Profits from Doing and Profits from Owning
So far we have considered income from the standpoint of the individual who receives it. We have distinguished between the income derived by individuals from the services they render and the income derived from the property they own; between what is commonly called 'earned income' and what is commonly called 'unearned income.' We have urged the importance, in the interests of social progress, of bearing in mind that a large proportion of what is called unearned income of individuals has been earned by somebody. It is a return, in the present, on income earned and saved in the past.
Coming now to that part of the national income which we call profits, we may well turn from the standpoint of individuals to that of corporations. In its bearing on public welfare and public policy, what the corporations do that make the profits is more important than what the stockholders do who receive the dividends. There are profits from doing and profits from owning. When a corporation generates electric power, or grows bananas, or spins cotton, or transports lumber, or operates theaters, the profits that are realized as a result of those activities are rewards for service rendered. But when a corporation acquires coal lands, or corner lots, or patent rights, or franchises, or water power, and does nothing whatever but hold the property until it can be sold at a higher price, the resultant profits are rewards for the risks incurred merely in owning the property. In one case, the corporation has done something which increases the national wealth. In the other case, the corporation may have contributed nothing; the national wealth may remain precisely what it would have been if the land and rights had remained in other hands.
Among successful enterprises, there are wide variations in total net profits and in rates of profit. Not only do aggregate business profits fluctuate widely from quarter to quarter and from year to year, but also the profits of the various industries, and of different concerns in the same industry. We find, too, that in any given year some industries suffer while others prosper; some concerns in a given industry succeed while others fail; and certain branches of a given industry fare much better than others.
In any one year a large number of corporations in the United States disburse as dividends more than 90 per cent of their net profits. A still larger number pay no dividends at all. Between these two extremes, the other corporations are rather evenly distributed. If, however, we consider these same corporations by industrial groups, we find a marked tendency toward uniform practice among the groups. From year to year there are large increases and decreases in total dividend payments, in the rates paid by most industries, and, naturally, still wider variations in the dividend rates paid by individual companies.
In short, profits are highly fortuitous. They rise and fall quickly and far in response to innumerable adventitious and unpredictable influences that never affect, in precisely the same degree, the supply of or the demand for any two commodities or any two services. Unlike population and production, profits do not show a normal rate of growth. Unlike rates of interest, rates of profit do not reveal a central tendency around which the variates cluster closely. In so far as the attitude of Congress and of the public toward business enterprises is dependent on a belief that there is a rate which the profits of individual enterprises tend to approximate, in a given year, or a rate of profit which tends to prevail, year after year, in business as a whole, that attitude is determined by an assumption which is contrary to fact. There is no such thing as 'normal' short-run profits, in any useful sense of the word.
 More Readings |
