Principles of Economics
By Alfred Marshall
Economic conditions are constantly changing, and each generation looks at its own problems in its own way. In England, as well as on the Continent and in America, Economic studies are being more vigorously pursued now than ever before; but all this activity has only shown the more clearly that Economic science is, and must be, one of slow and continuous growth. Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them…. [From the Preface to the First Edition]
First Pub. Date
London: Macmillan and Co., Ltd.
The text of this edition is in the public domain.
- Appendix A
- Appendix B
- Appendix C
- Appendix D
- Appendix E
- Appendix F
- Appendix G
- Appendix H
- Appendix I
- Appendix J
- Appendix K
PROFITS OF CAPITAL AND BUSINESS POWER, CONTINUED.
BOOK VI, CHAPTER VIII
§ 1. The causes that govern Earnings of Management have not been studied with any great care till within the last fifty years. The earlier economists did not do much good work in this direction because they did not adequately distinguish the component elements of profits, but searched for a simple general law governing the average rate of profits—a law which, from the nature of the case, cannot exist.
In analysing the causes that govern profits the first difficulty which we meet is in some measure verbal. It arises from the fact that the head of a small business does himself much of the work which in a large business is done by salaried managers and foremen, whose earnings are deducted from the net receipts of the large business before its profits are reckoned, while the earnings of the whole of his labour are reckoned among his profits. This difficulty has long been recognized. Adam Smith himself pointed out that:—”The whole drugs which the best employed apothecary in a large market-town will sell in a year may not perhaps cost him above thirty or forty pounds. Though he should sell them, therefore, for three or four hundred, or at a thousand per cent. profit this may frequently be no more than the reasonable wages of his labour charged in the only way in which he can charge them, upon the price of the drugs. The greater part of the apparent profit is real wages disguised in the garb of profit. In a small seaport town a little grocer will make forty or fifty per cent. upon a stock of a single hundred pounds, while a considerable wholesale merchant in the same place will scarce make eight or ten per cent. upon a stock of ten thousand
It is here important to distinguish between the
annual rate of profits on the capital invested in a business, and the rate of profits that are made every time the capital of the business is turned over; that is, every time sales are made equal to that capital, or the rate of profits
on the turnover. At present we are concerned with profits
The greater part of the nominal inequality between the normal rates of profit per annum in small businesses and in large would disappear, if the scope of the term profits were narrowed in the former case or widened in the latter, so that it included in both cases the remuneration of the same classes of services. There are indeed some trades in which the rate of profit, rightly estimated, on large capitals tends to be higher than on small, though if reckoned in the ordinary way it would appear lower. For of two businesses competing in the same trade, that with the larger capital can nearly always buy at the cheaper rate, and can avail itself of many economies in the specialization of skill and machinery and in other ways, which are out of the reach of the smaller business: while the only important special advantage, which the latter is likely to have, consists of its greater facilities for getting near its customers and consulting their individual wants. In trades in which this last advantage is not important, and especially in some manufacturing trades in which the large firm can sell at a better price than the small one, the outgoings of the former are proportionately less and the incomings larger; and therefore, if profits are so reckoned as to include the same elements in both cases, the rate of profit in the former case must be higher than in the latter.
But these are the very businesses in which it most frequently happens that large firms after first crushing out small ones, either combine with one another and thus secure for themselves the gains of a limited monopoly, or by keen competition among themselves reduce the rate of profit very low. There are many branches of the textile, the metal, and the transport trades in which no business can be started at all except with a large capital; while those that are begun on a moderate scale struggle through great difficulties, in the hope that, after a time, it may be possible to find employment for a large capital, which will yield earnings of management high in the aggregate though low in proportion to the capital.
