Chapter 51 Chapter 8 Profits from Capital and Operating Capabilities (Continued)

Section I Next we must inquire whether there is a general tendency for the rates of profit to be equal.In large enterprises some management remuneration is classified as salary; in small enterprises the labor wages of the managers are mostly classified as profit; therefore, the profits of small enterprises appear to be more than they are. The reasons which determine managerial compensation have not been carefully studied until the past fifty years.Previous economists have contributed little in this direction, because instead of properly distinguishing the elements which constitute profit, they have sought only simple general laws for determining the average rate of profit which, by their very nature, cannot exist. of.

The first difficulty we encounter in analyzing the factors which determine profit is, in a sense, a difficulty of letter.It arises from the fact that most of the work done by the proprietor of a small business is, in large enterprises, divided among the managers and overseers, whose wages must be deducted from the income of the business before the profit can be calculated, while the proprietor of a small business The whole remuneration of his labor is counted as his profit.This difficulty has long been recognised; Adam Smith has observed that "in a large town the whole medicine which an apothecary sells in a year may cost no more than thirty or forty pounds. Although he may sell Three hundred pounds or four hundred pounds, or 1000% profit, but this is often the result of adding his own reasonable wages to the price of medicine; A small grocer in a small port can make 40 or 50 per cent on a capital of one hundred pounds, while a large wholesaler in the same place can rarely make 80 per cent on a capital of ten thousand pounds. or 10% of the profit."

Therefore, it is very important to distinguish between two rates of profit, one rate of profit is the annual rate of profits of business investment (annual rate of profits), and the other rate of profit is the income from each turnover of capital (that is, the total amount of each sale equals capital). Profit rate, or called turnover rate of profit (rate of profit on the turnover).At this moment we are dealing with the annual rate of profit.If the term profit is narrowed to the former or extended to the latter, so that it includes in both cases the remuneration for like services, the great part of the nominal inequality of the normal annual rates of profit between small and large enterprises is disappear.It is true that there are some industries and trades in which, although the rate of profit of enterprises with large capitals is lower than that of enterprises with small capitals calculated by ordinary methods, the rate of profit of enterprises with small capitals is higher than that of enterprises with small capitals calculated by correct methods.Because of two firms competing in the same industry, the large firm can often purchase raw materials at a lower price and take advantage of many of the economies of mass production, such as division of labor and specialization of machinery, etc., that the small firm can afford. beyond reach.The only important advantage that a small business has is that it is easier to get close to customers and to do what they want.But in those trades where the latter advantage does not play an important role, especially in the processing industry, the large factory can obtain a better price than the small factory, so that the expenditure is less and the income is larger; therefore, in both cases Next, if profits refer to profits that contain the same factors, the profit rate of large enterprises must be higher than that of small enterprises.

It is in these enterprises that it often happens that after the big factory squeezes out the small factory, it merges with it and obtains the benefit of a limited monopoly for itself, or the profit margin is reduced to a very low level because of their fierce competition among themselves.There are many branches of textiles, metals, and transport which cannot be started unless there is a large amount of capital, and enterprises which are small to begin with, struggle with great difficulty, in the hope that in a short time it may be possible to employ large amounts of capital, and The managerial rewards that bulk capital will provide are low in comparison to capital, but the sum is high.

There are industries that require extreme capabilities, where managing a large enterprise is almost as easy as a medium-sized one.A rolling mill, for instance, is so rare in which the details of the work cannot be made routine, that an investment of a million pounds can be managed without difficulty by an able man.A rate of 20 per cent is not a very high average rate of profit in some branches of the iron industry, because the details of the work require constant consideration and planning; remuneration.This situation is further illustrated by the recent merger of large factories in various sectors of the steel industry.Their profits vary much with business conditions, and although the total amount is large, the average rate is very low.

The rate of profit is very low in nearly all those trades which seldom require very great ability, public or private factories with large capitals and proper dealings, managed by thrifty men with common sense and a fair amount of enterprise. Enough to fend off newcomers.And a well-off company or private factory does not lack such people, because a private factory can take in its most capable employees at any time. To sum up, we can draw the following conclusions: First, the profit rate of large enterprises is higher than it appears at first glance, because the profit rate of small enterprises is compared with that of large enterprises, and the part that small enterprises generally count as profits should be included in another Second, even after this correction, the rate of profit, calculated in the usual way, generally decreases as the size of the enterprise increases.

