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Profits result from Wise Choice of Risks The extent to which it is possible to transfer risks does not, however, determine profits and losses. They result from risks that are assumed, whether or not these risks can be transferred. It is a matter of common observation that the makers of two competing products of nearly equal merit do not make equal profits. Indeed, it often happens that one producer makes substantial profits, while the other makes no profits at all. The explanation is to be found chiefly in a comparison of the risks that are assumed. If, for example, we seek an explanation for the profits of the Gillette Safety Razor Company, we find that this company, in creating a demand for its product, ran greater risks in advertising expenses than any other producer of safety razors. As another example from current business, let us take two kinds of tooth paste. The laboratory tests revealed no reason why consumers should like one better than the other. As far as the merits of the products were concerned, the makers started with equal chances of profit. Neither had any discernible advantages over the other, except in fitness for choosing risks. Yet one turns out to be a best seller, yielding steady profits, while the other is a failure. If a business man is too venturesome in taking risks, he loses: if he is not venturesome enough, he loses. Between these two dangers, he must contrive to find a safe middle course. He is like a baseball player who has reached first base. The closer he sticks to the base, the smaller risk he takes of being put out at first; but the smaller also are his chances of reaching second. On the other hand, the farther he plays off the base, the greater risk he takes of being caught at first; but if he is not caught, the greater are his chances of reaching second. The most successful baserunner is the one who takes such risks that the pitcher can almost, but not quite, catch him every time he takes a lead for second. The most successful runner after profits is the one who usually takes his position in the middle ground between security and excessive danger. But neither in business nor in baseball is any man infallible in his estimate of chances: if he never runs what turns out to be too great a risk -- if he never gets caught off the base, or never takes a business chance that results in a loss -- he is overcautious. Every man who does any kind of business can at any time use greater caution: he can reduce some of his risks. He can do less advertising, cut down his stock, discontinue certain lines, or curtail his personnel department. He can insure against risks which he himself has previously borne. If he insures his factory against fire, he accepts the certain loss of the premium he pays, which otherwise might have been added to his profits, rather than run the risk of a greater loss from fire. In many other ways, he can narrow the scope of possible losses; but in the process he narrows the scope of possible gains. Thus, as he reduces various risks, he increases the risk of failing to make any profits at all. If he could transfer all risks, he would transfer all dangers of loss and all hopes of profit. Every year many men fail in business because the risks they take are too great; but every year there are other men who fail because the risks they take are too small. It is true that profits are sometimes realized on individual transactions in which the risk is negligible. Sometimes a dealer buys and sells a bill of goods at the same time, and for cash. Sometimes a builder makes a contract on a 'cost plus' basis which seems to guarantee a profit no matter what happens. Every enterpriser, however, runs the risk of not obtaining enough business of this kind to cover his operating expenses. And even when a man profits from an individual transaction which appears to involve no risk, a little thought will show that in order to be in a position to take advantage of that particular opportunity, he must have taken numerous risks in the past. Even so, it is said, risks are not the only causes of profit; some concerns in each industry earn higher profits than others, year after year, because of the superior natural ability of their managers; and in so far as these profits result from limited natural ability, they are analogous to rent upon land. These profits, however, like all others, result from the wise choice of risks. That is, in fact, the way in which superior ability manifests itself. Moreover, every concern runs a risk every time it employs an executive, or decides to retain one, or allows any other concern to outbid it. This may seem to economists too broad a use of the term 'business risk'; but to business men it is commonplace. From all this it must be clear that business men are constantly impelled, by the powerful urge of self-interest, to choose risks as wisely as possible. To assume that public officers, selected through political means rather than through the struggle for survival in actual business, and with no personal liability for the losses due to their mismanagement, would choose as wisely among business risks as the responsible enterprisers in a profit economy, is to assume that human nature will suddenly become entirely different from what we know it to be. Thus far, we have stated a few essentials in a theory of profits -- a few accepted principles that seem to be a necessary foundation for our discussion of practical business problems. Throughout that discussion we must bear in mind that business profits and losses result from taking risks; that risks are due to uncertainties that are inherent in the nature of business; that, as a rule, these uncertainties are not the artificial creation of gamblers, but necessary attributes of a living, social organism -- a part of the price we pay for progress. As these business risks are not susceptible of reliable measurement, somebody must carry them. No business man can escape all of them; if he escaped all other risks, he would have left the risk of dying of dry rot. Of these various risks, we shall be concerned mainly with those that arise from consumers' freedom of choice. To this crucial phase of the subject of profits, we shall now turn.