Economic Growth And Profit

The objective of business is to make a profit. That is, to take in more money than it costs to operate the business. There are any number of ways to explain free-market economics, and I would like to explain it in terms of profit as another way of looking at things.

First, an economic system is defined as workers and business owners being one and the same with consumers. If this is not the case, then the economy of the given area must be a part of some larger economic system.

Let's have a look at where profit comes from. In a closed economy, profit is actually not possible. Suppose that there is an industry on an island that produces everything that the people buy, and where all of the workers are employed. The company could only get back the money that it pays out in wages because there is no other money in the system.

Even if we introduce taxation, and use the money to pay workers such as police and teachers, so that their wages can be used to buy things made by the industry, that still only recirculates the original money flowing between the industry and it's employees. There is still no extra money so that the industry can take in more money than it pays out in wages. If there were other businesses, which sold to the industry, and the industry makes payments to them for supplies or equipment, that is still only recirculating the original money.

At least theoretically, all money that circulates through the economy ends up as either wages or purchases, before re-entering the cycle. In such a closed and static economy, profit may be possible if there were multiple competing industries. But it would still be a zero-sum game, one industry could make a profit only if another industry was losing an equal amount of money. The net profit of all the industries together would still be zero. Printing more money could not bring about profit, by putting more money into circulation, because prices would just equalize in the form of inflation.

But yet, there must be a way to make a profit or business would not exist.

Suppose that we now introduce genuine growth into our economy. It is this growth that can change the zero-sum game that a static economy would be. The only way to bring about profit is for there to be more real money available to be spent on the products and services produced, than it costs to run the businesses that produce these products and services. This is only possible with growth.

Growth means making production more efficient so that the same volume can be produced with fewer workers and redundant workers be employed in producing something else or in non-productive sectors, and their wages are available to be spent on the products of industry. Some of the wages paid to the industrial workers is spent on these non-production services, so that these non-production sectors enable industry to recoup some of the wages that it has paid out to it's own workers.

This is what makes profit possible. It is necessary, of course, for the profit to be re-spent to keep the cycle going. The making of profit can only mean grasping a share of the growth, if there is no growth than there can be no net profit.

Growth, with regard to profit, cannot mean more workers or more industries producing goods at the same rate. That would simply give us a larger closed system, one with still no possibility of net profit. Profitable growth must mean either the same number of workers producing more, or something new added to the economy. The value of this growth will show up as net real profit.

Growth can come from improving the product so that it will sell for more money, relative to the cost of producing it including the workers' wages. This is not possible in our simple closed system or by simply raising prices because that would mean that workers will not have enough money to buy as many of the products, or that the higher prices will make the product less desirable relative to competing products.

Growth will show up first as net profit in an economic system, and growth is sustained by this profit being spent back into the system. Isn't this a fresh way of looking at economics?