Updated: 3/2/20
Blessed are the meek, for they shall inherit the earth (Matthew 5:5).
I have commented on this verse in detail in my economic commentary on Matthew. It has to do with people who are meek before God and therefore active toward the world. [North, Matthew, ch. 4: “Meekness and Inheritance”] This prophecy implies a zero-sum contest in history between covenant-keepers and covenant-breakers. Covenant-keepers will inherit everything. This means that the capital created by covenant-breakers will be the inheritance of covenant-keepers at the end of time. It means that inheritance necessarily carries with it the concept of disinheritance. The model of this disinheritance is the poor steward who buried the coin of the owner who went on the long journey: the parable of the talents and the parable of the minas. His coin was given to the most profitable steward.
1. Covenantal Foundations
This chapter is an extension of the fifth law under theocentric (judicial) laws: God mandates growth. In Chapter 2, I wrote: “Because dominion is ethical/covenantal, corporate inheritance in history will be ethical/covenantal. God issued the dominion covenant to Adam and his heirs (Genesis 1:26–28), but there is now a covenantal separation between disinherited families and adopted families. Adoption (salvation) is by grace alone (Ephesians 2:8–9). Grace precedes law. Covenant-keepers are required by God to build God’s kingdom in history (Matthew 6:33). This takes capital. God promises to supply this capital. This is seen clearly in God’s promise that covenant-keepers will become the primary heirs in history. ‘But the meek will inherit the land and will delight in great prosperity’ (Psalm 37:11). Jesus repeated this promise: the meek will inherit the earth (Matthew 5:5)” (2:C:5).
This chapter is also an extension of the fifth law under judicial (representative) laws: trustees designate successors. In Chapter 2, I wrote: “This principle applies to all forms of property and all legal arrangements for the protection and maintenance of property. This goes back to God’s arrangement with Adam and Eve regarding the garden. ‘The Lord God took the man and put him into the garden of Eden to work it and to maintain it’ (Genesis 2:15). His children would inherit his property. Inheritance is the legal basis of today’s property. Property can be held in trust for designated beneficiaries through the ages. The trustees are required by the trust document to administer the property in the trust in terms of the stipulations of the founding document” (2:D:5).
This chapter is also an extension of the fifth law under stewardship laws: owners designate heirs. In Chapter 2, I wrote: “In order to fulfill God’s requirement of compound economic growth, there must be inter-generational wisdom passed on by owners to their as yet non-owning sons and daughters. This wisdom must include the knowledge of how to increase per capita wealth. The solution to this problem eluded mankind until about 1800. Only then did per capita wealth increase every year by 2% or more. That compounding process has created the modern world” (2:E:5).
2. Inheritance and Disinheritance
The meaning here of “meek” is not “helpless.” It means “meek before God.” Those people who are meek before God are not helpless. They are under God’s covenant blessings. The historical process is on their side. This process is not impersonal. It is highly personal: the outworking of the decree of God.
Point five of the biblical covenant is succession. In economic theory, this is inheritance.
The essence of the dominion covenant is adding value. This is what Matthew 25:14–30 is all about: the parable of the talents. North, Matthew, ch. 47] Man’s God-assigned goal is to increase value in the broadest sense. He who fails to do this will have his inheritance transferred to the more productive members of society in the final judgment (Matthew 25:30). [Covenant-keepers get richer. Covenant-breakers are disinherited. Put differently, the poor in spirit inherit the kingdom of God (Matthew 5:3). So do the meek, i.e., meek before God. This is the fundamental New Testament principle of inheritance.
This inheritance process is supposed to be reflected in the economy. Those who subordinate themselves to the demands of customers will get richer. Those who do not will get poorer. The market-based sanctions system of monetary profit and loss rewards those who are efficient servants of customers. They have subordinated their efforts to the demands of customers. This is how stewards prosper. They accumulate wealth. Then they die.
