Where Do Profits Come From?

I was listening to today’s EconTalk podcast with Russ Robert and he was talking with Mike Munger about the source of profits. Munger made a good point that profits aren’t about exploitation; they’re really about correcting errors:

I think it is important, and the reason I wanted to start with that, as you pointed out, hilarious joke, that we need to recognize what the source of profits are. The source of profits is correcting errors. The economy around us is full of errors. And what I mean by errors is a maladjustment, a divergence between what we are actually producing and what we “should” produce in order to use the stuff that we have–our mental resources, physical capital, labor–to produce the highest possible level of satisfaction of what the public wants. So, there’s this unobservable thing that nobody knows and nobody can know, and that is: What is it that a consumer-sovereignty oriented society would produce? How are we going to allocate our resources? There’s all sorts of mistakes in the way we are allocating resources. If we not making iPods, if we are not making things that people want to buy, even if they don’t know that they want to buy it. The genius of Steve Jobs was to say: Here’s the way people want to buy these things. They don’t know it, but if we do it, we correct this mistake.

Posted by on December 12th, 2011 at 3:31 pm


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