Chapter 50 CHAPTER VII CAPITAL AND PROFIT OF MANAGEMENT CAPACITY

The first section is the survival competition among entrepreneurs.Initiator's services. In the last chapters of Part Four we studied the various forms of business management and the capabilities required; The second is the supply of operating capacity to use capital; the third is a certain organization, through which the first two factors are combined to enable production.In the preceding chapter we have dealt primarily with interest, the remuneration for the first factor; in the first few sections of this chapter we shall deal with the remuneration of the second and third factors, what we call the total remuneration of management. , and later we will discuss the relationship between the total rewards of management and the second factor itself, which we used to call net operating income.We must examine more closely the nature of the service to society rendered by business owners and managers, and the remuneration for their work.We shall see that the factors which determine these rewards are not so arbitrary as is commonly supposed, but are, on the contrary, similar to those which determine other rewards.

At the outset, however, we must make a distinction.Herein should be borne in mind the fact that the struggle for existence often prevails the methods of organization which are most suited to develop in their circumstances; Their remuneration is just commensurate with the benefits they contribute directly or indirectly.But in fact it is not.For in general the principle of substitution (which is nothing but a special and limited application of the law of the survival of the fittest) tends to substitute one method of industrial organization for another, provided that the former can be produced at a lower cost. The price provides direct immediate service.As for the indirect final service which either will render, it is generally of little importance in comparison with the direct service.As long as many enterprises have a good start, they may contribute to society in the long run, but due to the above reasons, they decline and close down.This is especially true of some cooperative-type enterprises.

On this point, we can divide employers and other entrepreneurs into two categories: those who refer to advanced enterprise methods, and those who stick to the old ways.The latter class render chiefly direct services to society, and their adequate remuneration is often secure.But this is not the case in the former category. For example, some iron-making departments have recently adopted a more economical method, which can reduce the number of heating times in the entire smelting process; at the same time, this invention can neither be patented nor kept secret.Assume that a manufacturer has a capital of 50,000 pounds, and usually makes a net profit of 4,000 pounds a year, of which 1,500 pounds is his management remuneration, and the remaining 2,500 pounds is the remuneration of other two profit factors; Like his neighbour, his ability, though great, was not above the average ability of persons for this peculiarly difficult task; that is, suppose fifteen hundred pounds was the normal remuneration for his year's work.However, as time went by, he came up with a new method, which reduced the heating time compared with the usual method at that time. Therefore, the expenditure did not increase, but the annual output was increased, that is, an extra net of 2,000 pounds could be sold each year. payment.His management remuneration exceeds the average remuneration, £2,000 a year, provided his goods can still be sold at their original price.He is fully paid for his social services.His neighbor, however, will necessarily adopt this new method, and in a short time may obtain a profit above the average.But competition increases the supply, thereby reducing the price of their goods until profits return to about their original level.Because once Columbus's egg inversion recipe became known to everyone, he couldn't get extra high wages for inverting eggs.

Many entrepreneurs, whose inventions are of inestimable value to the world in the long run, get even less for their inventions than Milton or Meera did for them.And many have amassed great fortunes through luck rather than through special talent displayed in the accomplishment of socially important causes.It is possible that some entrepreneurs, who died millionaires, were not paid in life commensurate with the benefits to society of the new methods they invented.We shall see that although the remuneration of each entrepreneur tends to be in proportion to the direct service he renders to society, this by no means in itself proves that the existing industrial organization of society is perfect and commendable.Moreover, it should not be forgotten that the scope of our current research is limited to discussing the role of the causes of determining enterprise management compensation under the existing social system.

First we shall study the adjustment of the remuneration for services rendered by society by ordinary workers, overseers, and employers at all levels.Thus we shall find that the principle of substitution is at work everywhere. In the second section, firstly, through the labor service of supervisors and ordinary workers, secondly, through the labor services of enterprise managers and supervisors, and finally through the comparison of the labor services of managers of large enterprises and managers of small enterprises to illustrate the impact of substitution principle on management compensation.

