Profit in American Economic Theory

Abstract

DURING the past sixty years, there has been a highly significant development of the concept of profit in American economic thought, generally unaffected by influences from abroad. The process of this development has given the term an entirely new content and new connotations which are peculiar to its use in the United States. Unfortunately for clear comprehension, the history of profit doctrine has usually been considered to be chaotic and disconnecteda mere series of mutually exclusive and incompatible doctrines. It is the purpose of the present article to show (i) that there has been a logical process of development in the history of profit theory in the United States, and (2) something of the nature and significance of the concept which has been developed by this historical process. The thread of the process of development is not to be found in any series of positive contributions, each new one adding to the accepted content of its predecessor. On the contrary, the various contributions are important chiefly as they subtract from a common beginning. The process is one of the successive refinements of a concept. The start is taken from the classical definition of profit, as exemplified by John Stuart Mill. According to his definition, which was widely accepted in the United States prior to I883, profit is composed -of interest, wages of management, and the reward for risk-bearing. In three successive stages, American theorising has rejected each of these component parts, leaving no content whatever to the old definition. The first important step in the development of this American theory was the separation of interest from the concept of profit which had been accepted by classical economics. Although previously suggested in a sketchy fashion by minor writers,' the greatest credit for this achievement must go to Francis A. Walker, whose system of distribution was unique and original, if not endowed with enduring validity.2 His system, briefly, was as follows: Industry produces a certain amount of wealth, from which each participating factor is entitled to a share. The landowner receives rent, in the Ricardian sense. The capitalist receives interest, the rate of which is determined by the law of supply and demand. The entrepreneur receives profit, determined by the rent principle as applied to the relative efficiency of entrepreneurs, measured upward from the wage rate which alternative employments offer to the least efficient among them. After these deductions we have but one