The Principles of Economics Part 27

4. _In the narrower and exacter sense profits are the net gain of the enterpriser after counting the rent of material agents and contract wages of employees at the prevailing rates._ Into the practical problem of cost and profit many factors enter, and the theoretical problem is to determine just how much ought to be attributed to each. In a large business usually the practical bookkeeping problem is not unlike that of economic a.n.a.lysis. A stock company counts as cost, as a part of fixed charges, interest on capital borrowed either from banks or bondholders.

Its managers are paid salaries, counted as a part of cost. The net balance, after deducting these and all other expenses, is counted profits and paid in dividends to stockholders. The economic student is not attempting to get a theory of profits that is in contrast with practice. Rather, he is trying to a.n.a.lyze profits generally, just as they are a.n.a.lyzed in the few cases where the books are properly kept. In economic theory, therefore, profits are the part of the gain of any business that is logically attributable to fortunate investment and good management; profits are the income attributable to the enterpriser's services.

[Sidenote: Profits a species of wages]

5. _Typical economic profits are thus a species of wages but are marked by peculiar features._ In some of the older treatises on political economy, profits are treated merely as a combination of "wages of management," and of interest on capital invested. A man hired at a fixed sum to manage a business is receiving simply contract wages. Economic profits are not _contract_ wages, not being paid by agreement, but being yielded impersonally by the industry. Profits are, however, _economic_ wages or the earnings of services. As business has developed, it has been seen that the enterpriser's work has its peculiar character and deserves special attention. The old English word "enterpriser," used of the "adventurer" who embarked in foreign trade, may fittingly apply to the organizer and director of business to-day. Foreign trade then, more often than now, was most uncertain, and there were many chances that the ship would be lost, or the venture prove a losing one. In the simplest business to-day there is this element of enterprise, or undertaking, combined with ordinary capital and labor. As industry develops, this special service stands out more clearly. In the corner-grocer and in the manager of the little news-stand, the elements of enterprise and labor are not apart. In the large wholesale house, the enterpriser is seen to be not merely an abstractly thinkable function, but a separate and concrete person. The typical enterpriser is the man who gives his time and energies to the launching and guiding of business.

-- II. THE TYPICAL ENTERPRISER'S SERVICES REVIEWED

[Sidenote: The enterpriser's skilful use of capital]

1. _The enterpriser guarantees to the capitalist-lender a fixed return._ Agents will yield the highest economic rent of which they are capable only in the hands of those who can use them with exceptional skill.

Owners of capital who for any reason, such as youth, inexperience, ill health, incapacity, or conflicting duties, are not able to make agents yield the average rent, seek out, or are sought out by, those who in general can make the agents yield more than the average. The interest contract between them is one of mutual advantage, in that the enterpriser pays a definite sum to the investor unable himself to apply his productive agents. Immense sums of capital are now put into the hands of small enterprisers, such as Western farmers improving their lands, builders of city homes and business blocks, and small manufacturers. But stocks and bonds of corporations give a wide variety of investments which shade off from the safer or capitalistic type, to the more uncertain, or enterpriser's type. First-mortgage bonds, being a first claim on the income and property, have the highest security and yield generally the lowest interest. Even national bonds are not absolutely safe, and for that reason as well as because of their fluctuation in price, even their purchase has something of the nature of an enterprise. Stocks are the enterpriser's type of investment, the dividends being more uncertain, but giving the chance of a higher return than the average. It is because some stand ready to a.s.sume the risk of making goods yield average returns or more, that others can sit and enjoy a fixed income with little effort and in comparative security.

[Sidenote: The enterpriser's insurance of the lender's capital]

2. _The enterpriser gives up the certain income to be got by lending his own capital, and, becoming a borrower, offers his capital as insurance to the lender._ Every business has an element of uncertainty in it, and some one must meet the risk. A man with marked ability as an organizer of industry is rarely found long without capital of his own. But even a penniless man who can gain the confidence of investors is able to get backing and to secure the necessary funds to engage in business. The lenders in such a case, however, run a greater risk than when the enterpriser is a man of some means, and they therefore ask a higher rate of interest than if they were loaning to a wealthy man or to a wealthy company. They are in part the enterprisers. When, as usually, the enterpriser invests some of his own capital, it is a guarantee of his good faith, a sort of insurance reserve to protect the lender from loss.

The first loss falls on the enterpriser, and the chance of loss to the lender is in large part, though not entirely, eliminated. It is characteristic of modern loans that the borrower may be rich, not poor,--often richer than the lender. The mortgage on real estate and the creditor's claim on a merchant's property usually give security of far greater value than the loan.