We have seen that the greater part of the work done by a small proprietor is done in large enterprises by salaried heads of departments, managers, overseers, etc.This clue will be of great help to our present investigations; the simplest example is that of the common overseer's wages; we shall now discuss it. Suppose, for instance, that a railway contractor or shipyard manager thinks that, if an overseer is paid twice as much as a workman, it is most expedient to have one overseer for every twenty workmen.This means that if he has five hundred workmen and twenty-four overseers, and wishes to do a little more work at the same expense, he would rather have one more overseer than two ordinary workmen.And if he has 490 workers and 25 overseers, he thinks it would be better to add two more workers.If he could keep overseers at one and a half times the wages of his workmen, he might have one overseer for every fifteen workmen.But in fact, the number of supervisors hired is determined by the ratio of one to twenty, and their demand price is twice the wages of workers.

In some exceptional cases, overseers earn their wages by driving workers to overwork.But we now assume that the overseer performs the tasks entrusted to him in a proper manner and by a proper arrangement of the details of the work; Consequently, there are very few mistakes and reworks to be done, and help is immediately available to everyone who needs help moving heavy objects; all machines and tools are in order and ready to use; no one wastes himself by using the wrong tools, etc. time and energy.The wages of an overseer for this work may be seen as an example of most managerial remuneration.Through the action of employers, society puts an effective demand on the services of overseers, up to the margin at which the general efficiency of industry can be increased more by adding workers in other trades than by adding overseers whose wages increase the cost of production. , an increase equal to the salary of the overseer.

As noted above, the employer is seen as the middleman through whom competition operates to allocate the factors of production to maximize direct services at minimum money cost (measured in their monetary terms); How the work of the employers themselves is arranged and allocated, though in a more accidental manner, by the direct conduct of their competition with one another. The third section continues. Next we should consider the constant contest between the work of the foreman and the manager and that of the entrepreneur.It is very interesting to observe the process of the gradual expansion of a small business.A carpenter, for example, gradually increases his tools, and later rents a small workshop, and does odd jobs for private persons, whose approval he must obtain for the work, and who manages the work and the burden of various small risks, by himself and those persons. shared responsibility, because it caused them a lot of trouble, and they were reluctant to pay him a lot for the management work he did.

Therefore, the second step is to contract various minor repairs.Now he has become a small builder; if his enterprise expands, he gradually disengages from manual labor, and to some extent does not even supervise the details of the work.The work he does is replaced by hired hands, and the wages of the hired hands must therefore be subtracted from his income before he can calculate his own profit.Unless he proves that he can manage as well as the average of his peers, he may soon lose the small capital he has earned, and, after a short struggle, return to the humble life from which he was born.If his abilities are just average enough, he will, with average fortunes, hold his own, perhaps better.And the excess of income over expenses will represent the normal remuneration for management at his level.

If his ability is above the normal ability of his peers, that is, he can achieve at a certain expense (salary and otherwise) what most of his competitors can achieve at a greater expense.He was bound to replace some of their expenses with his special organizational skills.His management compensation will include the value of the savings.Thereby, he will increase his capital, improve his credit, and can obtain large loans at lower interest rates.He will have wider commercial connections and contacts; acquire greater knowledge of materials and processes, and have opportunities for daring and clever profitable ventures.Up to the end, even after he had ceased to do physical labor, he left almost all the little things that took up all his time to other people.

