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profit,in economics, return on capital, also called earnings, minus the costs of maintaining land, labor, and capital. It is also known as net income. Economic theorists generally make a distinction between two types of profit: normal profit, in which the entrepreneur receives the minimal necessary amount to encourage him to open or stay in a particular business; and excess profit, that which exceeds normal profit. With the development of the corporationcorporation,
in law, organization enjoying legal personality for the purpose of carrying on certain activities. Most corporations are businesses for profit; they are usually organized by three or more subscribers who raise capital for the corporate activities by selling shares
..... Click the link for more information. , profits are apportioned between dividends to the holders of stock, and investment and depreciation funds in the control of hired managers. Interest paid on loans is usually considered as separate from profit, and is therefore deducted from the net profit. Profit is often considered to be the major incentive for production in a capitalist economy, although with the decline of the entrepreneur and the rise of a salaried managerial class, it has tended to become less personal and more institutional in character. See also profit sharingprofit sharing,
arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of equipment, and
..... Click the link for more information. .
See F. Knight, Risk, Uncertainty, and Profit (1921); M. Obrinsky, Profit Theory and Capitalism (1983); D. C. Mueller, Profits in the Long Run (1986); S.-Y. We Production, Entrepreneurship, and Profits (1988).
profitsee RATE OF PROFIT.
an economic category that expresses the final financial results of economic activity in expanded reproduction (vosproizvodstvo).
Under capitalism, the category of profit is a converted form of surplus value, the embodiment of the unpaid labor of wage workers, which is appropriated without compensation by the capitalist. The profit is in a converted form because, in reality, surplus value is manifested as the amount by which the price exceeds the costs of production. As a product of variable capital alone, profit appears, superficially, to be an increase in all advanced capital, both constant and variable. Thus, profit conceals its true meaning as the product of capitalist exploitation, and, as Marx pointed out, “in its assumed capacity as the offspring of the aggregate advanced capital, surplus value takes the converted form of profit” (K. Marx and F. Engels, Soch., 2nd ed., vol. 25, part 1, p. 43). Marx strongly emphasized that under the conditions of capitalism, profit “is the same as surplus value, but it assumes a mystified form that is nonetheless a necessary outgrowth of the capitalist mode of production” (ibid., p. 44). In a letter to Engels (Apr. 30, 1868), Marx wrote: “For us, profit is above all just another name or another category for surplus value. Given the form of wage payment today, all labor appears to be paid for, so it inevitably seems that the unpaid part of labor arises not from labor but from capital, and not from its variable part but from capital as a whole. As a result of this, surplus value assumes the form of profit, without a quantitative difference between the two. This is only an illusory form of the appearance of surplus value” (ibid., vol. 32, p. 60).
The ratio of profit to all advanced capital is the rate of profit. The chief factors influencing the rate of profit are the rate of surplus value, the organic composition of capital, and the rate of capital turnover. The rate of profit is inversely proportional to the organic composition of capital and directly proportional to the rate of surplus value and the rate of capital turnover. The rate of profit also increases as a result of savings in constant capital, which are associated with intensified exploitation of the workers.
Technological progress results in an increase in the organic composition of capital. This leads to a tendency for the rate of profit to decline, despite such countervailing factors as a higher degree of exploitation of the labor of wage workers, which is manifested in an increase in the rate of surplus value; the decline of wages below the value of labor; a decline in the cost of the elements of constant capital; chronic unemployment; and high profits from exporting goods for sale at higher prices on the world market. As a result of the intersector competition for the most profitable use of capital, the rates of profit in various sectors level out at a general, average rate of profit, by means of the spontaneous transfer of capital from certain sectors to others. (This transfer takes place through the pricing mechanism and under the influence of the credit system.) The equalization of the various rates of profit results in the conversion of value into the price of production (the costs of production plus the average profit).
Marx pointed out that the production of surplus value and the receipt of profit (the converted form of surplus value) is the direct, permanent goal of the capitalist system (ibid., vol. 26, part 2, pp. 607–08). During the period of monopoly capitalism the pursuit of high rates of profit becomes, to an even greater degree than before, the motive force behind the development of capitalist production. At the same time, however, the pursuit of high profit rates leads to the deepening and exacerbation of the contradictions of bourgeois society. V. I. Lenin wrote: “All of us have read in Das Kapital how capital changes internally and grows more daring when interest rates and profits rise rapidly. All of us recall that capitalism is capable of taking deadly risks and that Marx recognized this long before the war and before capitalism began its ‘leaps’ “(Poln. sobr. soch., 5th ed., vol. 45, p. 220).