[Sidenote: The enterpriser's insurance of the laborer's production]

3. _The enterpriser gives to other workers a definite amount for services applied to distant ends._ In discussing the wage system it was pointed out that most labor at the present time is put upon future goods. It is not known what they will be worth a month or a year later when they mature as consumption goods; their present worth can merely be estimated. If they prove to be worth little, the profits may be nothing or less than nothing. The enterpriser, however, buys the services for ready money, embodies them in goods, and a.s.sumes the risk; the goods may sell for more or less than the wages. It is sometimes said with a certain irony that if the enterpriser a.s.sumes the risk he is very careful to pay so little for labor that he does not lose. In this naive view the enterpriser is so independent of the market that he can pay much or little as he pleases. In fact in many cases he gains little, and in many he loses and loses largely.

[Sidenote: The risk of the enterpriser's services]

4. _The enterpriser risks his own services and accepts an indefinite chance instead of a definite amount for them._ a.s.suming the risk for the right conduct of industry, he backs himself, expresses his faith in himself as a manager who can make labor earn more than the prevailing wages and make capital yield more than the prevailing rate of interest.

If it were otherwise, he would loan what capital he has instead of borrowing more; instead of employing others, he would himself seek employment in some other industry. Men are constantly shifting from the cla.s.s of hired workers to that of enterprisers. It is a rude and often tragic process of adjustment and selection that enables men having ability as enterprisers to continue in that work, and forces others into the cla.s.s of employees.

[Sidenote: The enterpriser the intermediary in industry]

5. _The enterpriser is the economic buffer; economic forces are transmitted through him._ In a more primitive industry each man is wage-earner, capitalist, and enterpriser combined in one. As industry develops, some of the factors of cost become distinguishable, and relatively stable and calculable. A low rate of interest, ranging from three to four per cent., can be secured with practical certainty by putting one's money into good corporation securities, into the savings-bank, or into national bonds. Contract wages in each cla.s.s of labor also are fixed by compet.i.tion at a point where they are a medium or average of gains and losses. The enterpriser is the most movable element. As the specialized risk-taker, he is the spring or buffer, which takes up and distributes the strain of industry. He feels first the influence of changing conditions. If the prices of his products fall, the first loss comes upon him, and he avoids further loss as best he can by paying less for materials and labor. At such times the wage-earners look upon him as their evil genius, and usually blame him for lowering their wages, not the public for refusing to buy the product at the former high prices. Again, if prices rise, he gains from the increased value of the stock in his hand that has been produced at low cost. If the employer often appears to be a hard man, his disposition is the result of "natural selection." He is placed between the powerful, selfish forces of compet.i.tion, and his economic survival is conditioned on vigilance, strength, and self-a.s.sertion. Weak generosity cannot endure.

[Sidenote: Fluctuation of profits]

6. _Profits therefore fluctuate more from industry to industry and from man to man than do other incomes._ As a somewhat exceptional case, small employers in industries such as baking and tailoring, may for long periods get less for their work than their employees get in wages. The pride in being an employer and occasional chances of greater gains perhaps explain the fact. The fluctuations of the market may sweep away from the enterpriser not only all his "profits," but all his acc.u.mulated wealth. As a consequence, profits may be at other times very high, for men will not take the risk of great losses unless there is a chance of large gains. While the income of the salaried man is occasionally advanced, and then for long periods remains unchanged, the profits of enterprise come in waves. In seasons of prosperity the income of the employer swells with a dramatic swiftness while rents and wages move tardily upward. But for years again the employer earns a return hardly exceeding a low interest on the capital invested in the enterprise, or runs the business for a time at a loss. Profits of this kind should not be spoken of as a percentage. Greater or less, they are the net result attributable to the enterpriser's skill, and bear no fixed or calculable relation to any capital investment.

-- III. STATEMENT OF THE LAW OF PROFITS

[Sidenote: Antisocial or pseudo-profits]

1. _Some apparent profits are due to antisocial or criminal acts._ Cheating, lying, breaking of contracts, bribery of public officials, and many similar acts may greatly increase individual incomes. These are not profits, as the term is here understood, but they are hard to distinguish from profits in practical life. One man gains a temporary success by acts that are later punished as crimes; another, guilty of like deeds, escapes conviction for lack of evidence or on technicalities, and enjoys ill-gotten wealth. More fortunes, however, are due to actions on the border-line of ethics, which society is not yet honest enough to condemn or wise enough to prevent. No code of laws can be framed that will make possible the punishment of all antisocial acts. Any law that would catch all the guilty would injure many of the innocent. Economic a.n.a.lysis may exclude from the concept of profits the gains made by such means, but only omniscience could distinguish them in every actual case from "swag and boodle."