The normal annual rate of profit on the capital employed in Section II is higher in branches where circulating capital is relatively greater than fixed capital.Once the economy of mass production has spread throughout industry, it will not raise the rate of profit in that branch of industry. If the management work is too heavy to be commensurate with the capital, of course the normal remuneration for management is also disproportionately high, so the annual rate of profit of the capital is also high.And the management work is heavy because it takes so much effort to organize and plan new methods, or because it causes so many troubles and risks.And these two things often go hand in hand.

It is true that trades have their own peculiarities, and that to all laws in this respect there are liable to be great exceptions; but, other things being equal, the following general proposition holds, and explains the normal The many inequalities of the rates of profit. In the first place, the amount of managerial work required by a firm depends more on the quantity of circulating capital than on the quantity of fixed capital.There are, therefore, low rates of profit in some trades, because they have a plethora of fixed capital equipment, which, once invested, require little care and attention.As we have already seen, most of these trades are carried on by joint-stock companies.The total wages of the directors and officers of railroads and water companies, especially those that own canals, docks, and bridges, represent a small proportion of the capital invested.

Next, assuming that the ratio of the fixed capital to the circulating capital of the enterprise remains constant, the greater the burden of management, the higher the rate of profit, and the greater the importance of the sum of wages than the cost of raw materials and the value of commodities. In industries dealing with expensive raw materials, their success depends much on luck and the ability to buy and sell.To correctly and adequately explain the various causes which affect prices requires a clear head, which is not many people, and thus can be highly rewarded.Adding to this, it is so important in some industries that some American scholars regard profit as purely the reward for risk, as the balance of gross profit minus interest and management rewards.However, this use of the noun seems inappropriate, since it tends to confuse management with day-to-day supervision.Indeed, ceteris paribus, the man who engages in a risky business will not operate unless he expects the profit to be greater than the other business, and his probable gain outweighs his probable loss (according to a reasonable calculation). This kind of enterprise.If there is no absolute harm to this risk, people will be reluctant to pay insurance premiums to insurance companies, because they know that the premiums they pay provide, in addition to the actual value of insurance and the huge advertising and operating expenses, a surplus as a net profit. .If there is no insurance, if the practical difficulties of preventing the risk can be overcome, they must be compensated in the long run equal to the premium of the insurance.However, there are many people who handle troublesome businesses competently with their intelligence and enterprise, but hold back in the face of great risks because their own capital is not large enough to bear heavy losses.Risky trades, therefore, are mostly carried on by men who are not afraid of taking risks; perhaps by a small number of powerful capitalists who are skilled in the trade, and who agree with each other not to stress the market, in order to obtain a high average rate of profit.

In some enterprises, in which the speculative nature is not very important, the management work is mainly supervision, and the management remuneration is based on the amount of work performed in the enterprise; and the total wages can be used as an extremely rough and convenient measure of this remuneration.Of all the generalizations that can be made concerning the general tendency of equal profits in all trades, the most imprecise, perhaps, is that, with equal capital employed, there is an annual tendency for profits to be equal to some per cent of the total capital and some per cent of the total wages.