In the period of premonopoly capitalism the price of production was the manifestation of the law of value—the chief regulator of the economy, which shapes the basic economic proportions and the distribution of capital and labor by sectors and regions. In the epoch of imperialism, the law of value is manifested in the monopoly price. The monopolies take advantage of the growing potentials of production, science, and technology to obtain maximum profits by establishing high monopoly prices, intensifying the exploitation of the toiling people, plundering the peoples of dependent countries, militarizing the economy, and acquiring part of the profit of nonmonopoly enterprises. According to official American statistics, the profits of US corporations rose from $22.6 billion in 1946 to $98 billion in 1972 or, if taxes are taken into account, from $13.4 billion to $42.7 billion. Growing profits at capitalist enterprises and savings on the cost of production are combined with enormous losses from periodic economic crises, chronic underutilization of the production apparatus, and unemployment.
Under socialism, profit assumes a new socioeconomic meaning. It differs fundamentally from profit under capitalism in the mode of its creation, the character of its formation, its influence on social reproduction, and its use. In socialist society profit has five principal characteristics. First, profit is a concrete form of the manifestation of the value of the surplus product, which is social property, and it expresses the production relations of comradely cooperation and socialist mutual assistance among the working people. Second, under socialism, profit is created in conformity with a plan, by the organized labor of people who are free from exploitation. Third, profit is formed when commodities are sold at prices established in conformity with a plan, and it goes “not to the propertied class but to all the working people and only to them” (Leninskii sb., XI, 1929, pp. 381–82). Fourth, profit is the chief source of financial support for steady growth in production and for raising the standard of living of all members of society. Fifth, in socialist society profit is used as an important economic lever in the planned management of the national economy, and it is one of the synthetic indexes of the economic efficiency of socialist production.
The socialist economic system ensures the achievement of the greatest results per unit of expenditure in the interests of society. This is a necessary condition for profitable work by enterprises.
Lenin always demanded that “every state enterprise pay its way and show a profit” (Poln. sobr. soch., 5th ed., vol. 44, p. 343). Of fundamental importance is Lenin’s thesis that the receipt of profit belonging to the state and the use of profits in the interests of all society “are assets also from the communist viewpoint” (ibid., vol. 45, p. 263).
The profits of socialist enterprises (or associations) are directly connected with their relative isolation and with the profit-and-loss method of economic management in the national economic complex as a whole. Under socialism, the economic category of profit operates as a definite form of surplus product, expressing the value of the surplus product either in full or in part, depending on whether profit is combined with turnover tax (in the USSR and most of the other socialist countries) or whether it is the only form of accrued cash in which net income is embodied. The division of net income and accrued cash into profit and turnover tax is a consequence of the profit-and-loss organization of socialist enterprises (associations), the methods of accumulating income in the state budget, and the tasks of regulating the profitability of production. The division of accrued cash into profit and turnover tax is somewhat arbitrary, because profit and the turnover tax are similar in their economic character.
In the practice of socialist planning and accounting the magnitude of profit is defined as the difference between earnings in the wholesale prices of the enterprise and the full cost of the product sold.
The profitability of an enterprise (association) or sector is a relative index of profit.
Under the economic conditions of developed socialism the problem of ensuring an optimal level of profitability at each normally operating enterprise becomes even more important. This means that in order to operate profitably in accordance with the principles of full economic accountability, enterprises must make up for the costs of production with earnings from the sale of output, and they must make enough of a profit to enter top-priority payments in the budget, to pay interest to the bank, and to form profit-and-loss funds. The lower limit of profitability is the level that ensures that the enterprise can make payments for assets and make deductions from profit for the economic incentive funds.
The key factors in raising profit and profitability are the expansion of production, the growth of labor productivity, the reduction of the prime cost of output, and the improvement of the quality of output. The party’s economic policy takes as its point of departure the need to improve the planning of profit, which is the principal source of state revenue, and the need to increase the role in profit formation of reducing the prime cost of output. The magnitude of profit is significantly influenced by national economic factors: the acceleration of scientific and technological progress, rational location of the productive forces, increased efficiency of capital investment, and specialization and cooperation in production (seeCOOPERATION IN INDUSTRY and COOPERATION IN CONSTRUCTION). Profit and profitability are very closely related to several indexes: the incremental output/capital ratio, the consumption of materials (material-intensiveness), and the quality of products. Profit also depends on the assortment of products and on the level of prices. It matters to socialist society how, at whose expense, and under what conditions profit is increased. Any attempt to make a profit by violating state price policy or by disregarding the established assortment of products and standards is an antistate practice.
The transition of enterprises to full economic accountability and the implementation of the wholesale price reform in 1966–67 were key prerequisites for increasing the role of profit. Under the new conditions of management, the role of profit has increased significantly in the economic mechanism for influencing social production. Profit is included in the system of endorsed plan indexes and indexes for evaluating the profit-and-loss operations of enterprises (associations) and ministries. As the final financial result of economic activity, profit is, to a significant degree, the factor that determines each enterprise’s contribution to the national income. Moreover, profit encourages greater emphasis on the interests of production units in improving labor, material, and financial resources. The importance of profit as the source of the formation of economic incentive funds has increased, because the formation of these funds depends on the level of fullfillment of the sales, profit, and profitability plans. Profit is more widely used to finance centralized and non-centralized capital investment, to increase circulating capital, and to meet other planned needs related to technological improvements in production. Moreover, profit is a very important source of revenue for the state budget. Payments from profits, especially payments for assets, are expected to have an effect on improving the use of production funds and raising the efficiency of capital investments in the national economy.