[Sidenote: Chance profits]

2. _Some profits are the result of pure chance or luck._ What is luck? A result that is not calculable, coming to pa.s.s in conditions where a rational choice is not possible, is called luck, for lack of another name. Now pure luck often brings temporary profit to the individual, but chance does not in the least account for the average and abiding profits. There is bad luck as well as good luck. According to the law of chance, in the tossing of a coin for "heads and tails," one side is as likely to come up as the other, and in the long run the number of heads and tails will be equal. Where cases are numerous, losses and gains distribute themselves about a general average, and may be eliminated by insurance, as that against fire, flood, lightning, against sickness of the employer, which would cripple the business, or against his death, which would check it. But many factors evade all attempts to reduce them to rule, and chance remains a considerable factor in the success of many individuals. It still sometimes appears better to be born lucky than rich.

[Sidenote: Profits due to a union of chance and choice]

3. _Some profits are temporary gains from happy but not entirely accidental choice of the best course._ Many cases of profit said to be due to chance are found on closer knowledge to be due to superior judgment. A slight advantage in choice will give now and then apparently chance gains. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck; but if he stays at home it is more likely, according to the theory of chances, that he will stumble over an ash-heap. In places where gold-mines are comparatively plentiful, one takes chances between a load of lead and a bag of money. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of stumbling upon a good thing, usually gets the advantage, and men call it luck. The more the causes of success in general are studied, the larger is found the element of choice, the smaller that of luck. Some writers make these temporary gains the essence of profits. Considering that profits are always due to the introduction of new and better methods, and not to the continued use of better ones, they argue that as the knowledge of these becomes common property profits will disappear. But this in our view is a partial truth.

[Sidenote: Skill the essential condition of continuing profits]

4. _Continuing profits arise from the continued exercise of superior judgment._ After all the chance elements are taken into account, there remain differences in the abilities of men, and a continued and ever-renewed need of organizing power. Profits, being recognized as due to these differences in the abilities just as rent is due to differences in the fertility and efficiency of goods, have therefore been called differential gains. There would be no objection to the term were it not intended to emphasize a supposed difference between profits and rents on the one hand and interest wages on the other.

[Sidenote: Risk of loss reduced by skill]

Some writers have so magnified the thought that the enterpriser's function is to a.s.sume risk, as to make it a denial of the view that profits are the earnings of ability. The risks of business are not those of the throwing of dice in which (if it is fair) skill plays no part, and gains in the long run offset losses. Business risks are rather those of the rope-walker in crossing Niagara; the task is easily undertaken by the skilful Blondin, it is fatally dangerous to the man of unsteady nerve and limb. Profits are due not to risks, but to superior skill in taking risks. They are not subtracted from the gains of labor but are earned, in the same sense in which the wages of skilled labor are earned. So long as some men have better organizing ability than others, have better judgment, are better able to take the risks, there is reason to believe that profits will continue.

Profits are the share, or income, of the enterpriser for his skill in directing industry and in a.s.suming the risks. Despite the complex influences, they are determined by his contribution to industry essentially as is the value of any skilled service.

CHAPTER 32

PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COoPERATION

-- I. PROFIT-SHARING

[Sidenote: Nature and definition of profit-sharing]

1. _Profit-sharing is rewarding labor with a share of the profits in addition to contract wages._ The essential mark of profit-sharing is that the additional payment depends on the net profits of the whole business at the end of the year. It is not to be confused with a free gift, or with special privileges granted by the employer, such as lunch-rooms, bathrooms or houses at a low rent. Profit-sharing is a contract made in advance, not a free gift. Nor is it the same as a bonus or premium for a larger output, made contingent on the physical product, on the increased number of pieces turned out by the workmen, individually or in groups. Premium for output is given for something directly under the influence of the worker. The amount of profits is affected by the amount of output, but also by a number of other things that are quite outside the control of the workmen.

[Sidenote: The possibilities of profit-sharing]

2. _The purpose of the employer in adopting profit-sharing is to stimulate the industry of the workers, thus reducing waste and cost of labor and supervision._ The employer adopting the plan does not intend to lose by it; he believes that if he can get his workmen to take an interest in the business his costs will be reduced. He offers to divide with them the resulting savings. There is, in every factory, greater or less waste of materials, destruction of tools, and loss of time, that no rules or penalties can prevent. If the worker can be made to take a strong enough personal interest he will use care when the eye of the foreman is not upon him. The product also can be slightly increased in many ways by the workmen's exertions or suggestions. In some cases the quality of the work cannot be insured by the closest inspection as well as it can be by a small degree of personal interest. Either responsibility for the fault cannot be fixed, or the defect is one not measurable by any easily applied standard. Strikes are averted, good feeling is promoted, and contentment is furthered if the interest of the worker can be made to approach, and actually to be in harmony with, that of the employer. The economic result of the plan, if it can be made to work, must be to reduce the costs of these establishments below what they are. The crucial question is whether this alone insures that the costs will be less than those of compet.i.tors, thus giving a source out of which an increased amount, really a wage, can be paid to the laborer.