A particularly shrewd and capable manufacturer will use methods and machines that are superior to those of his competitors. He also has relatively proper arrangements for the production and sales of the enterprise and maintains a normal relationship between the two.In this way he will enlarge his enterprise, thereby gaining the greater advantage of division of labor and specialization of equipment.In this way, what he will get is increasing returns and increasing profits; because if he is only one of many producers, his increased output will not substantially cause the price of his commodities to fall, and the economic benefits of large-scale production will almost All to him.If he has a partial monopoly in the industry, he will adjust his increased output so that his monopoly profit can increase. If, however, the improvement is not confined to one or two producers, if the improvement arises from a general increase in demand and output corresponding to it; or from advances in machinery and methods, which are shared by the whole industry; or As a result of the development of auxiliary industries and the spread of the "external" economy, the prices of the products will approach the point at which only a normal rate of profit can be afforded for this type of industry.In this process, the trade tends to tend towards one class, that is, its normal rate of profit is lower than the original class; because it is more consistent, more monotonous, and less laborious than before; More suitable for co-management.It can be seen that when the quantity of products in a certain industry is compared with the quantity of labor and capital, an increase in its ratio will inevitably lead to a decline in the rate of profit; from a certain point of view, it can be regarded as diminishing returns calculated in value. Section 3 All trades and trades have their customary or fair turnover rate of profit. The annual profit is as above, and now we shall study the reasons for determining the turnover profit. It is evident that the annual normal rate of profit varies very little, while the turnover profit varies greatly from one trade to another, as it depends on the length of time and the amount of work required for the turnover.For example, wholesalers buy and sell a large number of products in a single transaction, which can make their capital turnover very fast. Although their average turnover profit is less than 1%, they can make a lot of money; especially in large stock transactions, The turnover profit is only a fraction of 1%.But the shipbuilder, long before he sells the ship, is bound to invest labor and raw materials in the ship itself, and prepare a berthing place, and he must also attend to various details connected with this, and he must pay attention to the direct or indirect expenses. He attaches a high rate of profit to his labor and invested capital. In addition, in the textile industry, some factories buy raw materials and produce finished products, while others specialize in weaving or polishing; obviously, the turnover rate of a factory in the first category must be equal to that of each of the other three categories. The sum of the factory's profit margins.From the perspective of a retailer, the turnover profit of the commodities he distributes is often only 5% or 10%. These commodities are needed by ordinary people and are not affected by changes in styles; less, and the investment in it could have been turned over quickly, with no risk or labor.However, there are several retailers whose turnover profit is almost 100%, because what they sell are decorations and cosmetics, which can only be sold slowly, and at the same time must have a variety of stocks, which in It requires a lot of space for display, and if the style changes, it cannot be sold unless it loses money.Even these high profit margins are often lower than those on fish, fruit, flowers and vegetables. The fourth quarter continues. We know, therefore, that there is no general tendency towards equality in the turnover profits; but there can be, and in fact there is, a rate of profit which is considered "fair," normal, and fairly definite in all trades and branches of trade.Often, of course, these rates of profit are altered by a change in the method of trade, which generally arises from those who wish to do less business, and though the turnover rate is lower than usual, the annual rate of return on their capital But higher.However, in the absence of such drastic changes, it is the tradition of the trade to charge a certain turnover rate for special work or for substantial practical service rendered to a fellow trader.This tradition is largely empirical, and it suffices to demonstrate that, if that rate of profit is charged, the costs (direct and supplementary) employed in the particular case will be compensated, and that, moreover, the industry will provide the normal annual profit margin.If they charge a price that gives a profit margin well below that turnover margin, it will be difficult for them to grow; if they charge too much, they run the risk of losing customers because others can outsell them. Get cheap.This is the "fair" turnover rate that an honest person would like to receive on an order if no price has been agreed upon in advance, and it is the rate of profit that courts will allow in the event of a dispute between buyers and sellers. Section 5. Profit is a constituent factor of normal supply price.But the income from invested capital (in material form or acquired skills) is determined by the demand for its commodities. In the above studies, we have focused mainly on the final, or long-term, or really normal results of economic forces; we have discussed the tendency of the operating capacity to employ capital to adapt itself to demand in the long run; we have seen , this power is constantly seeking out businesses, and methods of running businesses, in which the services it can render are highly valued by those who can pay a fair price for the satisfaction of their wants, As a result, the service will be highly remunerated in the long run.This dynamic is entrepreneurial competition.Each person predicts possible future events according to