Reducing Risks Tends to Reduce Profits and Losses
From now on we shall have much to say about desirable ways of reducing profits. We mean the exceptionally high profits of individual concerns. In general, whatever prevents such profits tends to prevent correspondingly large losses, and to benefit business as a whole. Risks which give rise to exceptionally high rates of profits for individual concerns should be curbed wherever practicable, not only because such rates are socially undesirable, but also because they interfere with business enterprise as a whole.
Since the profits and the losses of business enterprise are the outcome of risks that have been taken, it follows that whatever reduces risks tends to reduce both profits and losses. The Great Atlantic and Pacific Tea Company, for example, narrows the range of its risks by scientific cost accounting, by selling only for cash, by investing very little in each of its stores, by carrying nothing but staple commodities, and by freeing itself from dependence on the trade of any one locality. Thus the company makes less than four cents of profit on each dollar of sales; but, as the records show, it has little danger of loss. The ordinary grocer, on the other hand, through incurring far greater risks, has a better chance of making a larger percentage of profit on his sales; but, as the records show, he is in far greater danger of making no profit at all.
Conversely, whatever increases the risks of business enterprise tends to increase both profits and losses. At the present time, for example, men customers are increasing the risks of shoe manufacturers and shoe dealers by purchasing new styles. In this automobile age, when men seem to care more about the appearance of their feet and to use them less, there is a decreasing demand for the staple lines of heavy shoes that used to be produced in large quantities, year in and year out, and an increasing demand for innovations. As a result, manufacturers take greater risks in producing the new styles, retail dealers take greater risks in stocking their shelves, consumers necessarily pay more for their shoes, and profits and losses are greater than they would otherwise be.
It is a matter of common observation that profits and losses are likely to be great where uncertainty is great in million-dollar film productions, for example, in the construction of buildings where strikes are imminent, in the summer hotel business, and in the development of oil properties. Profits and losses on women's hats are much larger than on men's hats because of the greater difficulty in forecasting demand. Grocery stores show a small percentage of profit on sales of staple articles, such as sugar and salt, the demand for which is constant, and a large percentage of profit on sales of fancy goods and perishable products, such as caviar and strawberries. Since profits and losses are due to risks, and risks are due to uncertainties, it follows that the chief way to reduce profits and losses is to reduce uncertainties.
Knowledge and Publicity Reduce Profits and Losses
This requires, first of all, increased knowledge. We should have more accurate and more nearly complete statistics concerning stocks of goods on hand, current and contemplated output, planting intentions, contracts awarded, building construction, sales, prices, wages, employment, consumers' purchasing power, savings, and other factors that cause fluctuations in consumer demand. Various other statistical data which summarize current economic conditions should be so improved and extended as to increase our knowledge of what is going on now and what is likely to occur in the future.
If the first necessity for reducing the uncertainties of business enterprise is increased knowledge, the second necessity is publicity for such knowledge as we have. Indeed, of all the available means of reducing profits and losses, the one that transcends all others in effectiveness is widespread distribution of dependable information. The more accurate information we have concerning realized profits and the prospect of profits, and the wider the distribution of this information, the smaller are the chances of large profits or large losses.
Yet, as a rule, business has been conducted in the dark. Business men have jealously guarded information about their undertakings, particularly about their profits. They have regarded secrecy as a legitimate, indeed, a necessary, business asset. But private enterprise is not justified in withholding information, the circulation of which would reduce the excesses of business cycles, the resultant loss to society, and the cost of supplying the needs of the community at all times. Compulsory publicity is justifiable because public welfare requires effective competition, and effective competition thrives in the light. Indeed, one of the chief motives of secrecy is to render effective competition impossible.
Publicity, moreover, limits the field of fraudulent enterprise, a field in which the risks, and consequently profits and losses, are very large. Instances are numerous and well known. The regulation of stock exchanges and the requirement of detailed, certified statements in connection with the listing of securities have done much to prevent profits and losses due to fraud. Compulsory publicity has had similar results in the banking business and in the insurance business. The laws which require manufacturers to list ingredients on the labels of certain products have cut off opportunities for profits and losses in some objectionable enterprises. And it is well known that, among the railroads, publicity has helped to do away with certain forms of risk-taking that once were common. Those who invested in stock of the New York, New Haven and Hartford Railroad Company, at prices ranging as high as $279 per share, have not received a dollar in dividends since 1913. Adequate publicity concerning the financial operations of the road would have helped to prevent these losses. 'Sunlight is said to be the best of disinfectants; electric light, the most efficient policeman.'