In industry, the key sector of the USSR economy, profits rose from 22.5 billion rubles in 1965 to 65.9 billion rubles in 1975. In the entire national economy, profits increased during the same period by a factor of 2.8, rising from 37 billion rubles to 104.4 billion rubles. At the same time, the aggregate social product increased by a factor of 2.0.
High growth rates for profit, an index of the increasing efficiency of social production, are also characteristic of other socialist countries. This progressive trend is typical of a number of members of the Council for Mutual Economic Assistance (COMECON; see Table 1).
|Table 1. The dynamics of profits in industry in Bulgaria, Poland, and Czechoslovakia|
|Absolute volume of profits|
|1965||1971||1971 as percentage of 1965|
|Bulgaria (million leva) ..........||660||1,502||228|
|Poland (billion zlotys) ..........||56.6||129.5||229|
|Czechoslovakia (billion korun) .....||28.2||55.2||196|
The accelerated growth of profit, which is a result of the intensification of social production and an increase in its efficiency, makes possible a significant increase in the part of profit that is used directly in the economy to expand production, provide incentives to workers in addition to wages, and increase payments to the national budget. The percentage of profits left at the disposal of enterprises and economic organizations in the USSR increased from 30 percent in 1965 to 44 percent in 1975. During the same period payments to the budget from the profits of state enterprises rose from 30.9 billion rubles to 69.7 billion rubles, and the share of these payments in total state budget revenues rose from 30.2 percent to 31.9 percent.
Under the conditions associated with full economic accountability, it is objectively necessary to increase the share of profit left at the disposal of enterprises (associations) and ministries for the development and improvement of production and scientific research, for capital investments and for other expenditures. From the remainder, the free balance of profit is paid to the state budget. The formation and development of production and industrial (all-Union and republic) associations make it possible to centralize part of the profits, thereby promoting a uniform sectorial technological policy, as well as the more rational use of the economic resources of the enterprises and associations.
Antiscientific views of the essence and role of profits under socialism are widespread in contemporary bourgeois literature. On the one hand, bourgeois scholars try to equate the economic meaning of profit under capitalism with its meaning under socialism. The intensified role of profits in the system of endorsed plan indexes, as well as in the economic stimulation of production associated with reforms in the socialist countries, is interpreted by bourgeois economists as a return to capitalism. On the other hand, bourgeois economists declare that profit is alien to the socialist economy and unnecessary to its functioning. In reality, profit acquires a new social meaning under socialism. It is used in conformity with a plan as an economic lever to develop socialist production and raise its efficiency. Moreover, profit is the chief source for the formation of centralized cash assets (at the level of the state as a whole) and decentralized cash assets (at the enterprise and association level) to ensure high, stable rates of economic growth and to raise the standard of living of the people.
Under the conditions of developed socialism, when the intensive factors of economic growth operate more fully, profit assumes an even more significant role in the functioning of the national economy.
REFERENCESMarx, K. “Teorii pribavochnoi stoimosti,” part 3 (vol. 4 of Kapital). In K. Marx and F. Engels, Soch., 2nd ed., vol. 26, part 3, pp. 76–83, 504–39.
Lenin, V. I. “Ob edinom khoziaistvennom plane.” Poln. sobr. soch., 5th ed., vol. 42.
Lenin, V. I. “Proekt tezisov o roli i zadachakh profsoiuzov v usloviiakh novoi ekonomicheskoi politiki.” Ibid., vol. 44.
Materialy XXV s”ezda KPSS. Moscow, 1976.
Ob uluchshenii upravleniia promyshlennost’iu, sovershenstvovanii planirovaniia i usilenii ekonomicheskogo stimulirovaniia promyshlennogo proizvodstva: Postanovleniia Plenuma TsK KPSS, priniatye 29 sentiabria 1965 g. Moscow, 1965.
Bazarova, G. V. Pribyl’ v ekonomicheskom stimulirovanii proizvodstva. Moscow, 1968.
Pribyl’ i rentabel’nost’ v usloviiakh khoziaistvennoi reformy. (Materialy nauchnoi konferentsii). Moscow, 1968.
Finansovyi mekhanizm vozdeistviia na proizvodstvo: Na primere promyshlennosti SSSR i NRB. Moscow, 1972.
Butakov, D. D. Finansovye problemy khoziaistvennykh reform v stranakh-chlenakh SEV. Moscow, 1973.
Gewinn in der volkseigenen Industrie. Writers’ collective under the leadership of E. Seifert. Berlin .
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