Profit and Economic Growth

Abstract

Many facts attest to the existence of close ties between producer profits and economic growth. In the first place, in periods of economic growth, an overwhelming number of enterprises have fairly high profits. The markets are dominated by general confidence and optimism. A wholly different picture can be seen when economic growth is absent. In crisis conditions, producer profits tend towards zero, a few enterprises have insignificant profits and others suffer losses. In the second place, profits serve as the main source of investments, and as such the magnitude of economic growth depends on the amount of profit. If loans are a source of investment, then the guarantee for its repayment is precisely profit. The amount of loans received is directly dependent on the size of profits. In the third place, in a simple, commodity exchange economy the sole potential for generating profits is acquisition of additional commodities. It follows that the total profit of all economic agents is precisely equal to the cost of additionally manufactured commodities. As such, total profit equals economic growth. In such an economy, the words “profit” and “economic growth” practically become synonyms. If it can be proven that the stated equality always occurs, in any economy, then it will become possible to explain in a fairly simple manner the cyclical nature of economic development, to understand the reason for the existence of interest, and to continue drawing together the two branches of economic science: micro- and macroeconomics.