"In general, only accounting profit is measured
while only economic profit is interesting. When we think of economic profit, we
need not restrict ourselves to shareholders, who represent just one class of
claimants on an enterprise. Suppose there is an industry whose firms about
break even in accounting terms, but whose unionized workers, even those without
hard-to-find skills, capture salaries much larger than they likely would
outside of the industry. Is the industry “profitable”?
In an economic sense, it is very profitable. It
generates sales that far exceed the opportunity cost of its inputs. But for
institutional reasons, those profits are captured by workers rather than
accruing to equityholders, and so are missed by accounting measures. It’s
pretty clear that, in its heyday, the US auto industry was like this. The
industry generated a great deal more “value” than was captured by its
shareholders. The internal negotiations between firm stakeholders over the
distribution of economic profit has no bearing on the existence of that
profit."
