[pbhjpbhj]

Surely you need there to be no restriction on resources as well as an free market in order for the profits to tend to zero. A free market doesn't help if one person/group owns all the resources (though I gather Adam Smith's free market definition excluded monopolies this doesn't appear to be within the modern definition).

[mseebach]

They tend to zero, they don't actually go there. No-one does anything for a $0 profit margin. Scarcity of resources doesn't do anything to the profit margin, since the cost of the resource is an expense to the seller. What you can make money on is refining, and there the same rules apply (drilling and pumping oil out of the ground is a form of refining). Also, obviously, speculating.

Adam Smith was in no way a free market fundamentalist (Burke, ironically, was much more fundamentalist, even though he's considered the father of Conservatism). His legacy is the idea that "by pursuing his own interest, [the individual] frequently promotes that of the society more effectually than when he intends to promote it."

[crc32]

"Scarcity of resources doesn't do anything to the profit margin,"

This is patently false. For example during a drought, most people would pay well above the cost of production for a glass of water.

[mseebach]

No it's not.

An increase in scarcity increases the value of the good. If you have a small store on an island with 100 $1 bottles of water, your stock is worth maybe $60. Now, the ferry breaks down, and people start paying you $5 pr. bottle. You now have to report the value of your stock at ~$460, and at every sale book a cost of ~$4.60 against your stock. Thus your profit is (pretty much) the same.

You made a healthy profit on your accidental speculation in the bottled water market, but that's not your profit margin.

[crc32]

So... I pull water out of my well at a cost of $1 per bottle, later sell for $5 per bottle, have $400 in my hand, and yet my profit margin is zero.

I am not sure how to respond to this. You are self-evidently wrong, unless we are to accept your redefining of profit to be "the selling price of goods minus the selling price". Very strange.

[sebg]

"I pull water out of my well at a cost of $1 per bottle." This is the same as buying a bottle of water from a supplier. Your input costs $1 per bottle. You sell it for $1 dollar. Your profit is zero and your margin is zero. (profit = revenue - cost of inputs // profit margin = profit / revenue )

"I later sell if for $5 dollars per bottle." If you were to buy from a supplier now because there is no ferry it would cost you $5 dollars per bottle. You then sell the water for $5 per bottle. Your profit is zero and your profit margin is zero. (profit = revenue - cost of inputs // profit margin = profit / revenue )

So your profit margin is still zero.

You have $400 dollars in your pocket though. Where does this come from - this comes from speculation. You "invest" in 100 bottles of water at $1 dollar. The market for water goes up so people are now willing to buy bottles of water at $5 dollars. You speculation profit = revenue - cost of inputs[where this is the prior cost for you]. The speculation profit is $400 dollars.

This is the answer to your other comment [ http://news.ycombinator.com/item?id=1118301 ].

These are two types of profit.

profit = revenue - cost (at the same time)

profit margin = profit / revenue

speculation profit = revenue - costs from an earlier time

[crc32]

You are wrong and I think it is important that you understand your error. Your mistake is that pulling the water out of a well that I own is not "the same as buying a bottle of water from a supplier".

I have pulled the water out of a well that I own, at a cost of $1 per bottle. The cost of production is constant, over the time period that the ferry is both available and unavailable. Therefore should the price that I am able to sell my water at rise due to constrained supply, I will make more profit. My profit margin will increase.

This is called "supply and demand", you will find it explained on Wikipedia, and it is a basic concept underlying markets of all kinds.

What I meant by "there is only one type of profit" is that profit in all your definitions can also be stated as selling price minus cost price. In the context of this discussion the distinction is meaningless, because regardless of how you obtained that margin, whether by speculation or not, it does not neccessarily tend to zero in open markets!