<p>The standard measure of the size of an economy is total <em>income</em>. 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.</p>

<p>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.</p>

<p>So, you can see that there are different markets at play&mdash;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.</p>

<p>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.</p>

<p><strong>Edit:</strong></p>

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

<p>If you had a <em>ceteris paribus</em> 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 <em>ceteris paribus</em> 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.</p>

CC BY-SA 4.0
2019-06-06T12:51:00.847Z
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)
refik
CC BY-SA 4.0
2019-06-06T13:36:44.477Z
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).
ahorn
CC BY-SA 4.0
2019-06-06T13:50:27.887Z
I would like to accept your answer, would you be willing edit your last comment in it somehow?
refik
CC BY-SA 4.0
2019-06-06T21:04:42.057Z
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?_
asgallant
CC BY-SA 4.0
2019-06-07T14:58:41.220Z
@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)
refik
CC BY-SA 4.0
2019-06-07T16:14:27.807Z
Risk premium isn't relevant. If you measure growth by income, then the only thing that matters is if real incomes rise. In that sense, economic profits are irrelevant: you can increase real incomes through improvements in efficiency or development of new products and services (ie, innovation) or expand available resources (growth of the labor market, resource exploration, etc), even with zero economic profits.
asgallant
CC BY-SA 4.0
2019-06-07T16:42:20.843Z
@asgallant Thank you. I think I'm missing some basics. I'd be glad if you can point me to some resources. I was trying to understand whether economic profits can be used as a measure for a company's contribution to the economy as a whole (more economic profit, more contribution). I guess that is a dead end then?
refik
CC BY-SA 4.0
2019-06-07T17:30:37.687Z
@refik an "investor" of a company is equivalent to an owner, and that income is from profit. So, no, if profit is zero, investors won't earn income. To answer your last comment, a company's contribution to the economy is measured by its level of output - the amount of goods or services that it sells. That is like **revenue**, although economists prefer to look at **real** output, which is revenue divided by the price.
ahorn
CC BY-SA 4.0
2019-06-07T18:00:52.527Z
@ahorn Just to be clear, you are saying that "If economic profit is zero, investors won't earn income" right? (even if there is accounting profit) I understand that a company's contribution to the economy is measured by its real output, more clearly my question was whether economic profit can be related to a company's contribution to the **real economic growth** (no economic profit, no contribution to economic growth)
refik
CC BY-SA 4.0
2019-06-07T18:01:58.923Z
@refik economic profits are about opportunity costs, not about profits in terms of income. `economic profit = revenue - production costs - opportunity costs`, or `economic profit = accounting profit - opportunity costs`. Generally speaking, the more competitive a market is, the lower the economic profits of operating in that market are.
asgallant
CC BY-SA 4.0
2019-06-07T18:06:25.730Z
@asgallant Yes I am clear with that.
refik
CC BY-SA 4.0
2019-06-07T18:06:26.663Z
Whether investors earn profit (measuring accounting or economic profits) is factored into whether growth has occurred, but is not in and of itself sufficient to answer the question.
asgallant
CC BY-SA 4.0
2019-06-06T12:19:50.917Z
2019-06-06T13:58:54.443Z
2019-06-06T13:58:54.443Z
ahorn
<p>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)</p>

CC BY-SA 4.0
2019-06-06T11:55:15.217Z
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.
Bayesian
<economic-growth><profits>
If every company in the economy earns zero economic profit, can they contribute to real economic growth?
refik
# If every company in the economy earns zero economic profit, can they contribute to real economic growth?

(Asked by: username_0 on 2019-06-06)

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)

**Tags:** economic-growth, profits
> **Comments:**
> **username_1**: 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.  

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## 1 answers

### Answer by username_2 on 2019-06-06. Score: 4 | Accepted answer

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.

> **Comments:**
> **username_0**: 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)  
> **username_2**: 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).  
> **username_0**: I would like to accept your answer, would you be willing edit your last comment in it somehow?  
> **username_3**: 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?_  
> **username_0**: @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)  
> **username_3**: Risk premium isn't relevant. If you measure growth by income, then the only thing that matters is if real incomes rise. In that sense, economic profits are irrelevant: you can increase real incomes through improvements in efficiency or development of new products and services (ie, innovation) or expand available resources (growth of the labor market, resource exploration, etc), even with zero economic profits.  
> **username_0**: @asgallant Thank you. I think I'm missing some basics. I'd be glad if you can point me to some resources. I was trying to understand whether economic profits can be used as a measure for a company's contribution to the economy as a whole (more economic profit, more contribution). I guess that is a dead end then?  
> **username_2**: @refik an "investor" of a company is equivalent to an owner, and that income is from profit. So, no, if profit is zero, investors won't earn income. To answer your last comment, a company's contribution to the economy is measured by its level of output - the amount of goods or services that it sells. That is like **revenue**, although economists prefer to look at **real** output, which is revenue divided by the price.  
> **username_0**: @ahorn Just to be clear, you are saying that "If economic profit is zero, investors won't earn income" right? (even if there is accounting profit) I understand that a company's contribution to the economy is measured by its real output, more clearly my question was whether economic profit can be related to a company's contribution to the **real economic growth** (no economic profit, no contribution to economic growth)  
> **username_3**: @refik economic profits are about opportunity costs, not about profits in terms of income. `economic profit = revenue - production costs - opportunity costs`, or `economic profit = accounting profit - opportunity costs`. Generally speaking, the more competitive a market is, the lower the economic profits of operating in that market are.  
> **username_0**: @asgallant Yes I am clear with that.  
> **username_3**: Whether investors earn profit (measuring accounting or economic profits) is factored into whether growth has occurred, but is not in and of itself sufficient to answer the question.  

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