There are some trades which require a very high order of ability, but in which it is nearly as easy to manage a very large business as one of moderate size. In rolling mills, for instance, there is little detail which cannot be reduced to routine, and a capital of £1,000,000 invested in them can be easily controlled by one able man. A rate of profits of 20 per cent. is not a very high average rate for some branches of the iron trade, which demand incessant thought and contrivance in matters of detail: but it would yield £150,000 a year as earnings of management to the owner of such works. And even stronger cases are offered by recent fusions of giant firms in successive branches of the heavy iron industry. Their profits fluctuate much with the state of trade: but, though enormous in the aggregate, they are said to be on the average at a low rate.
The rate of profits is low in nearly all those trades which require very little ability of the highest order, and in which a public or private firm with a good connection and a large capital can hold its own against new-comers, so long as it is managed by men of industrious habits with sound common sense and a moderate share of enterprise. And men of this kind are seldom wanting either to a well-established public company or to a private firm which is ready to take the ablest of its servants into partnership.
On the whole, then, we may conclude firstly that the true rate of profits in large businesses is higher than at first sight appears, because much that is commonly counted as profits in the small business ought to be classed under another head, before the rate of profits in it is compared with that in a large business: and secondly that, even when this correction has been made, the rate of profit reckoned in the ordinary way declines generally as the size of the business increases.
§ 2. The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. The work of management may be heavy because it involves great mental strain in organizing and devising new methods; or because it involves great anxiety and risk: and these two things frequently go together. Individual trades have indeed peculiarities of their own, and all rules on the subject are liable to great exceptions. But the following general propositions will be found to be valid, other things being equal, and to explain many inequalities in the normal rates of profit in different trades.
First, the extent of the work of management needed in a business depends more on the amount of the circulating capital used than on that of the fixed. The rate of profit tends therefore to be low in trades in which there is a disproportionately large amount of durable plant, that requires but little trouble and attention when once it has been laid down. As we have seen, these trades are likely to get into the hands of joint-stock companies: and the aggregate salaries of the directors and higher officials bear a very small proportion to the capital employed in the case of railway and water companies, and, even in a more marked degree, of companies that own canals and docks and bridges.
Further, given the proportion between the fixed and circulating capital of a business; the work of management will generally be the heavier, and the rate of profits the higher, the more important the wages-bill is relatively to the cost of material and the value of the stock-in-trade.
In trades that handle costly materials, success depends very much upon good fortune and ability in buying and selling; and the order of mind required for interpreting rightly and reducing to their proper proportions the causes that are likely to affect price is rare, and can command high earnings. The allowance to be made for this is so important in certain trades as to have induced some American writers to regard profits as remuneration of risk simply; and as consisting of what remains after deducting interest and earnings of management from gross profits. But this use of the term seems on the whole not advantageous, because it tends to class the work of management with mere routine superintendence. It is of course true that as a rule a person will not enter on a risky business, unless, other things being equal, he expects to gain from it more than he would in other trades open to him, after his probable losses had been deducted from his probable gains on a fair actuarial estimate. If there were not a positive evil in such risk, people would not pay premia to insurance companies; which they know are calculated on a scale sufficiently above the true actuarial value of the risk to pay the companies’ great expenses of advertising and working, and yet to yield a surplus of net profits. And where the risks are not insured for, they must be compensated in the long run on a scale about as high as would be required for the premia of an insurance company, if the practical difficulties of insurance against business risks could be overcome. But further many of those who would be most competent to manage difficult businesses with wisdom and enterprise, are repelled from great risks, because their own capital is not large enough to bear great losses. Thus a risky trade is apt to get into the hands of rather reckless people; or perhaps into the hands of a few powerful capitalists, who work it ably, but arrange among themselves that the market shall not be forced so as to prevent them from having a high rate of profit on the average
In trades in which the speculative element is not very important, so that the work of management consists chiefly of superintendence, the earnings of management will follow pretty closely on the amount of work done in the business; and a very rough but convenient measure of this is found in the wages-bill. And perhaps the least inaccurate of all the broad statements that can be made with regard to a general tendency of profits to equality in different trades, is that where equal capitals are employed, profits tend to be a certain percentage per annum on the total capital, together with a certain percentage on the wages-bill