The more the business world knows about dangers ahead, the less dangerous they are. A storm that is accurately predicted' does not wreck many ships. When farmers know from reports concerning intentions to plant that there is danger of too large an acreage of corn, some of them change their plans. When manufacturers know that there is likely to be a shortage of silk, they husband their supplies, revise their production schedules, prepare to use substitutes, curtail commitments for future delivery, and in various other ways forestall the anticipated trouble. In short, if extraordinary happenings in the business world are clearly seen in the offing, they are not likely to occasion either extraordinary profits or extraordinary losses.
Such of the profits and losses in the purchase and sale of investment securities as are due to changes in the real value behind the securities cannot be reduced by means of publicity; but the profits and losses that result from this kind of trading are due in part to deception. If all investors had complete knowledge concerning values, obviously bonds and stocks would seldom be sold for more or less than they were worth. Complete knowledge is humanly impossible; but increased knowledge is always possible. The more investors know about the factors that determine values, the smaller will be the chances of profit and loss.
Nowhere do we find more timely, persistent, and intelligent efforts to forecast business conditions than among professional speculators. Every event of any concern to the business world, they seek to discount in advance. Consequently, it is precisely where speculation is most highly organized that the means are perfected for pooling promptly the most extensive and dependable information. Thus, to the extent that speculation reduces uncertainties, it tends to reduce profits and losses.
Publicity Reduces Profits and Losses by Promoting Sound Management
One of the reasons why publicity tends to reduce profits and losses is that it is a constant incentive to sound management. It is in accord with all we know about human nature that men should be willing to take risks in secret which they would not be willing to take in the open. This applies to men of integrity as well as to others. When men are aware that their activities are to be promptly known and appraised by the public, they are likely to take greater care in the selection of risks. If the public knew as much as it ought to know concerning costs and profits, some kinds of risks would not be assumed at all. As Mr. Tawney says concerning revelations of bewildering profit and waste in British industry: 'If the full facts had been published, as they should have been, quarter by quarter, these revelations would probably not have been made at all, because publicity itself would have been an antiseptic and there would have been nothing sensational to reveal.' The fact that banks are now conducted, as a rule, on such sound business principles and lose so little from bad risks, is unquestionably due in part to the publicity required by law. Under constant scrutiny, banks are compelled to exercise constant care.
Business Statistical Agencies Reduce Risks
The various business statistical agencies that have been organized by private enterprise have reduced risks through reducing ignorance. By throwing light on what has gone on in the world of commerce and finance, what is going on, and what is projected, they have given business men a better basis for forming their own judgments. By furnishing dependable information concerning building permits, for example, they have helped such concerns as the American Radiator Company to plan production schedules. Though these agencies have been conducted on a commercial basis, and have intended their information for the sole benefit of subscribers, they have nevertheless, on the whole, promoted the public welfare by helping to limit the range of business profits and losses.
Their subscribers, it is true, have used these services in the hope of increasing their profits; and some of them have succeeded. The net effect of all these services, however, has been to reduce those business profits and losses which are due to ignorance; and this social benefit will increase as these services increase in number, in wisdom, and in patronage. The more successful they are, the less value they will be to certain of their individual subscribers and the greater value to society. From the standpoint of society, large profits are less to be feared than large losses; but both are undesirable. As a matter of fact, the chief service of forecasting agencies is not in enabling certain individuals to make larger profits than others, but in distributing information that reduces the risks of all, and thus makes both large profits and large losses fewer than otherwise they would be.
Fortunately, these sources of information are increasing in number, in reliability, and in use. Among them are Government departments, university bureaus, chambers of commerce, scientific societies, journals of commerce, trade associations, statistical departments of banks and corporations, as well as professional statistical agencies.
It is natural that these services should have been undertaken first by private initiative. That is the familiar story of progress in medicine, in education, in insurance, and in human affairs generally. Private enterprise experiments; leads the way; proves its case. In the public interest, however, statistical services should be free of charge; for the wider the distribution of such services, the greater their value. The individual, as a rule, seeks confidential information that will give him an advantage over those who have it not; but the State seeks equal advantages for all. So it seems unfortunate that universities should feel obliged to charge large fees and thus limit the social value of the admirable economic services which they have recently developed.