Inheritance is the legal transfer of wealth at the death of the owner. This transfer is inescapable in the era after the fall of man. The accumulator of wealth cannot maintain control beyond his death. He must take steps to transfer it. This is one of the most daunting tasks of the rich man, Solomon said (Ecclesiastes 2:18–21; 6:1–2). Both inheritance and disinheritance apply to individuals. There will be a general resurrection (Matthew 25:31–46). Covenant-keepers will receive their inheritance: an extension of the new heaven and the new earth. Covenant-breakers will be cut off eternally: the ultimate disinheritance. They will receive the second death (Revelation 20:14–15). Inheritance also applies to the kingdom of God in history and eternity. There is a corporate inheritance. The kingdom of covenant-breaking man ceases to operate in eternity. It is disinherited. Each covenant has a doctrine of the last things. The kingdom of God predicts the future eternal extension of its jurisdiction. The kingdom of man predicts either the heat death of the universe, in which everything dies, energy dissipates completely, and time ends, or else endless cosmic cycles. I discuss this in Appendix B. In each evolutionary scenario, meaning dies at the end, either at cosmic end or the end of this cosmic cycle. Death swallows up life. Meaninglessness swallows up meaning. There is no sovereign to impute permanent meaning to the past, present, and future. All meaning is temporal, problematical, and transitory. Point one: God’s sovereignty. With respect to economics, this refers to original ownership. It is the result of God’s creation. He owns the universe. Before the foundation of the world, God had as His long-run purpose for the creation of the universe the redemption of His elect. This is a matter of adoption. It is a matter of inheritance. Paul wrote: This purpose structures all of history. Without understanding this and acknowledging this, a person misunderstands history. He begins with a distorted understanding of historical causation. Part of historical causation is economic causation. This means ethical causation: point three of the biblical covenant, biblical law, coupled with point four: predictable historical sanctions. Redemption means “bought back.” This is not man’s purchase of salvation on his own behalf. He does not possess sufficient capital for this. Later in his letter to the Ephesians, Paul wrote: “For by grace you have been saved through faith. And this is not your own doing; it is the gift of God, not a result of works, so that no one may boast. For we are his workmanship, created in Christ Jesus for good works, which God prepared beforehand, that we should walk in them” (Ephesians 2:8–10). Yes, we work to honor God, but this is not the basis of our redemption. Christ’s death is. Paul wrote: “But God shows his love for us in that while we were still sinners, Christ died for us” (Romans 5:8). This fact has economic implications. It teaches that error leads people to imagine that they can successfully strive to buy their souls out of hell. Jesus taught: “For what does it profit a person if he gains the whole world but forfeits his life? What can a person give in exchange for his life?” (Matthew 16:26). [North, Matthew, ch. 35] Theological error leads to the view that personal salvation is a matter of a sinner’s payment to God or bargaining with God. God’s purpose structures the most important of all payments to God. The payment was made by the Son of God to God the Father. It is therefore not a matter of economic planning. It precedes economic planning. This is the theological basis of this conclusion: purpose precedes planning. Individuals reflect God. They are made in His image. Like God, they have general purposes. They also have specific goals that are related to their overall purposes. These purposes guide them in devising plans that they hope will enable them to fulfill their goals. Point two: hierarchy. Man is under God as God’s covenantal agent. This is the meaning of the dominion covenant (Genesis 1:26–28). He must make plans in order to fulfill his assignment. [North, Genesis, ch. 3] Built into this planning is the multiplication of the species. [Ibid., ch. 4] 1. Multiplication The dominion covenant began with multiplication. “Then God said, ‘Let us make man in our image, after our likeness. And let them have dominion over the fish of the sea and over the birds of the heavens and over the livestock and over all the earth and over every creeping thing that creeps on the earth.’ So God created man in his own image, in the image of God he created him; male and female he created them. And God blessed them. And God said to them, ‘Be fruitful and multiply and fill the earth and subdue it, and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth’” (Genesis 1:26–28). God defines man in terms of this covenantal assignment. The Bible defines man in a three-fold way: (1) the image of God, (2) the dominion covenant, and (3), species multiplication. Multiplication mandates extension in space and time. To the extent that it involves time, it now involves death. This raises the twin issues of death and inheritance. Population growth is a matter of dominion. It is central to the calling of mankind. The extension of population is a covenantally mandated process. Individual decisions produce a corporate result. This corporate result is mandated. Therefore, the means by which it is fulfilled is through sexual bonding within the marriage covenant. Sexual bonding is by far the best example in history of intensely self-interested decisions of individuals which produce results that are glorifying to God. The division of labor is extended by population growth. The realm of dominion is thereby extended. There is the possibility of increasing wealth per capita. The compound economic growth that began sometime around 1800 in the British Isles, Canada, and the United States has transformed the world more than anything else that mankind has ever done. The defense of the idea of the pursuit of individual self-interest as benefitting society should begin here. The