Various Sources of Profits
We cannot hope to arrive eventually at any dependable answer to the question to what extent various profitmaking enterprises result in economic gain or loss to the community, unless we start with an analysis of the sources of profits. Evidently they are many and various. Evidently they have different effects on human welfare. Nobody contends that the profit-making ventures of the manufacturers of 'Shredded Wheat Biscuit' and the manufacturers of the 'Guaranteed Cancer Cure' are equally good from the social standpoint. Nobody either condemns or condones, on the same grounds, the profits of bootleggers and bootblacks.
For practical purposes, therefore, we must distinguish carefully among various ways of making profits. No matter what our views may be concerning the established money and profit economy, no matter what social programs we may seek to defend or discredit, we shall do well to take as fully into account as possible the diverse nature and consequent diverse effects of multifarious profit-making enterprises. And we shall find that it is necessary, for this purpose, not only to consider the origin of profits, but also to study the factors that account for the varied fortunes of different concerns in the same type of industrial endeavor. This may help us to avoid those fallacies which result, in every branch of learning, from lumping together indiscriminately things which, for the purpose at hand, are essentially different.
Sources of Income
Money spent for commodities to be consumed is the force that moves all the wheels of industry. Sustained business prosperity, therefore, depends primarily on the right flow of money into consumers' hands.Individual consumers derive their money incomes from the following sources: Wages and salaries (of employees)
Wages of management (of entrepreneurs)
Government payments (wages, salaries, pensions, bonuses, interest, etc.)
Insurance payments (annuities, etc.)
Gifts
Inheritance
Fraud (theft, forging, graft, etc.)
Gambling
Interest
Rents and royalties
Profits (of entrepreneurs)
Dividends (paid by corporations)
From all the other sources of consumers' income in this list, we have separated profits of entrepreneurs and dividends paid by corporations, because these two sources are the center of our present interest.
Sources of Profits
Profits result from many factors, among them low costs of production, low costs of distribution, and increases in the prices of commodities, land, securities, and franchises.
Profits are made in many ways, among others in connection with financing by banks, by trust companies, and by investment houses; selling commodities, securities, royalties, patents, and land; services of physicians, attorneys, and entertainers; insuring; and transporting.
In order that there may be any profits, demand must be large enough in volume and high enough in price. Among the factors which determine the demand for a given commodity or service are the following: habit, fashions, social customs, taboos, superstitions, wars, earthquakes, floods, pests, weather, climate, purchasing power of consumers, bodily needs, education, religion, population, and advertising.
Some profits are due to relatively low costs of production enjoyed by certain producers on account of advantages over their competitors with respect to capital facilities, transportation facilities, geographical location, community growth, ownership of raw materials, ownership of patent rights and processes, size of business, labor supply, and management.
Evidently the factors which determine profits are many, various, elusive, often fortuitous. This outline, though only a beginning, is enough to suggest the great complexity of the subject, and the impossibility of setting up a just defense or indictment of a profit economy on the basis of a simple analysis of sources of income.
Income from doing and Income from Owning
To base the indictment on the distinction between 'income from doing' and 'income from owning,' as the Webbs have done in The Decay of Capitalist Civilization, is to take no account of a far more important distinction. In our view, the main issue does not arise out of the distinction between income from owning and income from doing. Rather, it concerns the effect on social welfare of various ways of making a living, whether by doers, or by owners, or by the members of the largest economic group of all, including the farmers, who are both doers and owners. If human welfare is our aim, our chief concern over income is not its source, but its effect. It matters little how much of Mr. Henry Ford's income is from owning and how much from doing. It matters greatly what the net result is in human welfare. No economic fact thrusts itself more insistently and more disagreeably upon our attention than that some doers gain large incomes by means of anti-social activities. On the other hand, no fact is more patent than that some profitmaking owners use their property for the good of society. When, however, all rent, interest, and profits are thrown into one category and indiscriminately condemned as rewards for mere owning, that distinction is lost which transcends all others in importance.
Economical and Uneconomical Sources of Income
As a matter of fact, it is exceedingly difficult to divide all income-producing activities into those which are beneficial and those which are injurious to society. The following attempt (see page 40 ) illustrates the difficulty.
This is a suggestive analysis of sources of income. It is not, however, a logical classification. Some of the activities that are listed as 'destructive' are not always subversive of the material welfare of mankind; and some of those that are listed as 'economical' are at times opposed to material welfare. What is commonly called the adulteration of goods, for example, is sometimes, from the viewpoint of society, a net economic gain. To save the wool from rags that would otherwise be wasted and make it available for new cloth, whether we call the product 'shoddy' or re-worked wool, is to increase the community wealth. Again, no matter what we may think about monopolies in general or the necessity of legal restraint, the facts will not permit us to classify all monopolies as destructive. Some of them have resulted in larger output and lower unit prices than would have resulted from freer competition.
Similar difficulties confront us when we attempt to place 'marrying wealth' and 'inheriting wealth' among the ways of getting a living. From the community standpoint, they are never 'neutral.' Sometimes they result in economic gain, sometimes in economic loss. This is also the case with industries and services. Not all mining companies produce as much wealth as they destroy. Not all hunting and fishing and farming is 'economical.' Even the income-yielding services that belong in the categories of healing, teaching, inspiring, governing, and amusing are in part destructive. Some of them are as properly called swindling as the operation of bucketshops. They may be even more injurious to society, economically, than piracy and plunder. In short, whenever we group large numbers of individual enterprises under such general categories, we inevitably throw together some activities that promote and some that obstruct economic progress.
We do know that, at least in the United States, the combined result of all these activities, uneconomical and economical, is larger per capita wealth and larger per capita real income than we used to have; but we do not know how many of the individual enterprises, in manufacturing and in merchandising, for example, should be bracketed as destructive and how many should be bracketed as constructive. Evidently, it is not easy to classify all sources of income, individual and corporate, with reference to their effect on economic welfare. Certainly, we cannot do so by calling all income from doing beneficial to society and all income from owning injurious.
Profits May Be Due to Chance
If a man wins by staking his money at Palm Beach on the fall of the cards, his gains are not profits, according to our use of the term. Some of the gains, however, that are properly called profits result, like the gains of gamblers, wholly from chance; that is, from occurrences wholly beyond the control or prediction of those who benefit by them. Such are the profits of a man who buys a ranch, with no thought of using it or selling it for anything but a ranch, and then finds that it is rich in oil. In the same category belong the exceptional gains of the man who, just before a declaration of war, buys ships for use in ordinary trade channels, and then sells them for transports of war. Most of the profits which result from a rising price-level, as we shall see presently, are profits of chance. Indeed, every one has observed men who profit from 'bull luck.' Every one knows not only of men who sow where they do not reap, but also of men who reap where they do not sow.
All profits result partly from chance. This truth is not so commonly observed. It is easy to see that some profits owe their origin solely to sheer luck; but it is not so obvious that there are no profits due solely to sheer merit. As a matter of fact, it is not possible to find a business success which can be wholly ascribed to the labor, ability, wisdom, and devotion of those who have it in charge. The outcome of every enterprise is to some extent dependent on changes in weather, population, tastes, legislation, and other factors which those responsible for the undertaking can neither control nor accurately forecast. All business is subject to some of these risks, and all profits and losses result from taking risks.
 More Readings |