A manufacturer of exceptional ability and energy will apply better methods, and perhaps better machinery than his rivals: he will organize better the manufacturing and the marketing sides of his business; and he will bring them into better relation to one another. By these means he will extend his business; and therefore he will be able to take greater advantage from the specialization both of labour and of plant
*86. Thus he will obtain increasing return and also increasing profit: for if he is only one among many producers his increased output will not materially lower the prices of his goods, and nearly all the benefit of his economies will accrue to himself. If he happens to have a partial monopoly of his branch of industry, he will so regulate his increased output, that his monopoly profits increase
But when such improvements are not confined to one or two producers: when they arise from a general increase in demand and the output which corresponds to it; or from improved methods or machinery, that are accessible to the whole industry; or from advances made by subsidiary industries, and increased “external” economies generally; then the prices of the products will keep close to a level which yields only a normal rate of profits to that class of industry. And in the process, the industry is likely to have passed over to a class in which the normal rate of profits is lower than in its old class; because there is in it more uniformity and monotony, and less mental strain than before; and, though this is nearly the same thing in other words, because it is more suited to joint-stock management. Thus a general increase in the proportion which the
quantity of product bears to the
quantity of labour and capital in an industry is likely to be accompanied by a fall in the rate of profits; which may, from some points of view, be regarded as a diminishing return measured in
§ 3. We may now pass from profit per annum and examine the causes that govern profit on the turnover. It is obvious that while the normal rate of profit per annum varies within narrow limits, the profit on the turnover may vary very widely from one branch of trade to another, because it depends on the length of time and the amount of work required for the turnover. Thus wholesale dealers, who buy and sell large quantities of produce in single transactions, and who are able to turn over their capital very rapidly, may make large fortunes though their average profit on the turnover is less than one per cent.; and, in the extreme case of large stock-exchange dealings, even when it is only a small fraction of one per cent. But a shipbuilder who has to put labour and material into the ship, and to provide a berth for it, a long while before it is ready for sale, and who has to take care for every detail connected with it, must add a very high percentage to his direct and indirect outlay in order to remunerate him for his labour, and the locking up of his capital
Again, in the textile industries some firms buy raw material and turn out finished goods, while others confine themselves to spinning, to weaving, or to finishing; and it is obvious that the rate of profit on the turnover of one of the first class must be equal to the sum of the rates of profit of one of each of the three other classes
*90 Again, the retail dealer’s profit on the turnover is often only five or ten per cent. for commodities which are in general demand, and which are not subject to changes of fashion; so that while the sales are large, the necessary stocks are small, and the capital invested in them can be turned over very rapidly, with very little trouble and no risk. But a profit on the turnover of nearly a hundred per cent. is required to remunerate the retailer of some kinds of fancy goods which can be sold but slowly, of which varied stocks must be kept, which require a large place for their display, and which a change of fashion may render unsaleable except at a loss; and even this high rate is often exceeded in the case of fish, fruit, flowers and vegetables
§ 4. We see then that there is no general tendency of profits on the turnover to equality; but there may be, and as a matter of fact there is in each trade and in every branch of each trade, a more or less definite rate of profits on the turnover which is regarded as a “fair” or normal rate. Of course these rates are always changing in consequence of changes in the methods of trade; which are generally begun by individuals who desire to do a larger trade at a lower rate of profit on the turnover than has been customary, but at a larger rate of profit per annum on their capital. If however there happens to be no great change of this kind going on, the traditions of the trade that a certain rate of profit on the turnover should be charged for a particular class of work are of great practical service to those in the trade. Such traditions are the outcome of much experience tending to show that, if that rate is charged, a proper allowance will be made for all the costs (supplementary as well as prime) incurred for that particular purpose, and in addition the normal rate of profits per annum in that class of business will be afforded. If they charge a price which gives much less than this rate of profit on the turnover they can hardly prosper; and if they charge much more they are in danger of losing their custom, since others can afford to undersell them. This is the “fair” rate of profit on the turnover which an honest man is expected to charge for making goods to order, when no price has been agreed on beforehand; and it is the rate which a court of law will allow, in case a dispute should arise between buyer and seller
