[Originally published in the Freeman, November 1964, this article is included in Free Market Economics: A Basic Reader, edited by Bettina Bien Greaves.]
Although every businessman aims to earn a “profit,” he usually knows very little about the economic nature of his objective. He may even succeed in earning a profit, and yet be unable to explain this excess of proceeds that accrues to him after all expenses are paid.
The same can be said about tax collectors who search for “profits” and aim to seize parts thereof for the state. And the accountants who reveal the “profits” by comparing the business revenue with the expenses. They all look at the totality of net income without any distinction of its various component parts.
The economist who analyzes the economic nature of “profits” actually perceives three entirely different sources of income.
Most proprietors and partners of small businesses who think they are reaping “profits” actually earn what economists call managerial remuneration. They are earning an income through their own managerial labor, supervising their employees, serving customers, working with salesmen, accountants, and auditors. Obviously, their services are very valuable in the labor market. They would earn a good salary if they were to work for the A&P or a 5&10¢ store. Therefore, that part of a businessman’s income that is earned through his own labor exertion is a kind of wage or salary, and as such, totally unrelated to economic profits.
Thanks to BrotherJohnF