This additional wage is made conditional on the employer's success in gaining a net profit on the year's business.

[Sidenote: Its successes and failures]

3. _The profit-sharing plan is now successfully working in over one hundred firms in America and Europe._ The plan was first tried in Paris by Leclaire, a house-painter. In house-painting there is often a great waste of materials and time by men working singly or in small groups in different parts of the city. By this new method Leclaire enlisted the aid of the workmen, reduced the costs, and increased the profits. It is a remarkable fact that the plan has been continued successfully by the same firm to the present time. The most important examples of profit-sharing in the United States are the Pillsbury Mills in Minneapolis, Procter and Gamble's soap-factories at Ivorydale, O., and the Nelson Mfg. Co. at Leclaire, Ill. In some cases both manufacturer and workman value the system highly. N. P. Gilman, the author of "Profit Sharing," puts the ratio of successes very high. Others declare that the failures are mostly lost sight of and are very many. The proportion of business done in this way is not large. One hundred firms is a very small fraction of one per cent. of the total number of firms in Germany, France, England, and America. A still more important fact is that this method of remuneration did not spread in the ten years preceding 1900.

[Sidenote: Objections to and difficulties in profit-sharing in practice]

4. _The failure of profit-sharing to grow is due to objections on the side both of the employer and of the workman._ On the side of the workman there is the bookkeeping difficulty. He is suspicious, and he lacks knowledge of the business. If at the end of the year the books show no profits, the workman loses confidence, considers the plan to be mere deception, and rejects it. Moreover, the plan puts a limitation upon the workman's freedom to compete for better wages by changing his place of work. It is almost indispensable to make length of service a condition to the sharing of profits. Workmen coming and going, working only a few months, cannot be allowed to share; the percentage given to the others increases with length of employment. Whenever men are thus practically subject to a fine (equal to the amount of shared profits) if they accept a better position, there is danger of a covert lowering of wages. The plan tends to break up the trade-unions, which is one of the reasons that the employers like it, and is the reason that organized labor opposes it. The employer on his part objects to the interference with his management, the troublesome inspection of the books, and the constant grumbling and complaint of the workmen. It makes known the amount of his profits; if they are large, the advertising of his success invites compet.i.tion; if they are small, publicity injures his credit and depresses the value of his property. In view of all these difficulties it is not surprising that while the plan often starts promisingly, it usually loses its efficiency after a short trial. Business methods are severely subject to the principle of the survival of the fittest.

Through compet.i.tion and the survival of the firms that adopt improvements, better methods must eventually supplant poorer ones. If a method fails to spread when it has been tried for fifty years and all are free to adopt it, there must be some defects inherent in it. That must be our conclusion as to profit-sharing.

[Sidenote: Defective character of profit-sharing]

5. _It is usually better to make wages depend on the worker's efficiency rather than on the profits of the whole business._ The strongest motive to efficiency is present when reward is connected immediately and directly with effort, not with some result only slightly under the worker's control. In profit-sharing the added share is only partially due to increased effort of the worker. Labor is but one of the groups of costs. Profits are the net result of many influences. Chief among these is the wisdom of the enterpriser in planning and conducting the business. The "profits" may be nothing, though the worker may be exerting himself to the utmost. The plan is, therefore, reactionary, not in accord with the general progress of the wage system, which is tending constantly to centralize responsibility, to put the risk into the hands of competent managers, and to secure to the worker a definite amount in advance, as high as conditions make possible. The system of premiums, or bonus payments, for output, gives in most cases better results and is rapidly spreading. It is sounder in conception and works better in practice. This premium depends on the increase by the laborer of the output of his particular machine or process as compared with a standard based on the experience of some definite period.

-- II. PRODUCERS' COoPERATION

[Sidenote: Purpose of producers' cooperation]

1. _Producers' cooperation is the union of workers in a self-employing group to do away with any other enterpriser than themselves, and to secure for themselves the profits._ Its object is not to do away with any return on the capital investment. Capital may be borrowed either from outsiders or from the individual cooperators, and is paid a stipulated interest apart from the profits. The source of the gain is to be found in the saving of what the worker looks upon as the needless drain of profits into the pockets of the employer. The hope is that the enterpriser's function (if it is admitted that he has any useful function) will be performed by the workers collectively or through their representatives. They undertake to furnish brain as well as muscle, management as well as hand-work. The hope is even to increase the profits through increasing the stimulus to the workers and by saving in friction, disputes, and strikes.