These Services are Proper Functions of the Govermnent
It is, then, sound public policy to reduce business risks; and the chief means of reducing risks is through spreading accurate information as widely as possible. This is a function for which the Government is well qualified. Public education is primarily a function of the State; and the greater the success of the State in collecting and distributing information concerning all the factors which determine business profits and losses, the smaller they will be.
As no Government is qualified to take over the functions of price, no Government should attempt to regulate individual prices. But regulation of profits necessitates regulation of prices. Clearly, then, direct regulation of profits by the Government -- except in cases of monopoly where prices are also regulated -- is beyond the bounds of possibility. But as profits and losses spring largely from ignorance, it would be possible to eliminate them if the Government could make all its citizens omniscient. This the Government cannot do; but there is much that it can and should do. For the protection of all who travel on the seas, the Government now maintains geodetic services, weather forecasting stations, and lighthouses; no one sells confidential information concerning rocks and shoals and the approach of storms. It is just as clearly in the public interest for the Government to maintain business lighthouses, and to chart the rocks and shoals of commercial seas.
In this way the State should seek to relieve business men from uncertainties, thus enabling them to devote themselves more effectively to the creation of wealth. In the past, unfortunately, the success or failure of men engaged in manufacturing, in transportation, and in agriculture, has depended more upon their skill as prophets than upon their industry as producers. In view of the fortunes and the failures that have been due to the cornering of information that should have been made public, it is not surprising that many men have sought the complete overthrow of the present economic order. Of all the available measures for counteracting the propaganda of revolutionary radicals, none can accomplish more than the right kind of Government reporting of business conditions.
Various Govemment Reports Now Tend to Reduce Profits and Losses
Some such reporting we already have. The services of the Bureau of Agricultural Economics, for example, although naturally they have aroused opposition, and though necessarily they have been less valuable in the experimental period than they are certain to become if the Bureau remains free from partisan, political interference, and free from the obstructions of short-sighted profitseekers, have done much to decrease the risks and therefore the wide fluctuations in the profits and losses of farmers and dealers in farm products. Chief among the means employed by the Bureau for this purpose are crop estimates, standardization of products, shipping-point inspection, market inspection, and market news service. The crop estimates, which are issued by the Bureau at stated intervals, give information regarding present and prospective supplies, and thus enable farmers to reduce the extraordinary profits and losses that go with underproduction and overproduction of the great staple and perishable crops.
Standardization of raw products and of the containers in which perishable products are shipped reduces the risk of sending to market what the market does not want. Standardization also facilitates safe buying at a distance, safe use of quotations, safe use of market news, and thus, especially on perishable products, reduces risks all along the line. Shipping-point inspection prevents shipment of much produce that would not reach market in good condition, drives home the necessity for standardization, and lessens such shipping risks as wastes
and decay in transit and the arrival at market of produce that cannot be sold at a profit. Market inspection reduces the risk of sharp practice at both ends of the line, by reducing the risk of shipment of undesirable produce and the risk of unfair rejections by dealers. Market news service, by telegraph, radio, and mail, informs both shipping areas and receiving markets regarding immediate and prospective supplies, the condition of supplies at shipping points and in large markets, probable demand and probable prices. All this helps to prevent the large profits and large losses which are due to the simultaneous glutting of some markets and under-supplying of others. This market news service, by thus bringing supply and demand together and curbing price fluctuations of individual products, does more than any other single agency could do to reduce the risks that inevitably attend the marketing of perishable agricultural products. Thus the spread of information by a Federal agency reduces the spread of profits and losses.
The Department of Commerce has promoted the general welfare in similar ways. Secretary Hoover holds that the collection and distribution by trade associations of 'current, unidentified information and statistics as to production, stocks on hand, and prices on closed transactions should be permissible, providing that it is all made available on fair terms, not only to the association members, but to all others interested, including the general public.' Accordingly, the Department of Commerce has developed methods of coöperation with trade associations 'under which the association's secretary collects and compiles unidentified, current information and distributes it to the members, simultaneously sending identical reports to governmental agencies, competitors of the association's members, and to any other person who arranges for them.' The Federal Reserve Board also helps by issuing valuable reports concerning monetary aspects of business. In so far as all these Federal services tend to make competition freer and to prevent mistakes due to ignorance, they tend to reduce profits and losses.