Profits   Its Connection with Rising and Falling Prices
Made in Atlantis
Contents
We live in a Money and Profit Economy
Business Risks are Not Gambling Risks


Still further to emphasize this point, let us distinguish sharply between business risks and gambling risks. Business risks are inherent in the nature of economic enterprise. They must be assumed by somebody. The farmer does not create the risks that are associated with pests and the weather and shifting price-levels and foreign competition and uncertainties of transportation and fluctuations in consumer demand. Either the farmer himself assumes all these risks or, by means of various kinds of insurance, he shifts some of them to others. This is equally true of the risks that are assumed by the prospector, the miner, the manufacturer, the merchant, the contractor, and the common carrier. Unless somebody runs these risks, mankind will have to go without bread and oil and tools and shoes and houses.

In the construction of a stadium, numerous risks are involved: the risk of injury to workmen, for example. This risk is part and parcel of the enterprise; somebody has to carry it. But nobody has to bet on the outcome of a game; it can be played even if no money is staked on the score. In placing a bet, the gambler creates a risk; in placing an employers' liability policy, the insurance company takes over an existing risk. Gambling, in short, is taking chances on artificial risks. Such risks, at Monte Carlo or elsewhere, are not a necessary part of business enterprise. Economically, society does not care whether the race-track gambler bets on Fire Fly, or on Spark Plug, or on neither. The world would be at least as well off if nobody ever took such risks. Unlike business risks, they are created for the sake of the risks themselves.

Speculators Usually Deal in Business Risks

Whatever may be true of speculators in securities, speculators in the products of industry do not create all the risks they bear; they carry risks that somebody must carry. It is true that they do not always take delivery of the goods they buy. On the cotton exchanges of New Orleans, for example, many traders deal in cotton who never handle it. They merely take chances on the future price. If they buy cotton today, to sell six months from now, in a sense they bet that the price will then be high enough to yield a profit. If they sell cotton short today, they bet that the price, when they have to make delivery, will be low enough to yield a profit. But if this is gambling, so is every purchase for sale at an unknown price; and this covers nearly all the commitments of nearly all other dealers. They do not know at what price they can sell their goods. To call them gamblers is to confuse them with risk-takers, such as bucket-shop operators, who have no function in the economic organization of society. In a bucket-shop, two men, neither of whom owns a certain stock, or ever intends to own it, make a bet concerning the future price of that stock. There is no need for anybody to carry such risks. Cotton speculators, on the other hand, whether or not they perform other functions, render a real service in shouldering risks that are inherent in the nature of business.

A Static Society Would Have No Risks and No Profits

Risks are universal because human beings are what they are, because human society is progressive. In a static state -- in what Ricardo called a state of natural adjustments -- there would be no risks. By natural rates of wages, interest, and profits, the early economists meant the rates that would prevail in a society that was perfectly and finally organized, and therefore free from the uncertainties that go with progress. 'Reduce society to a stationary state,' says J. B. Clark, 'let industry go on with entire freedom, make labor and capital absolutely mobile. . . and you will have a régime of natural values.' In such a society, natural rates would be static rates; prices would never fluctuate; business forecasters would be needless. One economic chart would be sufficient for all time, and all its lines would be 'normal.' As the present would be a perfect guide to the future, there would be no chances to take; therefore no risks, therefore no reward for risk-taking. In short, a profit economy could not exist in a static society. But such a society is a pure abstraction; without change, there would be a complete relief from economic risks, but, alas, no human beings to enjoy the relief.

The fact that society is dynamic rather than static does not, however, account for profits and losses. They do not arise because changes take place, but because changes are unpredictable. Eclipses of the moon are not business risks. If all changes took place in accordance with known law, all changes would be taken into account, along with other known factors; there would be no uncertainty and therefore no profit. Only those changes that make the future uncertain give rise to profit.

No Business Risks are Accurately Measurable

Some writers attempt to draw a distinction between risks that are measurable and risks that are not measurable. According to their theory, profit is the result of risk, but only of risk which cannot be measured.

This distinction seems to us to have no scientific basis, and to be confusing rather than clarifying. The fact is, no business risks can be measured accurately; on the other hand, all business risks are susceptible of some kind of measurement. The question which concerns us, either as scientists or as business men, is not whether a risk can or cannot be measured, but the probable error in our measurements. If, by a 'measurable risk,' we mean one that can be measured with absolute accuracy, a measurable risk is a contradiction of terms. If a grocer could contrive to measure accurately his chances of loss from theft, or falling prices, or bad accounts, these would be known factors in his business outlook, and not risks at all. But exact measurement, even in the most 'exact' sciences, is impossible, for the best instruments of measurement that men can devise fall short of perfection. There is always error: the only practical question concerns the range of the error. In business usage, the term 'risk' is generally and properly used to cover not only uncertainties, such as the chances of loss by fire, that for a sufficient number of cases may be measured with a high degree of accuracy, but also uncertainties, such as the chances of change in the style of women's hats, that at first sight seem hardly susceptible of any measurement at all. It is not possible to draw a line between risks that are measurable and those that are not.

Some Risks Can Be Covered by Insurance

Some risks, such as the danger of loss from theft, tornadoes, and strikes, are measurable with such a degree of accuracy that the enterpriser can insure against them. That is to say, he can transfer most of the risk to an insurance company. Insurance is merely a means of prorating the losses of a group among the individual members. Thus each individual accepts a certain loss, namely, the premium he pays, rather than run the risk of a much larger loss.

There was a time, as in the days of Antonio's hazards and Shylock's bond, when robbers and pirates made the transportation of goods a thrilling adventure. In those days, the individual merchant ran a great risk of losing his entire shipment. His profit, if any, was to a considerable extent the reward for taking this risk. today, however, the chances of having merchandise stolen en route are so well known that any one shipper can have the main risk carried for him by a dealer in such risks, even by the Government, in so far as he ships by parcel post. He has left on his own shoulders little more than the risk of insolvency of the insurer and the risk that he will have trouble in collecting.

This is true of all business risks in which the actuarial chances of loss can be measured with no great margin of error. All such risks, the enterpriser can transfer to others. Thus a taxicab company can insure against losses due to collisions, and 'The Greatest Show on Earth' can insure against losses due to rainy days. In the same way, a bank can protect itself in part against defaulting tellers, and a firm against losses due to the death of members of the firm. Such insurance becomes possible through the grouping of cases. Although the risk involved in a single case is usually highly problematical, the combined risks of a large number are not. No honest hotel proprietor has any idea whether his building will burn down today, or next summer, or never; but an expert actuary can tell just about what the combined fire losses of a thousand hotel proprietors will be. All such losses can be predicted according to the laws of chance. As the number of cases increases, the chance of error in prediction approaches zero.

In such cases, therefore, the risk of loss can be all but eliminated. As far as mortality rates are concerned, the risk run by a large insurance company in the United States is negligible. There is virtually no chance that the death-rate will be as high as the death-rate upon which its premiums are based. Thus insurance not only enables an individual to transfer risks to a group, but it almost enables a group to eliminate the risks.

For the practical purposes of business, therefore, it makes little difference whether we know that certain changes will take place, or know, within a comparatively small range of error, what the probability is that those changes will take place. In the latter case the associated risks can be transferred almost entirely to a dealer in risks.



More Readings


Profits  Its Connection with Rising and Falling Prices
This is an unofficial website with educational purpose. If proper notation of owned material is not given please notify us so we can make adjustments.
No copyright infringment is intended.  HTML Sitemap
Mail Us