his touch, makes a proper estimate, and predicts the remainder of the enterprise's income minus the required expenses.The whole of his expected return is included in the profit by which he is engaged in the trade; all the capital and energy invested in making tools for future production and in establishing the "intangible" capital of business transactions, before he has invested, must show that It is profitable.The whole profit which he expects from these investments is included in the return which he expects in the long run to his venture.If he is a person of normal ability (the so-called normal is for this kind of work), and he is hesitant to know whether the risk is worth the risk, they can be regarded as really representing the normal production fee (margin) of the service in question. .The full normal profit is therefore included in the real or long-run supply price. The same motives which induce a man and his father to devote capital and labor to the training of him as a craftsman, a freelancer, or an entrepreneur are the same motives which impell capital and labor to invest in the establishment of material production equipment and the organization of business.In either case, investment (as human behavior is governed by conscious motives) will reach a point where additional investment is unprofitable, or where utility equals "disutility"; The price, which is the expected return on all such investments, therefore forms part of the normal cost of production of the service it renders. But it takes a long time for all these causes to work fully, so that the success of the exception can be compared with the failure of the exception.On the one hand, there are those who owe their success much to their extraordinary abilities and rare luck, which manifest themselves in special opportunities for their speculative business or favorable opportunities for the general development of enterprises.On the other hand are those who are mentally or morally incapable of making good use of their training and career opportunities, who have no special interest in their own vocation, and who, combined with all the misfortunes of speculation, or whose business has been overwhelmed by rival reined in by encroaching threats, or stranded as waves of demand recede elsewhere. Although these disturbing causes may be neglected in discussions of normal remuneration and normal value, they have a primary and dominant influence in discussions of the income received by a particular individual at a particular time.Since these disturbing causes affect profits and managerial rewards in a manner quite different from their effects on ordinary rewards, it is scientifically sound to treat profit and ordinary rewards separately when we discuss temporary fluctuations and individual opportunities. an inevitability.The various problems concerning market fluctuations cannot be properly resolved unless the theory of money, credit and foreign trade is fully explained.Even at this stage, however, we may note the following difference in the effect of said disturbing causes on profit and ordinary remuneration. Section 6. A comparison of profits and other remuneration, with respect to the changes in prices, and with respect to the different circumstances of different individuals, and with respect to the proportion of the total income which is due to the remuneration of labour, and of natural talents. In the first place, the profits of the entrepreneur are first of all affected by changes in the prices of the products of his capital (including the organization of the business), his labor and the labor of his employees; changes in his profits, therefore, generally precede changes in their wages. And the range of change is large.Because, if other conditions remain unchanged, a slight increase in the price at which his products can be sold is likely to increase his profit many times, or make him turn a loss into a profit.A rise in price will make him eager to take advantage of the high price he can get; he will fear that his hired men will resign or refuse to work, and will therefore be willing to increase wages; and wages tend to rise.Experience, however, shows (whether or not it is wages calculated in terms of the sale of products) that wages rise seldom in proportion to those of prices; and therefore they rise seldom in proportion to increases of profits. Another aspect of this fact is that, when business is very bad, the hireling earns at best nothing to support himself and his family; but the expenditure of the employer (especially one employing much loaned capital) must necessarily exceed his income; In this case, even his total management compensation becomes negative, that is, he is losing money.This is true of many or most entrepreneurs in times of great depression, and more so of those who are less fortunate, less capable, and less suited to the business than others. The seventh section continues. The second difference is that the number of people who are successful in business accounts for only a small percentage of the total; in their hands, they have accumulated other people's wealth, which is several times greater than their own. The so-called others are those people who have their own savings, or inherit the savings of others, and lose all the fruits of their own efforts when the business fails.To know, therefore, the average profit of an industry, we must never divide the sum of the profits made by the successful men by the number of them, nor even by the number of successful and unsuccessful ones, but first of all from the profit of the successful men. Subtract the total losses of those who may have changed jobs after failure from the total, and then divide the remaining difference by the total number of winners and losers to obtain the average profit of the industry. It is very likely that the total reward of management, that is, the difference between the profit and the interest, is, on average, less than one-half of the enterprise's profit estimated by ordinary people for the successful ones, and as far as some risky enterprises are concerned, it is still less than one-half of the enterprise's profit. Less than one-tenth.Still, as we shall