§ 5. During all this inquiry we have had in view chiefly the ultimate, or long-period or true normal results of economic forces; we have considered the way in which the supply of business ability in command of capital tends in the long run to adjust itself to the demand; we have seen how it seeks constantly every business and every method of conducting every business in which it can render services that are so highly valued by persons who are able to pay good prices for the satisfaction of their wants, that those services will in the long run earn a high reward. The motive force is the competition of undertakers: each one tries every opening, forecasting probable future events, reducing them to their true relative proportions, and considering what surplus is likely to be afforded by the receipts of any undertaking over the outlay required for it. All his prospective gains enter into the profits which draw him towards the undertaking; all the investments of his capital and energies in making the appliances for future production, and in building up the “immaterial” capital of a business connection, have to show themselves to him as likely to be profitable, before he will enter on them: the whole of the profits which he expects from them enter into the reward, which he expects in the long run for his venture. And if he is a man of normal ability (normal that is for that class of work), and is on the margin of doubt whether to make the venture or not, they may be taken as true representatives of the (marginal) normal expenses of production of the services in question. Thus the whole of the normal profits enter into true or long-period supply price.
The motives which induce a man and his father to invest capital and labour in preparing him for his work as an artisan, as a professional man, or as a business man, are similar to those which lead to the investment of capital and labour in building up the material plant and the organization of a business. In each case the investment (so far as man’s action is governed by deliberate motive at all) is carried up to that margin at which any further investment appears to offer no balance of gain, no excess or surplus of utility over “dis-utility”; and the price, that is expected as a reward for all this investment, is therefore a part of the normal expenses of production of the services rendered by it.
A long period of time is however needed in order to get the full operation of all these causes, so that exceptional success may be balanced against exceptional failure. On the one hand are those who succeed abundantly because they turn out to have rare ability or rare good fortune either in the particular incidents of their speculative enterprises, or in meeting with a favourable opportunity for the general development of their business. And on the other are those who are mentally or morally incapable of making good use of their training and their favourable start in life, who have no special aptitude for their calling, whose speculations are unfortunate, or whose businesses are cramped by the encroachment of rivals, or left stranded by the tide of demand receding from them and flowing in some other direction.
But though these disturbing causes may thus be neglected in problems relating to normal earnings and normal value; they assume the first rank, and exert a predominating influence, with regard to the incomes earned by particular individuals at particular times. And, since these disturbing causes affect profits and the earnings of management in very different ways from those in which they affect ordinary earnings, there is a scientific necessity for treating differently profits and ordinary earnings when we are discussing temporary fluctuations and individual incidents. Questions relating to market fluctuations cannot indeed be properly handled till the theories of money, credit and foreign trade have been discussed: but even at this stage we may note the following contrast between the ways in which disturbing causes such as we have just described affect profits and ordinary earnings.
§ 6. In the first place the undertaker’s profits bear the first brunt of any change in the price of those things which are the product of his capital (including his business organization), of his labour and of the labour of his employees; and as a result fluctuations of his profits generally precede fluctuations of their wages, and are much more extensive. For, other things being equal, a comparatively small rise in the price for which he can sell his product is not unlikely to increase his profit manyfold, or perhaps to substitute a profit for a loss. That rise will make him eager to reap the harvest of good prices while he can; and he will be in fear that his employees will leave him or refuse to work. He will therefore be more able and more willing to pay the high wages; and wages will tend upwards. But experience shows that (whether they are governed by sliding scales or not) they seldom rise as much in proportion as prices; and therefore they do not rise nearly as much in proportion as profits.
Another aspect of the same fact is that when trade is bad, the employee at worst is earning nothing towards the support of himself and his family; but the employer’s outgoings are likely to exceed his incomings, particularly if he is using much borrowed capital. In that case even his gross earnings of management are a negative quantity: that is, he is losing his capital. In very bad times this happens to a great number, perhaps the majority of undertakers; and it happens almost constantly to those who are less fortunate, or less able, or less well fitted for their special trade than others.
