The Daily Drucker

21 January 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 of labor income. The theory of economic development shows that no one except the innovator makes a genuine “profit”; and the innovator’s profit is always quite short-lived.

But innovation, in Schumpeter’s famous phrase, is also “creative destruction.” ...