zero population growth ideology is opposed to the clear teaching of the dominion covenant. So is the zero economic growth movement. They are peas in the same anti-dominion pod. Multiplication mandates thrift. It costs wealth to raise children. Children are wealth-absorbing creatures. Parents are obligated by civil law, by custom, and by love to care for their children. In some limited sense, children are consumer goods. But grandparents, not parents, are the main beneficiaries of children as consumer goods. Raising a family takes time and money. While parents do gain some returns in the short run, children are mostly capital expenditures until they either reach adulthood or graduate from college. The concept of compound growth raises the question of the exponential curve. At some point, a graph of the compound growth of anything turns upward and begins to approach infinity as a limit. In a world of finite resources, this cannot continue indefinitely. With respect to human population, we will run out of living space in short order. So, this means one of two things: (1) there will be a cessation of compound population growth because of limited physical space; (2) there will be a cessation of economic growth because of limited time: the final judgment. Nothing grows forever. Historical time will end. 2. Serving the Future Men add value to the creation over time. So, point two of the covenant—hierarchy—has to apply to this process of future-orientation. Hierarchical authority in a biblical covenant is supposed to spread outward—across borders—and through time. It takes time to spread this authority across borders. So, time and place are linked in the covenant. In short, the dominion covenant is future-oriented. The process of dominion requires present sacrifice for the sake of children, but this is an indirect sacrifice for the sake of families outside the extended family. Parents train their children to become productive. This means becoming customer-satisfying. The future economic success of their children will be dependent on their efficiency in serving the demands of strangers through the market process. Biblical stewardship is comprehensive. It involves service to God, service to family members, service to strangers, and service to ourselves as individuals. This service is always future-oriented: the next sale as well as sales by heirs in the distant future. This is inter-generational service. Future-orientation is inescapable. It is inherent in the dominion covenant. It takes time for covenant-keepers to extend God’s kingdom. This kingdom is comprehensive. It involves all of society, which is a far broader category than the state. The state is a relatively small aspect of society. The family has far greater influence than the state possesses. So does the realm of business. These realms absorb more time and money of individuals than taxes do. Wherever this is not true, the state becomes tyrannical. Then it is replaced by a less tyrannical state. Tyranny is inefficient. It invades too many spheres of life. It bankrupts itself. The classic example is the Soviet Union, from its birth on October 25, 1917 to its death on December 25, 1991. Service is inherently future-oriented. Entrepreneurial profits are obtained in the future by means of correct forecasting and efficient planning in terms of this forecast. The essence of value-added production in a free market economy is making profits. People add to their capital by reinvesting their profits. Capital is a tool of production. Point three: ethics. This is associated with law. Jesus commanded His followers: “Go and do the same” (Luke 10:37b). These words are the foundation of all imitation. Imitation is a crucial aspect of kingdom expansion over time. The best managers know that the best way to learn how to manage any organization is to work under an effective manager. This was the way of American business until the 1970s, when bureaucratic training in graduate schools of business administration began to replace the ancient systems of apprenticeship and mentoring. Here was the old rule: on-the-job training. It assumed that management involves far more than what is revealed in ledgers. People are not digital creatures. We learn analogically, not digitally. Adam had to start without a mentor. He alone in history had this independent responsibility. He was the first human. But his heirs were to receive training in his household. Then they were to depart from his household as adults, setting up their own households (Genesis 2:24). Having seen how a family is supposed to be managed, they were then to go out and apply whatever they had learned to new circumstances. This process rested on faith in judicial continuity in history. The rules governing one generation apply to the next generation. General rules are applicable to new situations. These new situations are both geographical and temporal. The rules will successfully apply across a geographical boundary and a temporal boundary: from here and now to there and then. These rules will serve as tools of dominion. This is why Jesus told the man to go and do likewise. Jesus knew that there is judicial continuity in history. This is why people believe that there are lessons worth learning in history. If there were no judicial and social continuity, lessons would not be worth learning. There would be no likelihood that a lesson learned in one time and place would be relevant in another time and place. People ask: “What are these lessons? Where is there proof that these lessons are in fact lessons? If the lessons are embedded in one time and place, on what basis can we legitimately expect them to be applicable in another time and place?” The biblical answer is the continuity of law in history. Psalm 119 is the great defense of this answer. God is above the law, yet He rules through law. Man is under law. He rules over the creation by means of law. If there were no continuity of law, there would be chaos. Whirl would be king. But whirl is not king. The biblical covenant’s structure of God, man, law, sanctions, and time provides answers to the logically