§ 7. To pass to another point, the number of those who succeed in business is but a small percentage of the whole; and in their hands are concentrated the fortunes of others several times as numerous as themselves, who have made savings of their own, or who have inherited the savings of others and lost them all, together with the fruits of their own efforts, in unsuccessful business. In order therefore to find the average profits of a trade we must not divide the aggregate profits made in it by the number of those who are reaping them, nor even by that number added to the number who have failed: but from the aggregate profits of the successful we must subtract the aggregate losses of those who have failed, and perhaps disappeared from the trade; and we must then divide the remainder by the sum of the numbers of those who have succeeded and those who have failed. It is probable that the true gross earnings of management, that is, the excess of profits over interest, is not on the average more than a half, and in some risky trades not more than a tenth part, of what it appears to be to persons who form their estimate of the profitableness of a trade by observation only of those who have secured its prizes. There are, however, as we shall presently see, reasons for thinking that the risks of trade are on the whole diminishing rather than increasing
§ 8. We may pass to another difference between the fluctuations of profits and ordinary earnings. We have seen that before free capital and labour have been invested in securing the skill required for the work of the artisan or professional man, the income expected to be derived from them is of the nature of profits: though the rate of such profits which is required, is often high for two reasons:—the people who make the outlay do not themselves reap the greater part of the reward arising from it; and they are frequently in straitened circumstances, and not able to invest for a distant return without great self-denial. And we have seen that, when the artisan or professional man has once obtained the skill required for his work, a part of his earnings are for the future really a quasi-rent of the capital and labour invested in fitting him for his work, in obtaining his start in life, his business connections, and generally his opportunity for turning his faculties to good account; and only the remainder of his income is true earnings of effort. But this remainder is generally a large part of the whole. And here lies the contrast. For when a similar analysis is made of the profits of the business man, the proportions are found to be different: in his case the greater part is quasi-rent.
The income which the undertaker of business on a large scale gets from the capital, material and immaterial, invested in his business is so great, and liable to such violent fluctuations from a considerable negative to a large positive quantity, that he often thinks very little of his own labour in the matter. If profitable business opens out to him, he regards the harvest accruing from it as almost pure gain; there is so little difference between the trouble of having his business on his hands only partially active, and that of working it to its full capacity, that as a rule it scarcely occurs to him to set off his own extra labour as a deduction from those gains: they do not present themselves to his mind as to any considerable extent earnings purchased by extra fatigue, in the same way as the extra earnings got by working overtime do to the artisan. This fact is the chief cause, and to some extent the justification, of the imperfect recognition by the general public, and even by some economists, of the fundamental unity underlying the causes that determine normal profits and normal wages.
Closely allied to the preceding difference is another. When an artisan or a professional man has exceptional natural abilities, which are not made by human effort, and are not the result of sacrifices undergone for a future gain, they enable him to obtain a surplus income over what ordinary persons could expect from similar exertions following on similar investments of capital and labour in their education and start in life; a surplus which is of the nature of rent.
But, to revert to a point mentioned at the end of last chapter, the class of business undertakers contains a disproportionately large number of persons with high natural ability; since, in addition to the able men born within its ranks it includes also a large share of the best natural abilities born in the lower ranks of industry. And thus while profits on capital invested in education is a specially important element in the incomes of professional men taken as a class, the rent of rare natural abilities may be regarded as a specially important element in the incomes of business men, so long as we consider them as individuals. (In relation to normal value the earnings even of rare abilities are, as we have seen, to be regarded rather as a quasi-rent than as a rent proper.)
