The Daily Drucker: January 21 - Profit's Function

Today's profitable business will become tomorrow's white elephant.

Joseph Schumpeter insisted that innovation is the very essence of economics and most certainly of a modern economy.  Schumpeter's Theory of Economic Development  makes profit fulfill an economic function.  In the economy of change and innovation, a profit, in contrast to Karl Marx's theory, is not a "surplus value" stolen from the workers.  On the contrary, it is the only source of jobs for workers and labor income.  The theory of economic development shows that no one except the innovator makes genuine "profit";  and the innovator's profit is always quite short lived.

But innovation, in Schumpeter's famous phrase, is also "creative destruction."  It make obsolete yesterday's capital equipment and capital investment.  The more an economy progresses, the more capital formation will it therefore need.  Thus, what the classical economist- or the accountant or the stock exchange - considers "profit" is a genuine cost, the cost of staying in business, the cost of a future in which nothing is predictable except that today's profitable business will become tomorrow's white elephant.

ACTION POINT: Insure that you are investing enough in innovation to prepare for the day when your profitable business becomes obsolete.

Quoted from The Daily Drucker, January 21 , Page 23