Profits Are Sometimes Losses
First of all, we should note again the crucial fact that in any given year many business ventures do not realize any profits at all. This fact has a bearing on every problem with which we shall be concerned in the following chapters. In considering what kind of public control should be exercised over business as a whole, or over a particular industry, to what extent governments should regulate prices and profits, how long an income period should be taken for computing taxes, and what proportion of private income should be appropriated for public use, we must not overlook the possibility that in any given year the profits of a given concern may be a minus quantity. That possibility seems obvious; every day has its record of passed dividends and business failures.
Yet the system which occasions these losses is called a profit economy,' never a 'profit and loss economy'; and when that system is indicted, the minus side of the account is usually ignored. Much of our proposed industrial legislation and some of our existing laws also ignore the possibility of business losses, or are framed on the tacit assumption that in any given year a corporation need have no anxiety either over losses suffered in the past or losses that may be suffered in the future. Thus mistakes have been made in matters of paramount economic importance -- the levying of profits taxes, for example, the fixing of legal minimum wages, and the regulation of railroad rates. Public policy cannot be sound until it takes fully into account the nature, extent, and consequences of business losses.
If we start with the assumption that winds blow only in one direction, we can develop an extraordinary theory of aeronautics; but it may not help us to fly. Upon the assumption that business is always conducted at a profit, or can be so conducted, we can construct in imagination an extraordinary industrial society; but it will not work. We cannot understand what will work -- what is going on in business, or why, or what we can sensibly do about it -- unless we grasp the full significance of these facts: that as long as consumers have freedom of choice, losses are inevitable; that no concern can possibly tell in advance how much money it will make or lose; that in any given year the profits of some concerns are offset by the losses of others; that paper profits do not always turn out to be real profits; and that the large losses of a given concern in certain years must be more than made up by large profits in other years, or eventually the concern must go to the wall.
Business losses are enormous. Annually, in the United States they amount to several billion dollars. These losses can be greatly reduced; but in a living society they cannot be eliminated. Some of these losses are the price we have to pay for progress. Sometimes all that is invested in getting ready to patent a new process, or to manufacture a new air brake, or to publish a new encyclopedia is a total loss because somebody reaches the market first with a better product. Corner grocers fail because chain stores and mail-order houses develop cheaper methods of distribution. Mines are abandoned because richer mines are discovered. Machines are scrapped because more efficient machines are invented. Ships rot at the wharves because faster ships take their places. Textbooks are discarded because better books are written. Such losses could be avoided only in a static society. As long as consumers have freedom of choice, and private enterprises are free to compete for their patronage and to create new desires, and individual initiative is encouraged by the prospect of profits, business must run risks and suffer losses.
Somebody must pay these losses. In the present industrial order they are paid largely by a small proportion of the population, as a penalty for their failure to compete successfully in the struggle for profits. In a different industrial order this problem would appear in different guise, but it would still be a problem. Radical reformers overlook it in theory, but they could not in practice. Under communism many of the risks discussed above would remain, and others would be added. Furthermore, at least some economic activities would be as badly managed as they are today. Society would suffer thereby just as much as though the net results of inefficient management were called business losses. In a communistic State such losses, now borne by comparatively few individuals, would be distributed, theoretically, over the entire population.
In a State which operated only a few of its industries, free from competition, the problem might be solved for these industries by fixing prices on a monopoly basis, or by paying deficits out of tax receipts; that is to say, by appropriating for the use of State enterprises whatever was needed of the profits realized by private enterprises. Thus, the United States Government covered the losses due to its management of the railroads. But no government could operate all industries in this way. In some form or other, the problem of vast business losses would persist in any conceivable, progressive, industrial order.