But there are exceptions to this rule. The humdrum business man, who has inherited a good business and has just sufficient force to keep it together, may reap an income of many thousands a year, which contains very little rent of rare natural qualities. And, on the other hand, the greater part of incomes earned by exceptionally successful barristers, and writers, and painters, and singers, and jockeys may be classed as the rent of rare natural abilities—so long at least as we regard them as individuals, and are not considering the dependence of the normal supply of labour in their several occupations on the prospects of brilliant success which they hold out to aspiring youth.
The income of a particular business is often very much affected by changes in its industrial environment and opportunity or conjuncture. But similar influences affect the special income derived from the skill of many classes of workers. The discovery of rich copper-mines in America and Australia lowered the earning power of the skill of Cornish miners, so long as they stayed at home: and every new discovery of rich mines in the new districts raised the earning power of the skill of those miners who had already gone there. And again, the growth of a taste for theatrical amusements while raising the normal earnings of actors, and inducing an increased supply of their skill, raises the earning power of the skill of those already in the profession, a great part of which is, from the point of view of the individual, a producer’s surplus due to rare natural qualities
§ 9. Next let us consider in relation to one another the interests of different industrial classes engaged in the same trade.
This solidarity is a special case of the general fact that the demand for the several factors of production of any commodity is a joint demand, and we may refer back to the illustration of this general fact which is given in Book V. chapter VI. We there saw how a change in the supply of (say) plasterers’ labour would affect the interests of all other branches of the building trades in the same way, but much more intensely than it would the general public. The fact is that the incomes derived from the specialized capital and the specialized skill belonging to all the various industrial classes engaged in producing houses, or calico, or anything else, depend very much on the general prosperity of the trade. And in so far as this is the case they may be regarded for short periods as shares of a composite or joint income of the whole trade. The share of each class tends to rise when this aggregate income is increased by an increase in their own efficiency or by any external cause. But when the aggregate income is stationary, and any one class gets a better share than before, it must be at the expense of the others. This is true of the whole body of those engaged in any trade; and it is true in a special sense of those who have spent a great part of their lives in working together in the same business establishment.
§ 10. The earnings of a successful business, looked at from the point of view of the business man himself, are the aggregate of the earnings, firstly, of his own ability, secondly, of his plant and other material capital, and thirdly, of his good-will, or business organization and connection. But really it is more than the sum of these: for his efficiency depends partly on his being in that particular business; and if he were to sell it at a fair price, and then engage himself in another business, his income would probably be much diminished. The whole value of his business connection to him when working it is a notable instance of Conjuncture or Opportunity
value. It is mainly a product of ability and labour, though good fortune may have contributed to it. That part which is transferable, and may be bought by a private individual, or by a large amalgamation of firms, must be entered among their costs; and is in a sense a Conjuncture or Opportunity
The point of view of the employer however does not include the whole gains of the business: for there is another part which attaches to his employees. Indeed, in some cases and for some purposes, nearly the whole income of a business may be regarded as a quasi-rent, that is an income determined for the time by the state of the market for its wares, with but little reference to the cost of preparing for their work the various things and persons engaged in it. In other words it is a
composite quasi-rent*95 divisible among the different persons in the business by bargaining, supplemented by custom and by notions of fairness—results which are brought about by causes, that bear some analogy to those that, in early forms of civilization, have put the producer’s surplus from the land almost permanently into the hands not of single individuals, but of cultivating firms. Thus the head clerk in a business has an acquaintance with men and things, the use of which he could in some cases sell at a high price to rival firms. But in other cases it is of a kind to be of no value save to the business in which he already is; and then his departure would perhaps injure it by several times the value of his salary, while probably he could not get half that salary elsewhere
It is important to see how the position of such employees differs from that of others, whose services would be of almost equal value to any business in a large trade. The income of one of these in any week consists, as we have seen, partly of a recompense for the fatigue incurred by the work of that week, and partly of a quasi-rent of his specialized skill and ability: and, assuming competition to be perfectly efficient, this quasi-rent is determined by the price which either his present employers, or any other, would be willing to pay for his services in the state in which the market for their wares is during that week. The prices, that have to be paid for given work of a given kind, being thus determined by the general conditions of the trade, these prices enter into the direct outgoings which have to be deducted from its gross earnings in order to ascertain the quasi-rent of this particular firm at the time: but in the rise or fall of that quasi-rent the employees would have no share. In fact however competition is not thus perfectly efficient. Even where the same price is paid all over the market for the same work with the same machinery, the prosperity of a firm increases the chance of advancement for each of its employees, and also his chance of continuous employment when trade is slack, and much-coveted overtime when trade is good.
