July 4, 2008 1 Comment
Here’s a distinction I was not able to make rigorously until Mises cleared things up in chapter 15, section 8 of Human Action:
Profit … is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it is, in other words, yield minus costs. To make profit is invariably the aim sought by any action. If an action fails to attain the ends sought, yield either does not exceed costs or lags behind costs. In the latter case the outcome means a loss, a decrease in satisfaction.
Profit and loss in this original sense are psychic phenomena and as such not open to measurement and a mode of expression which could convey to other people precise information concerning their intensity…
That much I’d already understood.
Profit is psychic (in the psychological, not the New Age, sense). It is not objective.
But then comes the critical distinction:
…It is possible to ascertain in terms of money how much an individual has profited or lost. However, this is not a statement about this individual’s psychic profit or loss. It is a statement about a social phenomenon, about the individual’s contribution to the societal effort as it is appraised by the other members of society. It does not tell us anything about the individual’s increase or decrease in satisfaction or happiness. It merely reflects his fellow men’s evaluation of his contribution to social cooperation…
So monetary profit and loss are objective, social facts in the world, reflecting subjective, individual desires of other people (customers), and the success or failure of the profit or loss maker (entrepreneur) to fulfill those desires.
Maybe this was already obvious to everyone else.
I’m sure this distinction as at the heart of the calculation problem.