see in a moment, there are reasons to think that corporate risk has generally stayed the same. The eighth section continues. The third difference we have to discuss is that of changes in profits and changes in ordinary remuneration.We have seen that the expected income from free capital and labor is of the nature of profit before they are invested in developing the skills required by artisans or freelancers; and that the required rate of profit is often high for two reasons: Men themselves do not receive most of its rewards; they are often poor, and unless they maintain their households thriftly, they cannot make such investments for future rewards.We also know that part of the remuneration of the artisan or freelancer, once he acquires the skill required for his work, is actually the future quasi-rent of the capital and labor invested which fit him for the work he undertakes. , with opportunities of employment, business intercourse, and general use of one's talents, only the rest of the income is the real reward of labour, but it generally constitutes a large part of the whole income.This is where the difference lies.For when the same analysis is made on the profit of the entrepreneur, the proportions are different, and the larger part is quasi-rent. The income of the manager of a large enterprise from invested capital, both material and immaterial, is so great, and his interests so variable, that he often thinks little of his labor in this direction.If the business is profitable, he regards the benefits it brings almost as a pure gain.Partial and full operation of his enterprise make little difference to his labor, so that, on the whole, it hardly occurs to him to subtract his extra labor from these returns.He thinks differently of any remuneration for his extra labor than the artisan does of any extra remuneration for overtime. This fact is the chief reason why the average person, and even some economists, do not fully admit, and to some extent may, admit that there is fundamental agreement in explaining what determines normal profits and normal wages. Closely connected with the above distinction is another distinction.If the artisan or freelancer possesses a special genius, which is neither produced by man nor sacrificed the present for future results, it enables him to obtain a surplus income, that is, surpasses those who have spent on personal education and career opportunities. The surplus of income which the common man, having invested the same capital and labour, can expect from the same labour, this surplus has the character of ground-rent. But, returning to the point mentioned at the end of the previous chapter, people with special talents often make up the majority in the entrepreneurial class.For it includes, besides those able men born in that class, many gifted men born in a lower order of occupation.Thus the profit on capital employed in education is a particularly important factor in the income of the freelance class, and the rent of rare genius may be regarded as a particularly important factor in the income of an entrepreneur, if we Considering the entrepreneur as an individual (in normal value even the remuneration of genius, as we know it, is rather to be regarded as quasi-rent than as rent itself). However, there are exceptions to this rule.A mediocre entrepreneur who has inherited a profitable business and has merely been able to run it enough to earn millions a year for very little rent on the rare genius contained in it.Conversely, the earnings of exceptionally accomplished lawyers, writers, painters, singers, and equestrians, for the most part, may be classed as rents of rare geniuses, at least if we take them as individuals, and disregard the differences in their respective occupations. The normal supply of labor depends on the brilliance they display to those aspirants. The revenue of a particular enterprise is often greatly affected by changes in its industrial circumstances and opportunities.But similarly the special income derived from the skill of various workers, for example, the discovery of the rich copper deposits in Australia and America, reduced the income-generating power of the skill of the Kearney miners (as far as the home miners were concerned). , each discovery of a bonanza in a new area increases the skill-generating ability of those miners who have moved to that area.Moreover, the increase in the taste for theater-going, while raising the normal remuneration of actors and increasing the supply of acting skills, also increases the ability of those already engaged in the show to generate income, the greater part of which, from the individual point of view, is the surplus from producers of rare talent. Section 9. Interests of different categories of workers in the same industry, especially in the same enterprise. Next, let us discuss the mutual interests of the various industrial classes in the same trade. Concordance of interests is a special case of the general fact that, in any commodity, the demand for its several factors of production is joint, and we may quote on this general fact what is given in Book V, Chapter VI. illustration. There we know that any change in the supply of mason's labor must affect the interests of other branches of the building trade, and still more the common man. The fact is that the income of the various classes engaged in building houses, weaving cloth, or other things, from their particular capital and expertise depends much on the common prosperity of that trade.If this is the case, the income can be considered in the short term as part of an industry-wide mixed income or common income.When the total income increases due to the improvement of efficiency or any external cause, the portion of income received by each class tends to increase. However, when the total income remains unchanged, the increase in the income of any class must be due to the decrease in the income of other classes.This applies to all members of a trade and, in a special sense, to those who have worked together for many years in the same enterprise. The tenth section continues. The remuneration beneficial to the enterprise is, from the point of view of the