In these times of soaring energy prices, the profits of companies in the sector are causing controversy. This is particularly true for TotalEnergies. Every time it releases its earnings, the same scenario plays out. Profits are labeled “superprofits,” the term circulates unquestioned, and the conclusion is self-evident: they must be taxed. The reasoning seems obvious. Yet it rests on a questionable understanding of what profit is, economically speaking. Two little-known economists, Frank Knight in 1921 and Harold Demsetz in 1973, offered explanations that deserve to be revisited in light of the current debate.
Knight: Profit Is the Reward for the Entrepreneur’s Judgment in the Face of Uncertainty
In his book Risk, Uncertainty, and Profit, Frank Knight defines uncertainty by contrasting it with risk. Risk pertains to recurring events. It is therefore measurable: we can assign probabilities to it, hedge against it with insurance, and incorporate it into a calculation. Uncertainty, on the other hand, cannot be quantified. It concerns unprecedented and complex phenomena, where we are unaware not only of the outcome but also of the range of possibilities. This is the case with markets, and in particular with emerging markets, such as the Internet in the 1990s.
Knight focuses on the individual who acts in the face of uncertainty: the entrepreneur. He begins with the observation, originally made by Cantillon, another economist, that the entrepreneur engages in a trade-off between investment—made in the present and therefore certain—and the expected return on that investment, which is uncertain because it lies in the future. The entrepreneur does not know whether this investment will yield anything: perhaps he will not succeed in developing his product, perhaps the product will not be successful at all, or, on the contrary, it may achieve unexpected success. The return on his investment is estimable, no doubt, but it cannot be predicted with certainty.
For Knight, profit arises precisely from this irreducible uncertainty. In a world of pure competition without uncertainty, as formalized by neoclassical economists, returns would be reduced to the remuneration of factors of production: wages, interest, and rent on capital. No true profit would emerge. But such a world does not exist. In the real world, uncertainty is everywhere. Profit exists because entrepreneurs make decisions whose outcomes are fundamentally unpredictable—investing in a particular deposit, betting on a particular technology, deploying a particular strategy—and they bear the consequences.
This explanation directly contradicts Marx, for whom profit is the result of a social relation of production that allows the capitalist to appropriate value created by the worker. On the contrary, for Knight, it is the counterpart to a commitment made under uncertainty. And it is by nature asymmetric: positive when the judgment proves correct, negative otherwise. In essence, profit is the entrepreneur’s remuneration for the judgment he makes under uncertainty. It is the only form of remuneration that is conditional: wages are due, just like debts and taxes. Profit is residual; it is what remains—and only if anything remains.
Demsetz: Concentration Is Not the Cause of Profits, It Is Their Consequence
In a seminal 1973 article titled “Industry Structure, Market Rivalry, and Public Policy,” Harold Demsetz challenges another dominant mental model: the idea that a concentrated industry is necessarily a breeding ground for monopolistic behavior. We observe that concentrated industries post high profits, and we conclude that this constitutes an abuse of market power. It is concentration that supposedly enables high profits. And this concentration, to the extent that it precedes profits, could only be achieved through illegal or immoral means. But for Demsetz, the opposite is just as plausible: he observes that the neoclassical economists’ assumption of firm homogeneity—that all firms are the same—contradicts obvious reality. Some firms are more efficient than others because they are better managed. They therefore develop superior capabilities that allow them to gain market share or command higher prices. Their profits are thus higher, and they can buy out their less efficient competitors. Concentration then emerges as a result of their performance, not as its cause.
Demsetz adds a decisive element: these superior capabilities are difficult to identify and replicate. Even competitors struggle to understand why one company succeeds better than they do. The advantage lies in the firm viewed as an integrated system—its organization, reputation, routines, historical trade-offs, in short, its business model—and not in any single isolable component.
The TotalEnergies Case
Let’s apply these two frameworks. TotalEnergies operates in a global market where it does not set prices. When the price per barrel rises, it is due to variable causes: geopolitical tensions, OPEC decisions, demand shocks, etc. The resulting margins do not reflect pricing power, but rather the return on investments made ten or fifteen years earlier, under considerable uncertainty—deposits explored with no guarantee of discovery, industrial capacity deployed without knowing the state of the market at the end of their payback period.
This is precisely the situation Knight described: a long-term, irreversible gamble in an environment where outcomes cannot be predicted. And it is also the situation Demsetz described: organizational capabilities—project portfolio management, engineering, international contract negotiation—developed and refined over years and which cannot be replicated overnight.
The Limits of the Term “Superprofit”
Without a precise definition, the term “superprofit” functions as a rhetorical shorthand. It suggests that there is a normal profit level beyond which one enters an illegitimate zone. But no economic theory defines this threshold. Profits are volatile by nature, due to the uncertainty surrounding decision-making. The same oil companies that are posting high profits today recorded massive losses in 2020 when the price per barrel collapsed. No one then proposed providing them with “super-support” to compensate for their “super-loss.” Labeling a one-off high profit as a “superprofit” amounts to isolating a favorable phase of the cycle of which it is a part. It is confusing a snapshot with an average, and compensation for uncertainty with a rent.
Corporate Bashing
Beyond TotalEnergies, the debate over super-profits illustrates a broader trend: the tendency to seek answers in morality or taxation for questions that are primarily matters of economic analysis. And, more broadly, the tendency to designate a scapegoat as soon as a problem arises. Perhaps these attacks are nothing more than opportunistic corporate bashing, at a time when all visible institutions are under fire, and perhaps the explanation goes no further than that. Still, a better understanding of what profit is and how it arises would make this reflex less prominent and allow for more level-headed discussions about the role of businesses in society.
✚ Read my previous article on Frank Knight: Frank Knight’s century-old wisdom on risk, uncertainty, and profit.
🇫🇷 A version in French of this article is available here.