Definitions and Basics

Profits, from the Concise Encyclopedia of Economics

Capitalists earn a return on their efforts by providing three productive inputs. First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future….

Second, some profits are a return to those who take risks. Some investments make a profit and return what was invested plus a profit, but others don’t.

Third, some profits are a return to organizational ability, enterprise, and entrepreneurial energy.

In the News and Examples

Mike Munger on Middlemen. Podcast at EconTalk.

Mike Munger of Duke University talks with EconTalk host Russ Roberts about the often-vilified middleman–someone who buys cheap, sells dear and does nothing to improve the product. Munger explains the economic function of arbitrage using a classic article about how prices emerged in a POW camp during World War II. Munger then applies the analysis to the financial crisis….

Insider Trading, from the Concise Encyclopedia of Economics

“Insider trading” refers to transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information originating within the firm that would, once publicly disclosed, affect the prices of such securities. Corporate insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information…. Although insider trading typically yields significant profits, these transactions are still risky….

Mike Munger on Price Gouging. Podcast at EconTalk.

Mike Munger of Duke University recounts the harrowing (and fascinating) experience of being in the path of a hurricane and the economic forces that were set in motion as a result. One of the most important is the import of urgent supplies when thousands of people are without electricity. Should prices be allowed to rise freely or should the government restrict prices? Listen in as Munger and EconTalk host Russ Roberts discuss the human side of economics after a catastrophe….

Capitalism, from the Concise Encyclopedia of Economics

Nonetheless, by the 1820s and 1830s the growing specter of child labor and “dark Satanic mills” (poet William Blake’s memorable phrase) generated vocal opposition to these unbridled examples of self-interest and the pursuit of profit. Some critics urged legislative regulation of wages and hours, compulsory education, and minimum age limits for laborers. Others offered more radical alternatives. The most vociferous were the socialists, who aimed to eradicate individualism, the name that preceded capitalism….

Marxism, from the Concise Encyclopedia of Economics

Marx then asked an apparently devastating question: if all goods and services in a capitalist society tend to be sold at prices (and wages) that reflect their true value (measured by labor hours), how can it be that capitalists enjoy profits–even if only in the short run? How do capitalists manage to squeeze out a residual between total revenue and total costs?…

A Little History: Primary Sources and References

Who wins with tribal casinos? The incentive to claim a stake in the profits: Indian Givers: Politicians and Tribal Gambling Casinos, by Fred S. McChesney. Econlib, February 6, 2006.

How did the federal government get involved with Indian casinos? Almost two centuries ago, the Supreme Court defined Indian tribes as “sovereign nations,” independent of the United States and individual states in many respects. But Indian tribal sovereignty vis-à-vis non-Indian governments is an extraordinarily complicated affair. As concerns gambling, states are free to prohibit gambling within their borders, in which case Indian tribes are bound by state law (despite their “sovereignty”). In states banning gambling, such as Utah, there can be no Indian gambling casinos, either….

Although taxing Indian tribes was of little interest in Washington when the tribes and their members had little income—the IRS initially opined that Congress did not designate Indian tribes as taxable entities—the rise of casinos has changed all that….

Risk, Uncertainty, and Profit, by Frank Knight on Econlib.

Advanced Resources

Profit, Loss, and Discovery. YouTube video,

Economics professor Howie Baetjer of Towson University explains how the market process generates improvements in the human condition. In particular, he highlights how profit & loss serve to help people channel their activities in creative and socially useful directions.

Related Topics

Competition and Market Structures
Productive Resources
Saving and Investing