The fourth quarter continues. Now that we have examined the remuneration of overseers and common workers, and of employers and overseers, we can now turn to the remuneration of employers in small and large enterprises. Since our carpenter has become a very large builder, his business is so onerous that it requires the time and energy of dozens of self-employed employers.Throughout the struggles of large and small businesses we have seen the principle of substitution at work.The big butcher replaces all the work of the small employer with a small part of his own work and a large part of the work of managers and overseers.For example, when bidding on the construction of a house, builders with substantial capital, although far apart, often find it worthwhile to undertake.The local builders get a lot of savings because they have workshops and cronies nearby.However, large builders also have various advantages; for example, buying large quantities of building materials, the price is relatively cheap, using machines, especially sawmills, to reduce costs, and perhaps borrowing the money they need at a lower interest rate.These two sets of interests tend to be roughly equal.Winning bids, therefore, depend on the relative efficiency of the undistracted energy of the small builder and the small amount of supervision provided by the busy and capable big builder himself (although he has local managers and help from head office staff). Section 5. Entrepreneurs using large amounts of loan capital. What is discussed above is the total remuneration for management of a person who uses his own capital to operate the enterprise, so that he himself can obtain the equivalent of direct and indirect costs. The so-called indirect costs refer to the costs incurred when borrowing capital. Some capital owners Unwilling to use the capital for its own use, it lends it to those who have insufficient capital in the enterprise. Next, we have to deal with the struggle for existence in certain trades between the entrepreneur who employs mainly his own capital and the entrepreneur who employs mainly loaned capital.Personal risk, that is, the risk that the lender will require security, varies to some extent with the nature of the business and the circumstances of the borrower.In some cases, personal risk is high, for example, when one is engaged in a new electrical sector where there is no past experience to draw on and therefore it is difficult for the lender to make an independent judgment as to the progress of the borrower; In all these cases those who employ loan capital are at a great disadvantage; and the rate of profit is largely determined by competition among owners of capital.It may happen that not many people are engaged in such enterprises; in this case the competition may not be great and the rate of profit may be high.That is, the profit greatly exceeds the net interest of the capital and the management's remuneration in proportion to the degree of difficulty of operation (though it may be above the average level). Moreover, in industries where development is so slow that long-term efforts will fail, newcomers with little capital of their own are at a disadvantage. But in those industries where courageous and indefatigable enterprise yields quick results, especially in those branches where expensive goods can be reproduced at a low cost and large profits can be made in a short period of time, the newcomer is just as happy as a duck to water. , it is precisely because he is decisive and clever in planning, and perhaps to some extent because he is not afraid of danger, he is ahead of the competition. Even under extremely unfavorable conditions, he tends to cling to his barriers.Because the dignity of freedom and status are very attractive to him.For example, a small farmer whose small piece of land is heavily mortgaged, or a "small boss" who accepts a subcontractor's order at a very low price, often works harder than ordinary workers, but earns less net income.A manufacturer who owns a small capital and runs a large enterprise works tirelessly and is not afraid of bothering, because he knows that he always has to work to earn a living, and he does not want to give up his work to serve others, so he works hard to earn income , but this income is nothing compared with that of a rich competitor, who can close down and live comfortably on the interest on his capital, so that he may not know how much he has to endure in a business life. Is the more torture worth it. The price inflation that culminated in 1873 produced windfalls for borrowers in general and entrepreneurs in particular, at the expense of other social classes.Therefore, emerging capitalists find it easy to start a business; and those who have already achieved or inherited the achievements of their predecessors in business find it easy to quit the business world.Therefore, when Bagehot wrote about the situation at that time, he said that "the tendency of variation in society, as in the animal kingdom, is the principle of social evolution", but the growth of new capitalists made British business more and more democratic.He regretted to point out how much the country could gain from the long-term power of the merchant aristocracy.But in recent years, there has been a reaction for two reasons: one is due to social reasons; the other is due to the impact of the continued decline in prices.The sons of entrepreneurs are more proud of their father's business than previous generations, and they find it increasingly difficult to meet the demands of an increasingly luxurious life with their vested income. Section 6. Joint stock companies. Nothing can compare the services of hired hands, and thus their remuneration, with the remuneration of entrepreneurial management, than with the example of a joint-stock company.Because most of the management work in a joint-stock company is shared by directors, managers and other subordinate employees, most of whom have no capital of their own, or if they have their own capital, it is limited in number.As their remuneration is almost the pure remuneration of labour, it is, in the long run, determined by the general causes which govern the remuneration of those labors of equal difficulty and discomfort in common occupations. As mentioned earlier, joint-stock companies are often disturbed by internal frictions and conflicts of interest, such as conflicts of interest between shareholders and bondholders, ordinary shareholders and preferred shareholders, and shareholders and directors. In addition, they are also subject to various audit and anti-audit systems. limit.The creativity, initiative, unity of purpose, and quickness of action that private