Profits and Losses Result from Risks
Risks are universal. For the orange grower, there is danger of a frost; for the cotton planter, the boll weevil; for the bond buyer, inflation; for the woolen manufacturer, tariff revisions; for the milliner, changes in style; for the contractor, strikes; for the railroads, Congress. The prospector drills where there may be no oil. The publisher prints a book that people may not buy. The clothier relies on spring stocks that may not arrive. The electric railway company constructs a road that the coming of the automobile may render useless. The producer of phonographs may lose his market to the radio. So it is the world over. Every branch of business enterprise faces not only risks that are the common lot, but also risks that are peculiarly its own.
These risks are of such scope and magnitude that at times they are successfully encountered by fewer than half our organized business enterprises. Indeed, over half the concerns engaged in trade, and over three quarters of those engaged in mining and quarrying, reported deficits. In the manufacturing group, only thirty-seven thousand succeeded in closing the year with any net income; more than forty-two thousand did not succeed. The total deficit of all the corporations that reported no net income was nearly four billion dollars.
What induced these corporations to carry on enterprises which yielded them, as a reward for a full twelve months of effort, nothing but this huge deficit? All the reporting corporations, the successful and the unsuccessful, ran the risk of suffering losses in the hope that they might make profits. Both the losses and the profits resulted from taking risks. No business man is ever free to decide whether he will or will not escape these dangers. He can usually choose among risks; but choose he must. Profit is his reward for choosing wisely.
A profit economy is indefensible, it is said, because profits are 'something for nothing.' 'What happens,' says Professor Harry F. Ward, 'when the net surplus of an enterprise is appropriated as profit by one participant or set of participants is that they have secured an advantage over the others and thereby obtained something for nothing. These are the essential elements in profit.' Here we have a fundamentally false assumption. Any discussion based upon it is necessarily misleading. The essential element in profit is not the acquisition of something for nothing, but the reward for risk. He who lends what he owns -- machines, buildings, money wherewith to buy them, money to advance as wages, in short, capital in any form -- contributes something and runs the risk of losing it. If, instead of losing what he thus lends, he gains a profit, it cannot be said that he has obtained something for nothing.
A farmer who lends his tractor or his money to a neighborhood enterprise, and receives part of the income as a reward, knows that he is not receiving something for nothing. An engineer who deposits his savings in a Brotherhood bank does not regard the interest he receives as something for nothing. There is no essential difference between lending a man capital goods and lending him the money wherewith to buy capital goods. And there is no essential difference between lending to one man and lending to an organization of men. Nor does it matter whether the organization is called a bank, or a coöperative society, or a corporation. In every case there is risk of loss. To induce any one to take that risk, there must be a prospect of gain. If the gain is realized, it is not 'something for nothing'; it is a reward for risk-bearing. And every business man must run risks.
Every woolen manufacturer, for example, must buy wool. If he buys wool today, he may buy on a falling market; if he does not buy today, he may be forced to buy later at a ruinous price. If he borrows money in order to buy wool, he may not be able to pay the interest; if he postpones buying, he may not be able to get the wool. Again, he must either use what equipment he has, or supplant it with new; and either course may enable competitors to undersell him. If he invests in advertising, he may fail to get his money back; if he does not advertise, he may fail to sell his product. If he opens new mills where labor costs are lower, he may incur expenses which more than offset the gains; if he stays where he is, producers in more favored localities may take away his customers. He may allow his credit department to cut down the risk of bad debts at too great a loss of sales; on the other hand, he may allow his sales department to extend his markets at too great a risk of bad debts. Every day he must make decisions. Always they are decisions to run certain risks instead of others. Postponing a decision is itself a risk. In short, every business man is beset on all hands by risks; if he runs away from some, he is sure to run into others.