irreconcilable issues raised by the two major pre-Socratic philosophers, Parmenides and Heraclitus. The logically unchanging rational categories of Parmenides cannot be shown to interact with the constant flux proposed by Heraclitus. The equivalent of a logical machine cannot deal with organically evolving parts. Change is the enemy of autonomously rational categories, and vice versa. Here is the biblical solution to this dilemma. The Bible teaches that God is sovereign (Proverbs 21:1). His decree is absolute (Isaiah 45). Logic is personal, for it has its origin in God’s mind. Historical causation is cosmically personal. Coherence originates in God. The continuity of law originates in God. God’s covenants are above all ethical. There is ethical continuity over time and across borders. A covenant-keeper can extend God’s kingdom through time and across borders. Why? Because God’s law is the covenant-keeper’s tool of dominion. God’s law applies to the details of history. There is covenantal continuity in history. With respect to the individual and the church, this continuity reaches into eternity. The division of labor rests on judicial continuity through time. Because of continuity across borders and through time, people can more safely trade with each other. They can understand each other. They can make contracts with each other. They can predict each other’s behavior. They can coordinate their plans with each other. This increases the output of cooperating people. It extends their dominion as individuals. It also extends the dominion of cooperating social groups. Both the one and the many are recipients of positive sanctions. For any system of imitation to function properly, there must be a system of predictable sanctions, both positive and negative (point four). If people could not predict the outcomes of their own behavior, as well as others’ behavior, they could not make accurate plans. They would not know which practices should be adhered to, and which should be abandoned. Only because there are predictable sanctions in history can Jesus’ command be trusted: “Go, and do thou likewise.” It assumes that if we follow the lead of a successful person, we can expect to enjoy comparable success. Point four: sanctions. Entrepreneurship has to do with forecasting the outcomes of plans. Outcomes are guided by objective economic sanctions: monetary profit and loss. There is causality in economic affairs. This is why rational economic forecasting is possible. An entrepreneur in a free market is motivated to maximize profits, mainly monetary profits. There is a planning function in all entrepreneurship. This is related to point two. But the primary guide for economic planning is accounting-based profits. This is why I categorize entrepreneurship under point four rather than point two. Economic results are assessed objectively: monetary profit or loss. They are also assessed subjectively: imputation. Both are aspects of point four: judgment and sanctions. The archetype is God’s final judgment at the end of history: point four. This leads to a conclusion: all creativity is results-oriented. It was for God in the creation week. It is for man. Every system of economic theory must provide an answer to two questions. First, what is the source of profits in a competitive economy? Second, if it is true, as free market economists argue, that every resource receives its proper share of the value of its contribution in the production process, what is the source of profits? Ludwig von Mises provided an answer. The free market pays for all factor inputs in terms of expected future value. But expectations can be inaccurate. It is possible to pay too much for a factor of production. This will produce either losses or reduced profits. It is also possible to pay less than value added. This produces higher profits. It is the discrepancy between expectations and reality that produces either profits or losses. In his discussion of entrepreneurship, profits, and losses in his magnum opus, Human Action (1949), he stressed the role of the entrepreneur.
On the other hand, the entrepreneur who misjudges the future prices of the products allows for the factors of production prices which, seen from the point of view of the future state of the market, are too high. His total costs of production exceed the prices at which he can sell the product. This difference is entrepreneurial loss. Thus profit and loss are generated by success or failure in adjusting the course of production activities to the most urgent demand of the consumers. Once this adjustment is achieved, they disappear. The prices of the complementary factors of production reach a height at which total costs of production coincide with the price of the product. Profit and loss are ever-present features only on account of the fact that ceaseless change in the economic data makes again and again new discrepancies, and consequently the need for new adjustments originate. Here is the heart of the matter: “The activities of the entrepreneur consist in making decisions. He determines for what purpose the factors of production should be employed.” He can buy low only because other entrepreneurs do not see this opportunity. He can sell higher only because other entrepreneurs have not brought competing goods to the market. Why not? Because they did not see the opportunity. The essence of entrepreneurship is forecasting future consumer demand. There is continuity over time. But there is also discontinuity. Competing entrepreneurs failed to see the discontinuity: factors of production that can be bought, reassembled, and sold as consumer goods at a price higher than the prices of all of the factors of production, including time (interest rate). The discontinuity is filled by entrepreneurs. As information spreads, the discontinuity—a discrepancy between factor prices and final products’ prices—disappears. Mises wrote: “Profits are never normal. They appear only where there is a maladjustment, a divergence between actual production and production as it should be in order to utilize the available material and mental resources for