companies possess are rarely found in joint-stock companies.However, these disadvantages are less important in some industries.The public declaration, which many manufactures and speculative mercantile companies regard as a major disadvantage, is a positive advantage in banking, insurance, and similar enterprises in general.Unlimited power to use capital gave them almost absolute dominion in these enterprises and in transportation (e.g., railroads, trams, canals) and utilities (gas, water, and electricity). If corporations are in business as usual, not speculating directly or indirectly in stocks, or engaged in eliminating competitors or taking them over, they generally look forward to the future and adopt policies that are farsighted (sometimes slowly).Most of them are unwilling to sacrifice their reputation for temporary benefits; nor are they willing to give employees extremely low treatment, which will affect their services. Section VII Modern business methods have a general tendency to adapt management rewards to the difficulties of the business being undertaken. In many modern business methods, each approach has its advantages and disadvantages.It has been employed on various occasions up to the point where its advantages and disadvantages are equal.In other words, on a particular occasion, the favorable margin of various enterprise organization methods is not a point on a certain line, but an irregular boundary connecting various possible enterprise organizations.And these modern methods, on the one hand, because they are very different, and on the other hand, because many of them can give a chance of development to those who have the ability to manage but have no capital, it is possible to make the remuneration of management and the cost of obtaining this remuneration. In the primitive system, such a coincidence is rare, since capital is hardly invested in production except by those who own it.It was accidental then that those who had the capital and opportunity to carry on a business or perform a service much needed by the public had even the talents required for the work.But that part of the normal cost of production of commodities, which is commonly called profit, is governed in every respect by the principle of substitution, and is therefore incompatible in the long run with the supply-price of the capital required, and with the power and capacity required to carry on the business. The supply-price of energy and the sum of the supply-price of the organization which unites the power of operation with the required capital differ too greatly. The supply of operating capacity is large and elastic because it comes from a wide range of sources.Each has to manage the affairs of his own life; and if he has an innate taste for business management, he may gain managerial experience in it.The most urgent and well-rewarded business ability, therefore, depends less on "genius" than on the labor and expense of acquiring it.Moreover, business ability is very unspecialized, since in most trades special knowledge and proficiency are increasingly of secondary importance to ordinary judgment, decision, tact, prudence, and firmness. Indeed, in those small businesses where the shopkeeper is almost equal to the foreman, expertise is very important.It is true that "every trade has its own tradition, which is unrecorded, perhaps unrecorded, and which can only be learned little by little, and best in early childhood, when his ideas are still unformed." However, in modern commerce, every industry is surrounded by subsidiary and similar industries, and because of the immersion in it, one can understand its current situation."Moreover, that general talent which characterizes the modern entrepreneur becomes ever more important as the size of the enterprise increases.And it is this ability that makes him a leader of people; it enables him to solve the problems he wants to solve in a targeted manner, to see the pros and cons of things clearly, to formulate wise and far-sighted policies, and to carry them out calmly and firmly. It must be admitted that the supply of operating capacity, and the adaptation to its demand, is somewhat hindered by the difficulty of calculating exactly how much a business pays for that capacity.The wages of a bricklayer or a mason are easier to calculate by taking the average of the wages of men of different efficiency, and then subtracting the loss due to the uncertainty of employment.But a man's total managerial remuneration cannot be obtained except by calculating in detail his actual business profits and subtracting the interest on his capital.He often doesn't know the truth about the business, and even his colleagues can't figure it out. Even in today's small villages, if it is said that everyone knows the family affairs of the neighbors, it cannot be believed to be true.As Clive Leslie said: "The country innkeeper, or small shopkeeper, if his business has improved a little, is reluctant to tell his neighbors his profits, so as not to cause competition; Willing to expose the truth and alarm his creditors." Although it is difficult to learn from the personal experience of a businessman, the situation of a business cannot be kept completely secret, nor can it be kept secret for a long time.Although one cannot tell the ebb and flow of the tide just from the five or six waves hitting the shore, with a little patience the problem will be solved.The entrepreneurs agree that the average rate of profit in an industry must not fluctuate greatly unless its changes have recently been widely noticed.Although the entrepreneur sometimes has more difficulty than the skilled laborer in judging whether changing his occupation will improve his situation, he has an opportunity of discovering the present state of his occupation and its future; if he wishes to change his occupation, he is generally Easier to do. In general, we may conclude that the rare natural talents and expensive special training required for work have the same effect on the normal remuneration of management as on the normal wages of skilled labourers.In either case, an increase in the income received brings into play certain forces which tend to increase the supply of those who receive it; Economic conditions. Although an able entrepreneur who begins with a large capital and appropriate business contacts seems to be able to obtain more management rewards than an equally able person without these advantages; The reason for the unequal (albeit small) rewards they receive is that they start with unequal social advantages.Even a worker's salary is determined by his opportunity to join the world and the education expenses his parents can give him.