Continuous Employment Depends on Profits
We hear much condemnation of employers who shut down their factories and thus throw men out of work. Some of this condemnation is deserved, for in some cases better judgment and better management would render continuous operation possible. Often, however, the closing of factories is not due to the inefficiency of individual employers; nor is it due to their perversity or heartlessness.
Often, employers have no option. They cannot long carry on at a loss, no matter how much they would like to do so. It takes money to buy materials and pay wages; and the money must come from somewhere. It cannot long come from capital, for most capital is in bricks and mortar and other forms that are not suitable for the payment of operating expenses. In any event, the limit to the payment of losses out of capital is reached when the capital is exhausted.
Here is the Studebaker Corporation, for example, with a long record of substantial success, with a capital, let us say, of ninety million dollars and a surplus of twenty million. Its financial condition is exceptionally safe. Yet its freedom of action may at any time be restrained by market conditions over which it has virtually no control. Out of accumulated capital and profits, it could not pay current costs of operation more than six months. Soon thereafter, without additional income, it would have to stop producing automobiles. If no profits were realized, month after month, the time would come when the directors would have to close the factories. Humanitarian impulses would not provide new capital, or pay for steel or mechanics.
It is customary to speak of the refusal of employers to utilize the full available productive power of capital and labor; and sometimes the refusal is indefensible. But does not the word 'refusal' generally give a wrong slant? It is true that some producers restrict output for the purpose of maintaining prices, rather than produce more and sell at lower prices, because they think that a smaller output will yield larger profits. But this can happen only under monopolistic conditions. Under typical competitive conditions, it is against the interests of any one producer to restrict his output in order to maintain prices, thus chiefly benefiting his competitors.
As a rule, 'refusal' is not the word: most employers have no choice. They cannot control fluctuations in consumer demand. They would be ruined if, regardless of market conditions, they continued to run their plants at capacity. And it may not be out of place to remark, in passing, that workers' control of industry would not solve this problem. Economic democracy cannot repeal economic law. Nor would the problem be solved by the elimination of profits. It would still be both impossible and undesirable to operate every part of our industrial equipment at capacity. Every day, somebody would have to decide what part of our equipment to leave idle: somebody would have to make the 'refusal.'
In one of his condemnations of capitalism, Werner Sombart says: 'The beginning and the end of capitalist economic activities is a sum of money. Consequently, calculation forms an important element in the capitalist spirit, and this was recognized quite early in the history of capitalism. By calculation I mean the tendency, the habit, perhaps more -- the capacity, to think of the universe in terms of figures, and to transform these figures into a well-knit system of income and expenditure. The figures, I need hardly add, always express a value; and the whole system is intended to demonstrate whether a plus or a minus is the resultant, thus showing whether the undertaking is likely to bring profit or loss.' With all this we agree. Deplorable or not, it is necessarily true. A successful business man is much more than a calculating machine; but, as we have said, he is first of all a good enough calculating machine to keep his balance sheets out of the red.
Nearly all Ways of making a Living depend on Profits
There are many ways of making a living, but nearly all of them are predicated on realized profits. A majority of human beings, it is true, depend upon wages; but wages depend largely upon profits. Employers, as a rule, pay wages only with the expectation of making profits; and, unless these expectations are realized, wages must stop. In this connection, we quote a definition of capitalism:
'By the term capitalism, or the capitalist system, or, as we prefer, the capitalist civilization, we mean the particular stage in the development of industry and legal institutions in which the bulk of the workers find themselves divorced from the ownership of the instruments of production, in such a way as to pass into the position of wage-earners, whose subsistence, security, and personal freedom seem dependent on the will of a relatively small proportion of the nation: namely, those who own, and through their legal ownership control, the organization of the land, the machinery, and the labor-force of the community, and do so with the object of making for themselves individual and private gains.' This is a defective definition. Not only is it possible, under capitalism, to have widespread distribution of ownership of the instruments of production among the workers, but, as we shall show presently, the capitalistic civilization of today is making, and should continue to make, progress toward that end. It is another defect in the definition, however, that concerns us at this point. Rarely are wage-earners as a body dependent on the will of employers. Employers, as a rule, are not only willing but eager to pay wages. Workers as a whole are dependent on nobody's will, but on the capacity of the enterprises for which they work to continue to operate at a profit.
The General Electric Company, for example, out of every dollar of income, pays out as wages about forty-one cents, and as cash dividends only about five cents. Now, it is the forty-one cents that makes the five cents possible; but, none the less, it is the five cents that makes the forty-one cents continuously possible. In the year 1914, the company paid about thirty-seven million dollars as wages; in the year 1920, it paid nearly one hundred and twenty-eight million dollars.
Had there been no profits, there would have been no such increase in wages; in fact, no General Electric Company. The total income of the United States in the year 1918 was about sixty-two billion dollars. Of this total, over half, or about thirty-two billion dollars, was received as wages and salaries. Of this amount, a small part was paid for personal services, with no possibility of profits; a considerable part was paid by those who hoped for profits, but hoped in vain. Most of this thirty-two billion dollars, however, was paid by those who had good reason to expect, and who did in fact receive, sufficient profits to enable them to continue in business. This means that wages, which are the chief economic incentives of most of the workers in the United States, continue to function only as long as somebody makes profits.
Indeed, there is scarcely a human being, wage-earner or not, in all the wide ranges of this country, whose daily life is wholly unconcerned with the balance sheets of business enterprises. Even Thoreau, in the seclusion and simplicity of his hut on the shore of Walden Pond, depended more than he was willing to admit on the products of the profit-making society which he was trying to escape. John Burroughs, simple as were his tastes, keen as was his delight in the meadowlark and the goldenrod, owed much of his joy in life, say nothing of his bodily comfort, to mills and mines, book shops and plantations, factories and railroads, that ministered to his material welfare only as long as they realized profits.
The lonely trapper in the forests of the Northwest, although he does not work for wages and calls no man master, can supply himself with no other rifles and shoes and newspapers and flour than men have succeeded in making under a profit economy. When he goes to the nearest village, he finds little to buy, ordinarily, except goods that have been produced at a profit, transported at a profit, and which the local merchant can sell at a profit. Few other goods can flow into that market, because of the almost automatic operations of a money and profit-making economy. In short, profits and the prospect of profits, but mainly realized profits, determine what there is to be bought and who is allowed to make it.
This foreword to our discussion of profits is not offered in justification of industrial society as it exists today. Complete justification is impossible. Even the directors of 'big business,' although convinced that our material prosperity requires the profit incentive, are far from complacent. They are as eager as any revolutionist could be to bring about changes that will increase the real wages of labor. Almost any kind of radical doctrine can find its advocates among Wall Street leaders; and no one can be wholly satisfied unless his complacency is rooted in ignorance.
To defend a majority of profit-seekers for what they do under existing conditions is not to defend those conditions; and to defend a majority of profit-seekers is not to defend all. Neither here nor elsewhere do we set up a sweeping defense of profits, however made and however utilized. There are many kinds of profits and many ways in which profits may be used, differing vastly, as we hope to show, in their effects on the common welfare. We cannot condemn or justify them all on the same grounds. And there are debatable questions, beyond the scope of these introductory remarks, concerning the size of profits and the extent to which they should be taxed. If the existing price and profit economy seemed to us satisfactory or, if not wholly satisfactory, at least without very serious defects, we should not be writing about it. As any one who has read Money is well aware, we have in mind many problems that must be better understood before the productive activities of mankind can be so directed and the products so distributed as to yield to the people generally the greatest possible benefits. With some of these problems that center around profits, we shall be concerned in the following chapters.