Tuesday, February 28, 2006

The Joys of Sole Proprietorship

Glen Whitman, in a post at Agoraphilia, says that
[l]oosely speaking, accounting profit considers only expenditures as costs, whereas economic profit counts both expenditures and forgone income as costs. The classic example is a sole proprietor who works 60 hours/week running his store. On paper, he might appear to be making a large (accounting) profit. But if you subtracted the income he could have received had he taken a job working the same number of hours for someone else, his (economic) profit would be smaller, maybe even negative.
I think Whitman omits an important aspect of economic income, which is sometimes called "psychic income." The sole proprietor gains a non-pecuniary benefit by working for himself: being his own boss. That's why many persons choose the long hours and greater risks of sole proprietorship to the generally shorter hours and more stable income of salaried employment.

Then, too, there's always the possiblity that one's sole proprietorship will be bought out by a larger company for millions of dollars. That's a potential pecuniary benefit that usually isn't available to a salaried employee. But I think that potential benefit is secondary to the psychic income derived from being one's own boss.