entrepreneur himself, the sum of remunerations, first, the remuneration of his abilities; second, the remuneration of his productive equipment and other material capital; third, the remuneration of his business reputation or business organization and business dealings; in fact it is more than the sum of these; for the entrepreneur's efficiency depends partly on his being engaged in the particular business; if he sells it at a reasonable price, and If he changes his business to another business, his income may be greatly reduced.The total value of business dealings to him is the most striking instance of conjuncture or opportunity value.This value, though it may be due to luck, is chiefly the result of ability and labour.The part that can be transferred and purchased by private individuals or large joint ventures should be counted as their cost. In a sense, it is a kind of opportunity cost (conjuncture or opportunity cost). However, the employer's point of view does not include the entire income of the enterprise: because another part of the income is related to his employees.Indeed, in some cases and for certain purposes almost the whole of the revenue of an enterprise is quasi-rent, that is, as determined for a short time by the state of the market for its commodities, and the cost of the various things necessary for its manufacture. Regardless of the cost of engaging in the business.In other words, it is a mixed quasi-rent that is distributed among the various persons in the industry by bargaining, as well as by custom and sense of fairness.And this result is due to causes similar to those of civilization in the first days of distributing the producer's surplus from the land, which was almost always placed in the hands of the cultivating corporations, rather than in individuals.For example, an executive in an enterprise is familiar with people and the environment. In some cases, he can take advantage of this advantage to be hired at a high price by a competitor; It is of little value; and consequently, if he goes away, the loss in the trade may be several times his wages, which he might get elsewhere for less than half. It is to be remarked that the position of this hireling differs from that of other hirelings, which are of almost equal value to the services rendered by any enterprise in a great trade.The weekly income of each of them, as we have already pointed out, is partly a payment for the fatigue of work done during the week, and partly a quasi-rent for his expertise and special abilities.Assuming perfect competition, this quasi-rent is determined by the price the employer, or any other employer, is willing to pay for his services, according to the state of the market for their goods during the week.Since the prices which must be paid for a given kind of work are so determined by the general state of commerce, such prices are included in direct expenses which must be subtracted from its total remuneration to calculate the current quasi-lease of the particular factory.However, the rise or fall of the quasi-rent has nothing to do with the employees.In fact, however, competition is not so perfectly efficient; even if the market pays the same price for the same work with the same machinery, the prosperity of the local factory has the opportunity to increase the income of each of its employees, while when business is slow, There are opportunities for continued employment and, when business is booming, coveted extra hours. There is, therefore, almost a de facto certain sharing of profit and loss between each enterprise and its employees; Also generously acknowledged for genuine friendship.But this is rare; the usual means of making the relationship of employer and employee economically and morally better, is the dividend system; when it is seen as tending towards the higher and more difficult This is especially the case with the first step. If the employers in a certain industry are united and the employees are also united, it is difficult to determine the solution of the wage problem.It is only by agreement that the employer and the employee shall share in the net income of the trade for a short period of time.The reduction of wages, except in industries which are being eliminated, can never always be in the interest of employers, because it forces many skilled laborers into other markets of labor, or even into other industries in which no special remuneration of skill matters; Must be high enough to attract young people to the profession.This establishes a lower limit for wages, while an upper limit is determined by the corresponding poverty of supply of capital and operating capacity.But which point to take on that limit can only be determined by bargaining; but this bargaining seems to be tempered by ethical discretion, especially if there are appropriate mediating institutions in commerce. . The problem is even more complicated in practice.Because most of the employees have their own trade unions, and they go their own way; the employer only acts as a buffer, and a group of employees who go on strike to demand a wage increase will actually use up the wages of other groups of employees, which is almost equal to the profit of the employer. The causes and effects of the various unions and confederations of trade and commerce among merchants and manufacturers, employers and employees, cannot here be examined.They represent vivid facts and singular changes, sufficient to attract the attention of the world, and seem to indicate that social changes are at hand.It is true that their importance is great and is increasing day by day; but there is some exaggeration in it.For most of them are but ripples in the ocean of progress.Though they are now larger and more violent than ever before, yet, now as before, the mainstream of the movement depends on a powerful undercurrent of tendencies to normal distribution and exchange.These trends are "invisible", but they drive the course of those "visible" episodes.For even in conciliation and arbitration the main difficulty lies in discovering what is the normal level, so that the arbitral authority does not deviate too far from it, lest it undermine its prestige.