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ABSTRACT. Neoclassical microeconomics characterizes profit as a sign of inefficiency, because in that framework profit is either a sign of monopoly power or market disequilibrium. In contrast, Schumpeter characterized profit as necessary for economic development and an indicator of economic progress. These conflicting views of profit can be analyzed by examining the factors that generate economic welfare. Welfare is enhanced through economic progress, not by arriving at some optimal allocation of resources, which supports Schumpeter’s view of profit. However, under some institutional settings people can profit by transferring to themselves output produced by others. Profit is an indicator of progress only when resources are allocated through market exchange. pp. 12–25

Keywords: profit, economic welfare, equilibrium
JEL Codes: L10, C60, D52

Randall G. Holcombe
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Florida State University

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