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Profits in the Modern Economy

Profits in the Modern Economy: Selected Paper From a Conference on Understanding Profits

Copyright Date: 1967
Edition: NED - New edition
Pages: 216
  • Book Info
    Profits in the Modern Economy
    Book Description:

    Profits in the Modern Economy was first published in 1967. As the editors point out in their introduction to this volume, profit is a concept about which there is much misunderstanding. The man in the street, the businessman, and the economist all think of profit in different senses and for this reason experience difficulty in communicating with each other. Although the subject is of crucial importance in the modern economy, relatively little of a scholarly nature has been written about profits. The aim of this book is to provide a basis for a better understanding of the nature and role of profits in today’s economy. Among the nineteen contributors of papers or discussions are professors of economics or business administration at a number of universities, executives of several financial or industrial firms, and government officials. Their papers present various viewpoints on profit measurement, use, and significance. The book is divided into sections on “The Problem and Its Setting,” “Profits in the Economy,” “Profits in the Firm,” and “Profits and National Economic Policy,” with an introduction by the editors for each section. The material is based on the papers and discussion from the Conference on Understanding Profits sponsored jointly by the University of Minnesota Graduate School of Business Administration and Macalester College. Harvey M. Rice, former president of Macalester College, writes a foreword.

    eISBN: 978-0-8166-6458-0
    Subjects: Economics

Table of Contents

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  1. Front Matter
    (pp. i-vi)
  2. Foreword
    (pp. vii-xii)

    Financial profit and the profit motive are strangely misunderstood in our society by many persons you would think should understand them. For a number of years both financial profit and the profit motive have been on the defensive in many parts of the world. There does appear now to be some change in this attitude, in some quarters at least, and we hope that we can help to further this trend through this book. The reasons for the misunderstanding are many. The spread of education among hundreds of millions of people makes it possible for them to learn what is...

  3. Table of Contents
    (pp. xiii-xiv)

    • Editors’ Introduction
      (pp. 3-4)
      Harold W. Stevenson and J. Russell Nelson

      Profit is a concept about which there is much misunderstanding. The man in the street, the businessman, and the economist all think of profit in different senses and for this reason experience difficulty in communicating with each other. Even among persons who think they have agreed on definitions, discussion often flounders in ambiguity because the term is being used to convey various shades of meaning.

      The meanings attributed to the word “profit” range from the view that it is the entire return received by the businessman to the view that “pure” profit is the residual after deductions from total income...

    • How High Is Up?
      (pp. 5-14)

      As everyone who has ever reared children knows, the simplest questions are sometimes the hardest to answer. For example, How high is up? I ask you to consider a question just as simple to ask and just as hard to answer: How high are profits?

      The news is full of answers, and all of them seem to run in the same direction: Profits at record high, say the headlines. Profits up 52 per cent, say the President’s economic advisers. Profits are staggering, says Walter Reuther. The profit squeeze is over, saysTime. These are all, in their fashion, answers to...


    • Editors’ Introduction
      (pp. 17-18)
      Harold W. Stevenson and J. Russell Nelson

      Anyone seeking to determine the state of the economy, and to predict future trends, must look closely at the private sector and, notably, at trends in corporate profits. Since there are differing views about the proper measure of profits, great care must be exercised in the use and interpretation of profit figures. The papers in this section, concerned with the development and use of aggregate profit data, enable one to see clearly the limitations of the figures.

      In the first paper, Richard Holton discusses the record of profits. After noting some difficulties in measuring profits, he addresses himself to the...

    • The Record of Profits
      (pp. 19-25)
      Richard H. Holton

      The critical role of profits in a free-enterprise economy is so clear that we need not take time to expand on this basic thought. It would seem unnecessary to preach the profit gospel to this particular congregation — I assume that the brethren here are already saved.

      We do hear conflicting stories about the present status of profits in the United States. Corporate profits both before and after taxes are at an all-time high. Yet Henry Ford II has argued that profits are really not at all high compared with selected postwar years, such as 1950. He clearly believes that...

    • The Economic Performance of Corporations
      (pp. 26-36)

      I should like to begin by saying a few things about the corporate profits series which the First National City Bank compiles and publishes. Second, I shall discuss some concepts of corporate profits and depreciation charges, and third, I shall comment on some relations among corporate profits, cash flow, and factors influencing expenditures for plant and equipment.

      I represent an institution that has long had a special interest in providing a better understanding of corporate profits. Indeed, it has been more than three decades since the first issue of the bank’s detailed annual review of corporate profits, covering at the...

    • Measuring Aggregate Corporate Profits
      (pp. 37-49)

      In a profit-oriented economy such as that of the United States, the trends of and prospects for corporate profits are vital in determining how well the economic system is working. Business prospects and the profit outlook are strongly intertwined. Nevertheless, it is remarkable, on reviewing the literature, to see how little work has been done and how widespread is the misunderstanding of the problems and methods of profit measurement. Therefore, it is useful here both to consider the purposes for which information about aggregate profits is needed and to differentiate among the various profit measures available to meet these needs....

    • The Outlook for Corporate Profits
      (pp. 50-58)

      An evaluation of the outlook for corporate profits in the United States may be conveniently divided into the following sections: (1) a review of the postwar record for profits in order to obtain a better perspective of the present position of profits; (2) an examination of trends in demand, costs, and prices, which are major determinants of profits; (3) the selection of an appropriate measure as a basis for projecting profits; and (4) the outlook for profits as viewed in May 1964.

      If we examine the statistics of after-tax corporate profits in the postwar period, the performance has been disappointing.¹...


