Online Library of Liberty: Economics, vol. 1: Economic Principles

advance, but often they are only partially specialized and within limits they can be adapted. Sewing-machine factories were readily turned to the making of bicycles at the time of greatest demand, and bicycle factories later were used for the making of automobiles. Thus, in general, machinery is used for the product in which it can realize its highest value. Any enterprise seeking it for any other use finds its “cost” affected by its various alternative uses. The same is true of all the materials and of all the grades of labor entering into products. The enterpriser’s cost is therefore the reflection of the ultimate prices of the productive agents in all its other uses as well as in the particular product he desires.

§ 12. Cost an expression of consumers’ estimates. It appears that within the limits of monopoly control prices may be fixed without reference to the costs in the particular enterprise. Even a monopoly, however, is limited by costs, in the range of its price fixing. When cost does appear as the limiting influence in the price of a particular product, the cost is itself fixed by a larger group of influences, the demand for the factor in the totality of its uses. Wherever cost asserts itself the enterpriser must bow to the situation, and must conform closely to costs or suffer a loss. The consumer by deciding to buy this or that product sets into motion waves of value. The enterpriser transmits these to the factors. He is the medium through which consumers express their estimates. The enterpriser who anticipates aright and satisfies the public taste is the good medium. He readily transmits and accurately focuses the rays of public judgment. The enterpriser who misjudges is a poor medium. The one realizes profits, the other incurs a loss.

Notes

On other meanings of profit. It is well to note for caution’s sake other loose uses of profit as any gain or advantage secured by any means in business. In retail business it has the meaning of the gross gain on a given sale, the excess of the selling price over the price at which the merchant bought it from manufacturer or wholesaler. Let us call this sale-profit. Buying an article for one dollar and selling it for two dollars, is said by the merchant to be selling at 100 per cent profit, jocularly called, “The Dutchman’s one per cent.” In different lines of goods there is added regularly to this cost 20, 30, or 50 per cent, as the case may be, as the merchant’s profit on the sale. Sale-profit leaves out of account rent, interest on capital, clerk hire, freight, and many other minor items that enter into the cost of running a store. It often happens that the Dutchman’s way of reckoning is near the truth, and that the sale-profit of 100 per cent leaves at the end of the year hardly 1 per cent of the sales as a true income to the merchant. This meaning is sometimes developed to a yearly sales-profit, the sum of all the separate sale-profits within a year, or the difference between the wholesale and retail prices of goods sold within the year.

Another meaning is given to the term by expressing yearly sales-profits as a percentage of the capital invested. The rate of profit in this case varies partly with the rate of the turnover. To illustrate: if the amount invested in a printing-office is $100,000, and the annual business done is $300,000, the capital is said to be turned over three times; if the yearly sales-profit were 20 per cent, the ratio of sales-profit to investment would be 60 per cent; but, if the capital had been turned over four times,

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Online Library of Liberty: Economics, vol. 1: Economic Principles

the rate would have been 80 per cent on the investment. In none of these cases is profit used truly as an income.

The source and cause of profits in economic writings. Profits, as used by the English economists from Adam Smith (“Wealth of Nations,” 1776) to John Stuart Mill (“Principles of Political Economy,” 1848) and after, was the residual amount combining the incomes attributable to the personal management together with the capital-investment. These functions were assumed without discussion to be united in one person, as they usually were, stock companies at that time being rare outside of banking and foreign trading companies. The capital-income was assumed to be much the larger part and there was almost no thought of the varying degrees of ability in management as affecting the result. Hence profits in the older English economics often means nearly the same as yield from capital, peculiarly the income of the capitalist; tho usually it means this plus an allowance for risk and services of management. “Normal” profit was thought of as varying from one class of business to another but not very clearly as varying from one establishment to another.

Then the pendulum swung in the other direction and some writers, notably the American, Francis A. Walker, made profit mean almost solely the earnings of management, it being assumed that financial resources naturally rolled into the possession of able business managers. But, as it was assumed that they always had some capital themselves, the concept of profit still had a dual character. Capitalists were thought of as always getting a contractual income, interest, whereas the entrepreneur got an income varying from zero (or a minus quantity) upwards, according to his skill in management.

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