the best possible satisfaction of the wishes of the public. They are the prize of those who remove this maladjustment; they disappear as soon as the maladjustment is entirely removed.” The system of profit and loss is governed by future-orientation: faith in continuity over time. To increase his wealth, a producer must meet future consumer demand. Not being omniscient, forecasters make experience-based guesses. They take hunches seriously. Some win. Some lose. But the entrepreneurial function is tied to the individual’s desire to accumulate wealth by satisfying the future demand of customers. The self-interest of the producer and the self-interest of buyers together produce goods and services that clear the market at some array of selling prices. Point five: succession. In economics, dominion requires compound economic growth. This is possible to attain only because there are predictable sanctions in history. These include economic sanctions. This means that there is a possibility to increase production over time. Why? Because positive sanctions accumulate. There is economic growth because output increases. This is promised in Deuteronomy 8:18. “But you will call to mind the Lord your God, for it is he who gives you the power to get wealth; that he may establish his covenant that he swore to your fathers, as it is today.” There is positive feedback between covenantal faithfulness and wealth. Increasing wealth confirms the covenant. [North, Deuteronomy, ch. 22] Mises wrote in Human Action, “We call a progressing economy an economy in which the per capita quota of capital invested is increasing” (XV:9). The basis of economic growth is therefore thrift: the reduction of consumption by the investor, who makes available his saved money, which is then used to increase the purchases of raw materials, capital goods, and labor during a period of production. But thrift is insufficient. There must also be competent entrepreneurship that produces net profits for society. The biblical goal is to build a posthumous legacy, individual and corporate, in the broadest sense. This legacy is part of the kingdom’s process of compound growth, which is a moral imperative. To the extent that covenant-keepers obey God’s laws, they will experience blessings. These blessings confirm the covenantal connection. The book of Job reinforces this, but only in the final chapter. Because the one and the many are coordinated in the covenant, the covenant-keeper’s legacy compounds in history, and this extends God’s corporate kingdom. The capital base of both the individual and the collective grow. The reinforcing gains of the one (corporate) and the many (individuals) are coordinated by the Holy Spirit under God’s authority. Whenever this is not true, men’s first task is to identify which biblical laws are being broken. If, over several years, the economy is not bringing greater prosperity to its members in response to their greater self-discipline and greater intra-covenantal cooperation, they should start looking for hidden sins. Covenant-breaking is most likely the cause. The dominion covenant assigns to all mankind the task of adding value to God’s creation. The creation was created perfect, but it was incomplete. Man was created perfect, but he was incomplete. Both man and nature will always remain incomplete. They are not infinite. Man will never understand God’s infinitude. Yet an infinite God governs the world. To understand this world perfectly, men would have to understand God perfectly, for God interacts with this world. Hence, man can never comprehend the world. In order for mankind to govern the world, individuals must rely on God as their source of covenantal laws, nature’s laws, and their personal insight (judgment) as to the proper management of all things. The division of intellectual labor mandates the cooperation of individuals in this species-wide task. The process takes time. Thus, there has to be an increase of man’s knowledge and jurisdiction over time and space. This means that the improved economic value of the creation over time testifies to man’s subordination to God. Economic growth reinforces the covenant. It testifies to God’s existence, with man and nature under God by means of God’s law. Men are supposed to perceive this added value, interpreting it as creatures under God. There must be continuity of God’s law through time. This rests on the continuity of God’s decree. Without this continuity of law, there would be no way to improve our knowledge of causation. Without knowledge of causation, we would live in mental chaos as well as cosmic chaos. The fifth point of the biblical covenant is inheritance. This points to continuity over time. It also points to net added value. A person is to leave more wealth behind, as evaluated by God, than he received at birth. This means that there must be per capita economic growth. The members of each generation are to have more capital to work with than the preceding generation. This has been fulfilled for more than two consecutive generations only since about 1800. In Great Britain, Canada, and the United States, compound growth began around 1800. It has not been reversed, except during the Great Depression of the 1930s, which was a worldwide phenomenon. This compound per capita economic growth has transformed human society around the world. The world in 1900 in the United States would not have been recognizable to someone who died in 1800. The world in 2000 would have been almost unrecognizable to someone who died in 1900—almost, but not quite. Indoor plumbing was widespread in cities. Electric motors were becoming common in industry. Streetlights were used in large cities. The internal combustion engine was being used in cars, but cars were rare. There was no voice radio, only radio telegraphy, then only a few years old. Train travel was well developed, as were steamships. There were no airplanes. There were anesthetics, but no sulfa drugs. There were punch cards, but no digital computers. There was no television or Internet. There was no electrical air conditioning. What would not have been recognizable, or