Profit and Entrepreneurial Functions

Frank H Knight

The Journal of Economic History, 1942, vol. 2, issue S1, 126-132

Abstract: In so far as the term “profit” has any fairly concrete and generally understood meaning, it designates the income accruing to the owner of a business or productive “enterprise,” through the operations of that business or enterprise. The owner may be an individual or a group, organized in some way as a legal entity; most typically, it is a “corporation,” particularly under American conditions. In either case, this owner, who normally hires productive services from others for a fixed compensation, uses them to make a product and sells the product for what he can get, is what is meant by an entrepreneur. He (or it) is the responsible controller or manager of the business in relation to market conditions, regardless of whomever he may consult or whatever functions he may delegate to others or on whatever terms. In business usage, profit is the entrepreneur's net income, what remains out of the gross proceeds of the business after paying the hired labor and capital at the agreed rates, determined by market competition (and after deducting costs of materials and “products” bought from others). It is thus a “residual” income, what is left after other distributive shares are removed, and may be positive or negative. But profit, so defined—when there is a positive profit, and not a loss—evidently consists to a greater or less extent of the remuneration for services furnished to the business by the entrepreneur himself—labor or capital services, or both. For analytical purposes, the economic theorist must define profit more narrowly, as what is or would be left (“residual”) after deducting wages and/or interest at the “going rates” for the entrepreneur's own services.

Date: 1942
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