Large Profits Are Sometimes Unavoidable
If all this be true, if it often happen that sellers have little to say about costs and prices, and if buyers determine by their dollar-votes who is allowed to stay in business, then it must often happen that sellers make no profit at all. In fact, it is an open question whether business as a whole, year in and year out, makes any profit at all, as we use the term. When our published statistics are sufficient for the purpose, as they will be when we are aware of the practical value to the community of such publicity, we may find that a combined balance sheet for all enterprises will show no profit.
For the very reasons that some business men suffer exceptional losses, others enjoy exceptional profits, far larger profits than most men realize. In strict truth, they cannot help it. This statement, no doubt, will be greeted with derision by many readers, who cannot quite picture the helpless capitalist, forced to accumulate large profits merely because somebody else has had so much to do with his costs and his selling prices. The cartoons never make him look like that. And yet it is literally 'true, without any important qualification, that at times many business men cannot help making large profits -- cannot help being 'profiteers,' in the common use of that term.
Before we condemn them as 'unfair' and 'unreasonable,' however, let us ourselves be fair and reasonable. Let us try to understand how it happens that some large profits must be realized, as long as sellers produce goods in competition with other sellers; and as long as buyers buy goods in competition with other buyers, and in the process of thus exercising their freedom of choice make prices what they are. Under these conditions, it is often the sellers who have no real freedom of choice. The very conditions that occasion losses to some guarantee profits to others. The war that helps one industry, ruins another; the tariff that brings profits to some sections, brings losses to others; the canal that benefits shipowners, injures railroads; the rain that saves some crops, destroys some trade; the inflated currency that spells profit for holders of stocks, spells loss to holders of bonds. Thus it is clear that large profits often come to men not, indeed, unsought, but quite uncontrolled.
Large Profits Result from Rising Prices
This is plainly true of profits that result from a rise in the price of a given commodity, say cotton. Any one who makes cotton cloth must buy cotton. If the price of cotton then goes up, he is in a position to make a profit. To be sure, he can escape the profit due to the rise in the price of cotton by selling his product below the market price. But in that case he must arbitrarily allot the goods, instead of allowing the distribution to be determined by the competition of consumers. Or, he can avoid making profits by holding his output until the price falls; but in that case he prevents price from moving the goods into any consumer's hands at all. In either case, he is interfering with the functioning of price. That is not a service to society.
Moreover, if he wishes to continue in business from one cycle of prices to another, he must protect himself against the fall in prices that is sure to come, over which also he has no control, and the time of which, even with the aid of all the available forecasting methods, he cannot predict. If a merchant were to refuse to accept profits due to rising prices, he might soon be in bankruptcy; for he has no choice about accepting losses due to falling prices.
Large Profits Result from a Rising Price-Level
The profits and losses of these companies were due partly to the fact that leather prices moved up and down faster than the prices of commodities as a whole; that is to say, faster than the general price-level. But the movements of the general price-level are in themselves causes of profit and loss.
Large Profits Result from Low Production Costs
Even if a stable general price-level were attainable, even if no large profits resulted from changes in individual prices, still some large profits would result from unequal costs of production. The reason is simple. Whenever two or more producers supply the same article to the same market, and the market requires their output, and competition is allowed to have its effect, competition tends to keep the price down to the cost of production. But for no two producers is the cost the same. Whose cost of production, then, tends to determine the price? Obviously, that of the highest-cost producer whose output is absorbed by the market.
Almost any commodity will serve as an illustration: corn, let us say, or soil pipe, or gasoline. But since coal 'profiteers' have had so much attention of late, let us consider the price of coal. Here, for example, is a coal company with rich mines, able management, and exceptional labor supply. It can load cars at the mine at a lower cost per ton than any other company, but it cannot supply all the coal that is used. Clearly, then, its cost of production cannot determine the price of coal. Otherwise, sooner or later, all other producers would have to shut down, or operate at a loss; and they could not long produce at a loss. Consequently, the price paid for coal must be high enough to bring to the market all the coal the market needs, including that part of the required supply that is mined at the highest cost. The company that produces this part of the supply works under the greatest disadvantages. Nevertheless, if the market regularly needs this company's output, it must, in the long run, pay at least enough to cover this company's cost.
But, in general, there cannot be more than one price in the same market. Nobody goes so far as to say that one consumer, merely because be buys his coal of a low-cost producer, should pay less than his neighbor who buys of a high-cost producer. If prices were fixed on this basis, every one would insist on buying coal of the lowest-cost producer, and chaos would ensue. Since, then, in general there cannot be more than one price in the same market, each company that brings to market a part of the necessary supply will make a profit corresponding, as a rule, to the advantages it enjoys over its least fortunate competitor. The higher profits of the most favored producers will not be due to their reprehensible conduct; since it is the most unfavored producers who, in the long run, are responsible for the price that must be paid to all producers.
Govermnent Price-Fixing does not Prevent Large Profits
Under private ownership of coal mines, even though prices were fixed by the Government, large profits would remain for certain producers, unless the Government put the high-cost producers out of business. For to fix a price which would enable the less efficient or less fortunate firms to continue operation, would be to fix a price which would guarantee high profits to others. Much has been said of late in favor of Federal regulation of coal prices; but, whatever may be said with reason, the claim that price control would prevent large profits is unfounded. Any price that would enable all producers and all distributors to make any profit at all, would enable some to make very large profits.
This was demonstrated during the War. The Federal Trade Commission found that, under Government control of prices, certain low-cost producers of coal made large margins, certain high-cost producers made small margins, and 'the bulk of the production, of course, enjoyed the large margin.' In a report of the Commission, we read that 'the outstanding revelation which accompanies the work of cost finding is the heavy profit made by the low-cost concern under a Governmental fixed price for the whole country.' For the same reason, the McNary-Haugen bill, which proposes to fix the price of wheat, would result in large profits for some producers, or landowners, or both.
In this respect, coal and wheat are not exceptions to the general rule. In the zinc industry, for instance, the Federal Trade Commission found no unusual profits during the War except those of the New Jersey Zinc Company. These profits, in the opinion of the Commission, were due wholly to the possession of an ore body of unusual richness and purity. It is clear that an established price low enough to have prevented these large profits would have prevented most zinc producers from covering their costs. Government regulation of the prices of manufactured products, clothing, for example, would also guarantee large profits to some concerns. In the retail clothing industry, a few concerns have exceptionally low costs; a larger proportion have moderate costs; and a few have exceptionally high costs. A firm with low costs in one year tends to remain with low costs in subsequent years. 4 Evidently there are forces at work, of which the dominant one is doubtless able management, that enable low-cost producers to retain their advantages year after year. Consequently, if prices were fixed high enough to enable the least efficient competitors to stay in business at all, the most efficient would make large profits.
Some Large Profits are Unavoidable
Thus we see that distribution by the method of price bidding, which for most commodities and services is the only method the people will tolerate, frequently results in a price far above the costs of the most favored producer; a price higher than is necessary to satisfy some sellers, higher than is necessary to induce them to continue in business. Consequently, profits are often far above the expectations of those who bought stock, and far above the amount needed to obtain new capital. The profits of the United Fruit Company, of the Woolworth Company, and of the General Motors Corporation will come to mind as examples. There are many more; there always will be.
For, prices being determined as, they are, what is the business man to do about it? In exceptional cases he might arbitrarily set low enough prices or high enough wages, to put out of business some of his high-cost competitors. This is actually going on all the time; but it is not always a net gain to the community, and it is what the courts have punished some producers for doing. So we return to our incredible statement: at any given time, there are many business men who virtually have no choice; they cannot help making large profits.
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