Both supporters and opponents of the capitalist market system agree on one point – the central importance of profit to the way the system operates. So what are profits and why do they get priority?
What is Profit?
Most production for the market is organised nowadays not by private individuals but by business enterprises of one sort or another. This represents a change since the times of many of the famous defenders of the market system, such as Adam Smith. The aim of these businesses, whether large or small, whether owned by shareholders or the state, is to maximise the return on the capital invested in them.
This “return” is profit. At its most basic, this profit is the difference between the money a business obtains from the sale of its products and the money it has to spend on producing them. The rate of profit is the amount of profit made over a given period, normally a year, as a percentage of the monetary value of the assets of the business at the beginning of the period.
Profit-seeking is not a matter of the greed of those running a business but is something imposed on them from outside by the competitive pressures of the market. All the businesses in a particular branch of production are in competition with each other to sell their products. This battle will be won by those firms that can provide an equivalent good at the lowest price.
This is largely a matter of having better technology – more performance machines and better methods of production that allow the same good to be produced at a lower cost. The extent to which a business can install such machinery and adopt such methods depends on the amount of profits it makes. In this way the market forces businesses to seek the maximum profits and then to invest as much of them as they can in improving and expanding their productive capacity.
At the level of the economy as a whole market forces tend to bring about an equalization of the rate of profit in all branches of production. If a higher rate is being made in one branch this will tend to attract more capital into it as a result production will increase and the extra supply will cause prices to fall – bringing the rate of profit back towards the average or ‘normal’ level. If, on the other hand, the rate of profit is lower than average somewhere capital will tend to flow out of that branch production will fall, the lessened supply will drive prices up and the rate of profit will tend to rise to the average level.
Author: Adam Buick
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