In the realm of economics, students are first introduced to the distinction between accounting profit and economic profit. The former, often what people mean when they say “profit,” is simply total revenue minus monetary costs. It’s the figure that proudly sits at the bottom of an accounting statement, labeled as “profit.”
Economic profit, however, paints a broader picture. For economists, “cost” has a more nuanced definition: it represents the highest-valued alternative that was not chosen. This encompasses both monetary expenses and the potential uses of one’s resources, known as implicit costs. Thus, economic profit is calculated as total revenue minus total costs, which includes both monetary and implicit costs. While implicit costs may not appear on an accounting statement, they are crucial for making informed life decisions.
It’s entirely possible for accounting profit to be positive—meaning the business is making money—while economic profit is negative, indicating that there are superior ways to utilize one’s resources. In such scenarios, a rational economic actor would reassess their resource allocation to pursue more fruitful opportunities.
A compelling illustration of this concept can be found in The Rise of the Cajun Mariners: The Race for Big Oil by Woody Falgoux. The narrative chronicles four Cajun families as they ascend from modest beginnings to become influential oil boat barons in the bayou, with the Orgeron family standing out.
For our discussion, let’s focus on Juan Orgeron and his two sons, Herman “Bouillien” and Bobby. During World War II, Juan operated the “Herman J,” a boat servicing Gulf of Mexico oil rigs. However, following the war, a dispute over submerged mineral rights arose between coastal states and the federal government, known as the Tidelands Dispute. This led to a downturn in demand for oil boats, prompting Juan to sell the Herman J and revert to muskrat trapping, his traditional livelihood.
Muskrat trapping proved profitable for Juan, enabling him to buy back the Herman J, feed his family, and provide his sons with basic education. With high post-war muskrat prices and low labor costs—his sons worked for him without salaries—Juan was undoubtedly enjoying accounting profit. But the real question was: was he achieving economic profit? Bouillien certainly thought otherwise:
“But then in 1946, Bouillien reminded him [Juan] that while trapping was a good living, the oilfield was a better one. Bouillien told his father things were picking up and convinced him to buy a 36-foot wooden crew boat with twin Chrysler engines, which was working for Texaco out of Lafitte, twenty-five miles to the northeast of Golden Meadow [their home] (pg. 23).”
Bouillien recognized that the economic cost of dedicating all their labor to muskrat trapping outweighed its revenue. Thus, it made sense to reallocate their resources. After some convincing, Juan purchased a new boat, appointed Bouillien as captain, and returned to servicing the oil industry. By acknowledging that their accounting profit was positive but their economic profit was negative, Juan and Bouillien managed to enhance their well-being—ultimately leading the family to considerable wealth. Yet, in a stroke of economic wisdom, Juan understood the importance of balance; he didn’t entirely shift resources to oil. He kept Bobby involved in muskrat trapping, much to Bobby’s chagrin, but that’s a tale for another day.
The economic perspective is both descriptive and prescriptive; it elucidates how decisions are made while offering insights for improved decision-making. Not everyone experiences the fortunate trajectory of the Orgerons (who were certainly skilled, but luck plays a pivotal role in success). They were positioned perfectly to capitalize on the burgeoning oil industry. Nonetheless, the economic mindset highlights how we can refine our lives, even in small ways. These incremental improvements can yield significant benefits over time, thanks to the power of compounding. Recognizing economic costs—no matter how elusive or intangible—is crucial for enhancing one’s financial circumstances.
