4 replies to this topic

[Murphy]

Is there a “normal rate of profit” in a market economy?

[Murphy]

Doug K, on Oct 27 2007, 11:53 AM, said:

The "normal rate of profit" can also be refered to as the market rate of interest. It is the rate earned simply from the employment of capital under unchanging circumstances (such as we find in the evenly rotating economy).

What you're saying is true, but most Austrians would probably say, "No, the 'normal' rate of pure profit is zero. The fact that gross returns tend to exceed outlays is accounting profit, i.e. interest."

[Murphy]

Mart Grams, on Jul 18 2008, 07:11 PM, said:

There is a normal rate of interest, the time discounting; but the normal rate of profit can't exist. Profit is the return for "abnormal" disequilibirum. (Which by the way is really normal market conditions.)

Exactly right. Other economists / financial analysts would object and say Austrians should have the notion of different average returns based on the variance in different investments, but Austrians haven't (as yet) developed the framework to think about things like that. For example, if I earn 10% on my investment in a corporate bond, while you earn only 5% on your government bond, is my higher return entrepreneurial profit? One could make a plausible argument to the contrary, I think.