    • Editors’ Introduction
      (pp. 61-62)
      Harold W. Stevenson and J. Russell Nelson

      The attention of theoreticians in recent years has increasingly been centered on decision-making in the individual business firm. It is understandable that profits — the carrot in the enterprise process — provide a common focal point for analysts and theoreticians of various disciplines. “True” profits are, of course, not determinable for a firm because of all the changes in products, factors of production, and prices in the real world. The question, then, is whether accountants are measuring and presenting a profit appropriate to its users. The papers and discussions of this section are concerned with this question and present the...

    • An Economist’s View of Profit Measurement
      (pp. 63-72)

      Back in 1939 the famous economist J. R. Hicks defined a man’s income as “the maximum value which he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning.”¹ In 1950 another distinguished economist, Sidney Alexander, proposed this definition of income as a basis for the measurement of corporate profits and used it to evaluate critically the definition of cost employed by accountants.² Accountants for the most part have since accepted the theoretical validity of the Hicks-Alexander, or, as it has come to be called,...

    • An Accountant’s View of Profit Measurement
      (pp. 73-81)

      The measurement of profits is the peculiar province of the accountant; the process by which such profit measurement is to be performed constitutes an important part of the subject matter of accounting. However, the accountant does not operate in a vacuum — he is influenced by traditions going back at least five centuries, by important consumers of accounting data such as bankers and investment analysts, by provisions of the Internal Revenue Code, by opinions of the staff and commissioners of the Securities and Exchange Commission, and by pressures of management that wishes to turn accounting to its own ends. The...

    • Profits from the Investor’s Point of View
      (pp. 82-97)

      The story is told of a bird who went to work every day. He gave his wife an affectionate peck as he picked up his briefcase and lunch and set out for work, from which he came back every evening. He was, however, a bit careless; he did not always fly over the public highway, but instead took shortcuts over private property. One summer day, he came home terribly battered and bruised, his briefcase lost, his feathers awry. His wife, after attending to his immediate needs, asked, “Whatever in the world happened?” “Well,” he replied, “I was taking a shortcut...

    • A Cash-Flow Concept of Profit
      (pp. 98-116)

      The traditional theory of the firm is based on the assumption that the firm acts in the stockholders’ interests, that the stockholders are interested in profit, and, therefore, that the objective of the firm is to maximize profit. There have been many theoretical discussions of the concept of profit, but there is no consensus on the precise definition of this theoretical construct.¹ Nevertheless, the theory of the firm has been based on the assumption of profit maximization, and profit has been thought of (loosely) as the difference between the revenue received from the product sold and the payments made to...

    • A Pragmatic View of Profit
      (pp. 117-122)

      I shall begin by stating my biases and reason for proposing that profits can be looked at in a couple of different ways. This will be inconclusive, but it may put a little order back into what I am afraid Professor Nelson completely disordered when he said there were so many things wrong with any specific kind of measurement of profit.

      First, I would like to say “amen” to Nelson’s main point, which I take to be that any figure with a name attached to it, such as profit, is going to be used by a variety of people for...

    • Investment Decisions of Corporations
      (pp. 123-133)

      Investment decisions of corporations are probably the single most important determinant of corporate profits which is directly controllable by corporations. They include the decisions of a firm about product line and the choice of equipment for producing the product. Decisions to buy or lease, or to make or buy, are investment decisions, as is the choice of the method of depreciation accounting. A firm deciding whether or not to refund a bond issue has an investment decision, and so does the president of a university deciding on the size of a new building for a school of business administration. All...

    • Sources and Costs of Obtaining Funds
      (pp. 134-169)

      The central focus of this paper is upon how management of the optimal financial mix can contribute to the profitability of a firm. “Financial mix” refers to the forms and sources of financing. It includes short-versus long-term financing, debt- versus equity-financing, various options that provide for mixed debt and equity forms, the relative use of internal and external financing as reflected in dividend policy, and the timing of the acquisition and disposition of funds. Also it includes analysis of comparative advantages in the use of alternative sources of funds — commercial banks, insurance companies, equity markets, and so forth.


    • Risk and Rate of Return
      (pp. 170-178)

      Every trade has its perils. That of discussant is subject to the danger that the papers to be discussed may not be received before the meeting at which comments are to be made on them. Aware of this possibility, I started to build defenses by sketching out what I would say if I had no papers to discuss. Now I am in a dilemma, because although the papers by Professors Bierman and Weston were received well ahead of this conference, I had grown quite fond of my contingent presentation and was reluctant to cast it aside. So I have compromised....


    • Editors’ Introduction
      (pp. 181-181)
      Harold W. Stevenson and J. Russell Nelson

      The annual Economic Report of the President to the Congress is awaited by the citizens of the United States as an important document, and they have accorded the President’s Council of Economic Advisers a place of importance in the national life. The Employment Act of 1946, which provides for the message, is a declaration of national purpose and is a recognition of federal responsibility for the promotion of “maximum employment, production, and purchasing power.” As can be surmised, an economy with full employment would, among other attributes, reward enterprise with profit. Just how profits are viewed in the shaping of...

    • The Role of Profits in National Economic Policy
      (pp. 182-194)

      In his paper, Richard Holton said he need not preach the virtues of profits tothiscongregation — that the brethren are already saved. But here I am assuming that the congregation is asking whether thepreacher— in this case, the government — is saved. At the end of this sermon, I hope that the congregation will have a reasonably reliable answer — that you will know whether the Administration is in league with the angels or the devils of your choice.

      The role of profits in national economic policy is essentially a derived one — derived from policies...

  8. Index
    (pp. 195-200)