison of Schools of Thought
Milton and Friedman’s school of thought discusses the power of the market in the sense that the majority of economic fallacies are driven by the lack of attention to simple insight and the tendency to assume that one party can gain profit at the expense of others. According to Milton and Friedman, the accumulation of physical capital, which ranges from office buildings to various types of machinery. Without the accumulation of large economic growth that companies have enjoyed, raising profit would not have been possible. Also, without the maintenance of inherited capital, the economic gains of one generation would likely be dissipated by another. Milton and Friedman have argued that the accumulation of human capital in the form of increased skills and knowledge as well as improved longevity and health all play essential roles. Due to the connections of skills and knowledge and prosperity, the physical capital can become very productive through offering a range of tools to enhance the quality of work. Within the capitalist framework, it is imperative to consider that each type of resources companies or individuals own is partially the result of chance and partially the result of choice. Similar to this principle, the price that markets set on services and products is also affected by the combination of chance and choice (Argyrous & Stilwell 2011).
To contrast with Milton and Friedman’s approach, it is imperative to mention corporate capitalism and laissez-faire. The golden age of competitive capitalism was associated with quick economic growth throughout most of Europe between 1840 and 1873 (Hunt 2003). At that time, when there was an evident shift toward corporate capitalism, new theories proposed by Jevons and Menger emerged. Their theories offered the perspective on the economy that is made up of a great number of small companies and consumers that separately have no sufficient power to influence the market to a great extent. Prices of final products are beyond their control, which means that companies could only manage processes with specifically chosen amounts. This approach is different from Milton and Friedman’s who suggested that prices are defined through the combination of chance and choice. The principle of laissez-faire applies to the market context in which there are many small companies and consumers.
Capitalism and Profit
Capitalism represents a system of predominantly private ownership that is open to new ideas, developments, and technologies as a means of production and their operation to gain profit. Several points should be mentioned in regards to the role of profits in capitalism. For example, higher profits enable an organization to spend more money on research and development. This subsequently leads to better technologies, lower costs and expenses, as well as dynamic efficiency. For industries such as car manufacturing or drug research, profit is the driving force of research and development because of the need to invest a lot into the creation of new market offerings. Without profit and investment, the economy is highly likely to stagnate and lose competitiveness on the global scale, leading to the loss of jobs in multiple sectors.
Another example associated with the role of profit in capitalism is associated with rewards for shareholders. Since they receive dividends, higher profits mean that they will be given higher dividends, which, in turn, results in them purchasing more shares. Shareholders are essential contributors to maintaining the profitability of firms while profit represents a measure that can help in remunerating shareholders. In addition to increasing firm attractiveness in the eyes of shareholders, high profits can help to attract new companies into the industry. For instance, if the prices on oil are high, companies operating in this industry will be more profitable. At the moment, mobile applications are becoming very popular and profitable, which enables more firms to enter the market.
Other roles of profit within capitalist economics include risk bearing, tax revenues, wages, and the incentive effect. In regards to risk bearing economies, profits can be used for providing insurance for an unexpected economy downturn ranging for exchange rate appreciation to the recession. Earning as much profit as possible is important for volatile industries such as luxury goods which are more likely to gain profit in the times of economic elevation but losing money during a recession. In regards to tax revenues, it should be mentioned that governments charge corporation tax on their profits to provide several billion dollars of tax revenue each year. Also, higher profits enable higher wages for workers, which is another important contribution of profit to capitalism. The incentive effect is notable to mention since higher profits play the role of incentives for entrepreneurs to start their business. Without the positive reward of profits, there would be less investment into companies, and fewer individuals will be willing to take risks in order to reach their business objectives.
Example of Facebook
The example of Facebook can be used for explaining the connections between profit and capitalism. At its conception, the social networking website was intended to offer Internet users such unique features as online profiles, listings of friends, and the ability to browse the other pages to enable interaction. Through research and development, Facebook managed to establish a reputation of a reliable and safe service, which subsequently attracted millions to the platform. As the company began earning more and more money, it implemented a controlled growth strategy to gradually develop a robust and reliable infrastructure of technologies that did not have the same issues with which its competitors were dealing (Press 2018).
The initial success of Facebook was linked to a positive reputation as well as significant research and development efforts for building new technologies and tools. Human capital was at the forefront of the company’s success because skilled engineers were at the center of the development of new products and options to integrate into the Facebook platform. The leadership of the company was also interested in driving competition in the market and offering the best range of services to customers. Public relations were also integral components of Facebook’s rising profits. With the increased focus on advertising when catering 2.2 billion active monthly users, the company had to be inventive in terms of data mining, new content, and other actions.
However, similar to other social networks, Facebook was placed in a unique position of facing consumer revolt when it changed its privacy features. The recent developments associated with the company’s violation of privacy and ethics showed that Facebook had gained such popularity that even such scandals do not make people leave the platform. Facebook has been found to engage in surveillance capitalism, the harvesting of data, and predictive analytics to provide private information of its users to advertisers (Spencer 2019). The unique characteristics of surveillance capitalism show that companies have taken extreme measures to gain profit at the expense of customers (Chakrabarti 2019). The new logic of profit accumulation suggests that the main operational mechanisms and economic imperatives have been placed on the backburner because such companies as Facebook have abandoned the past tools and practices that defined the history of capitalism. In many ways, the company’s attempts to monitor customer activities and share this information with advertisers is dangerous as surveillance capitalism has led to significant systematic shifts in attaining a profit. Facebook’s example showed that relying on such categories as monopoly or privacy is not effective anymore and that companies can develop new ways in acquiring a profit that was not communicated in their initial proposal.
Capitalism and profit are closely interconnected, with the former implementing all available measures in order to reach the latter. Businesses usually analyze all three types of profits to reveal how well they use their revenue. For example, a high ratio means that a business generates a lot of money per revenue dollar. A low ratio implies that the costs that a company spends are greater than profits. The example of Facebook shows that businesses that have captured a large customer base can resort to unethical measures for the purpose of gaining a profit. The recent scandal with the harvesting of customer data showed that capitalism often pushes organizations to commit fraud against its customers. This means that the objective of gaining a profit within the capitalist environment is not always rooted in positive actions for companies.
Argyrous, G & Stilwell, F 2011, Readings in political economy: economics as a social science, Tilde University Press, Melbourne.
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Chakrabarti, M 2019, ‘How tracking and selling our data became a business model,’ Wbur, Web.
Hunt, E 2003, Property and prophets: the evolution of economic institutions and ideologies, Routledge, New York, NY.
Leon, S 2016, Financial intelligence for supply chain managers: understanding the link between operations and corporate financial performance, Pearson, Old Tappan, NJ.
Press, G 2018, ‘Why Facebook triumphed over all other social networks’, Forbes, Web.
Spencer, M 2019, ‘Facebook’s monopoly shows we are okay with surveillance capitalism,’ Medium, Web.