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I understand that zero economic profit does not equal to zero accounting profit. It means that every resource that goes into the production is perfectly utilized considering alternative uses in the economy and nothing more. If every company in the economy is earning zero economic profit, can they contribute to real economic growth? (Ceteris paribus)

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    $\begingroup$ There can still be technical innovations. If you can produce a good in 1h instead of 3h, you can produce more independent of how these additional rents are distributed. $\endgroup$ – Bayesian Jun 6 at 11:55
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The standard measure of the size of an economy is total income. Profit is just one type of income (accruing to owners of firms). Wages that accrue to the workers in a firm can increase, which can be taken from the profit of the firm. In that way, income from other sources can continue to increase even though firms earn zero profit.

Other sources of income are rent (from land), and interest (from owning productively-used capital), but I'll stick to wages to keep it simple.

So, you can see that there are different markets at play—the labour market, the market for land, and the market for capital (or input goods). The important thing is that one does not, for example, simply take profit away from firm owners and give it to labourers. It must be a result of equilibrium in these markets. So, for example, if equilibrium in the labour market determines that wages for that sector must be high (e.g. due to scarcity of skills or an abundance of demand for those skills), then that high wage is just a cost of production that firms in that sector must swallow, in order to produce in that sector. Even though competition drives profits down to zero, all the other firms in that sector will also be having to pay the market wage rate.

I'm answering your question in a highly theoretical fashion, but then again, zero economic profit across the economy is a highly theoretical situation itself.

Edit:

To clarify, I'm arguing that aggregate income can increase through other forms of remuneration, even though profits stay at zero.

If you had a ceteris paribus clause that said these additional income sources remained the same, then economic activity would remain constant (i.e. growth would be zero). Take note that even if the wage rate (or interest rate or price of renting land) remained the same, an increase in the number of firms entering the market would increase economic activity. So, this ceteris paribus clause is not so much talking about the rate of remuneration remaining constant, but rather the aggregate level of income from other sources remaining constant.

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  • $\begingroup$ If I have added "Ceteris paribus" to my question, would it change anything? I had the impression that in order to create wealth, companies have to earn positive economic profit. If all companies in the economy earn 0 economic profit, can they contribute to economic growth? From your answer I understand that company profits may not matter as there are other markets at play. What if we factor them out? (I've edited my question according to this comment) $\endgroup$ – refik Jun 6 at 12:51
  • $\begingroup$ The wealth that they create in my scenario is through remuneration. However, if you add a ceteris paribus clause, that would be saying that other types of income are held constant, so then economic activity will remain constant (i.e. no growth, but GDP will remain constant). $\endgroup$ – ahorn Jun 6 at 13:36
  • $\begingroup$ I would like to accept your answer, would you be willing edit your last comment in it somehow? $\endgroup$ – refik Jun 6 at 13:50
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    $\begingroup$ Declaring that you hold all incomes constant aside from those attributable to economic profits and then make assuming economic profits equal to 0 a condition of your question, then by definition, you have zero growth (measured by income). This is analogous to asking, if there is no growth in an economy, can the economy grow? $\endgroup$ – asgallant Jun 6 at 21:04
  • $\begingroup$ @asgallant I see your point, how about this: If a company is earning zero economic profit, does it contribute to the economic growth through the income it generates to its investors and creditors? (considering risk premium in their required rate of return) $\endgroup$ – refik Jun 7 at 14:58

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