even conceivable, is the level of taxation in 2000. Yet that came in the West before the end of World War I, fewer than two decades later. Value-added living mandates thrift. Capital must be accumulated in order to fund increasing production. This mandates thrift. This means that consumption cannot legitimately be the sole end of production. There must be self-restraint on consumption individually to please God. There must be self-restraint corporately to achieve economic growth. To assess either economic growth or contraction, there must be value criteria. These criteria must be perceptible to individuals. This means that there are interpersonal comparisons of subjective utility, for individuals are required by God to assess corporate economic growth. Without the ability to compare subjective utilities, there could be no valid price index numbers. There could be no valid economic comparisons at all. All schools of economics rely on these indexes to discuss history. For example, Austrian School economists argue that monetary inflation produces price inflation. But to say anything verifiable about price inflation requires the use of an index number. All economists make assessments regarding corporate success. But, given the epistemological presuppositions of all schools of modern humanistic economic theory other than Marxism, they cannot do this, given the pure subjectivism of all nominalism. Marxism is an exception because its adherents still adhere to the objective value theory that preceded the marginalist revolution of the 1870s. Marxist economists do not show how economic realism is possible, but they nonetheless maintain it. In this sense, the Marxists are the last of the philosophical realists in economics. There are not many of them any longer. The suicide of the Soviet Union in late December 1991 decimated their already thinning ranks. _____________________________________ The complete manuscript is here: https://www.garynorth.com/public/department196.cfm
Blessed be the God and Father of our Lord Jesus Christ, who has blessed us in Christ with every spiritual blessing in the heavenly places, even as he chose us in him before the foundation of the world, that we should be holy and blameless before him. In love he predestined us for adoption to himself as sons through Jesus Christ, according to the purpose of his will, to the praise of his glorious grace, with which he has blessed us in the Beloved. In him we have redemption through his blood, the forgiveness of our trespasses, according to the riches of his grace, which he lavished upon us, in all wisdom and insight making known to us the mystery of his will, according to his purpose, which he set forth in Christ as a plan for the fullness of time, to unite all things in him, things in heaven and things on earth. In him we have obtained an inheritance, having been predestined according to the purpose of him who works all things according to the counsel of his will, so that we who were the first to hope in Christ might be to the praise of his glory (Ephesians 1:3–12).
The entrepreneurial function, the striving of entrepreneurs after profits, is the driving power in the market economy. Profit and loss are the devices by means of which the consumers exercise their supremacy on the market. The behavior of the consumers makes profits and losses appear and thereby shifts ownership of the means of production from the hands of the less efficient into those of the more efficient. It makes a man the more influential in the direction of business activities the better he succeeds in serving the consumers. In the absence of profit and loss the entrepreneurs would not know what the most urgent needs of the consumers are. If some entrepreneurs were to guess it, they would lack the means to adjust production accordingly (XV:9).
The problem with his exposition in Human Action is this: it is not clear where these profits or losses come from. In a speech, “Profit and Loss,” delivered in 1951, he made his position clear. First, the primary issue is forecasting. Second, there is the development of plans to buy low and sell high. This is possible only because competing investors do not see the potential for final sales. Third, the plan must be implemented. He wrote: Profit emerges from the fact that an entrepreneur estimates the future prices of the products more correctly than his rivals do. He buys some or all of the factors of production at prices which, seen from the point of view of the future state of the market, are low. Thus, his total costs of production—including interest on the capital invested—are lower than what he receives from the sale of the product. This difference is entrepreneurial profit.
In the progressing economy the range of entrepreneurial activities includes, moreover, the determination of the employment of the additional capital goods accumulated by new savings. The injection of these additional capital goods is bound to increase the total sum of the income produced, i.e., of that supply of consumers’ goods which can be consumed without diminishing the capital equipment used in its production and thereby without impairing the output of future production. The increase of income is effected either by an expansion of production without altering the technological methods of production or by an improvement in technological methods which would not have been feasible under the previous conditions of a less ample supply of capital goods (XV:9).
This assumes that entrepreneurial guidance is accurate. It is always possible to pour money down rat holes. So, increased thrift is necessary, but it may not be sufficient to produce economic growth. John Maynard Keynes put it well in his 1930 Treatise on Money. “Thus, Thrift may be the handmaid and nurse of Enterprise. But equally she may not. And, perhaps, even usually she is not. For enterprise is connected with thrift not directly but at one remove; and the link which should join them is frequently missing. For the engine which drives Enterprise is not Thrift, but Profit” (Vol. 2, p. 132).
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