Thus there is
de facto some sort of profit-and-loss sharing between almost every business and its employees; and perhaps this is in its very highest form when, without being embodied in a definite contract, the solidarity of interests between those who work together in the same business is recognized with cordial generosity as the result of true brotherly feeling. But such cases are not very common; and as a rule the relations between employers and employed are raised to a higher plane both economically and morally by the adoption of the system of profit-sharing; especially when it is regarded as but a step towards the still higher but much more difficult level of true co-operation.
If the employers in any trade act together and so do the employed, the solution of the problem of wages becomes indeterminate; and there is nothing but bargaining to decide the exact shares in which the excess of its incomings over its outgoings for the time should be divided between employers and employed. Leaving out of account industries which are being superseded, no lowering of wages will be permanently in the interest of employers, which drives many skilled workers to other markets, or even to other industries in which they abandon the special earnings of skill; and wages must be high enough in an average year to attract young people to the trade. This sets lower limits to wages, and upper limits are set by corresponding necessities as to the supply of capital and business power. But what point between these limits should be taken at any time can be decided only by higgling and bargaining; which are however likely to be tempered somewhat by ethico-prudential considerations, especially if there be a good court of conciliation in the trade.
The problem is in practice even more complex. For each group of employees is likely to have its own union, and to fight for its own hand. The employers act as buffers: but a strike for higher wages on the part of one group may, in effect, deplete the wages of some other group almost as much as the employers’ profits.
This is not a fitting place for a study of the causes and effects of trade combinations and of alliances and counter-alliances among employers and employed, as well as among traders and manufacturers. They present a succession of picturesque incidents and romantic transformations, which arrest public attention and seem to indicate a coming change of our social arrangements now in one direction and now in another; and their importance is certainly great and grows rapidly. But it is apt to be exaggerated; for indeed many of them are little more than eddies, such as have always fluttered over the surface of progress. And though they are on a larger and more imposing scale in this modern age than before; yet now, as ever, the main body of movement depends on the deep silent strong stream of the tendencies of normal distribution and exchange; which “are not seen,” but which control the course of those episodes which “are seen.” For even in conciliation and arbitration, the central difficulty is to discover what is that normal level from which the decisions of the court must not depart far under penalty of destroying their own authority.
Outlines, p. 203, puts the normal rate of profits on a capital of £100,000 at less than 10 per cent., on one of £10,000 or £20,000 at about 15 per cent. , on one of £5,000 or £6,000 at 20 per cent., and “a much larger per-centage” on smaller capitals. Compare also § 4 of the preceding Chapter of the present Book. It should be noted that the nominal rate of profits of a private firm is increased when a manager, who brings no capital with him, is taken into partnership and rewarded by a share of the profits instead of a salary.
e.g. boot factories; as well as in some industries, which make only a slight change in the form of their material, such as sugar-refining, and slaughtering and meat-packing.
Next, analysing the turnover of circulating capital and comparing the cost of raw material to the wages-bill, we find that the former is much less than the latter in watch-factories, where the bulk of the material is small, and in stone, brick and tile works, where it is of a common sort: but in the large majority of industries the cost of material is much greater than the wages-bill; and on the average of all the industries it is three and a half times as great. And in the Slight-change industries it is generally from twenty-five to fifty times as great.
Many of these inequalities disappear if the value of the raw material, coal, etc. used in a business is deducted before reckoning its output. This plan is commonly followed by careful statisticians in estimating the manufacturing output of a country, so as to avoid counting say yarn and cloth twice over; and similar reasons should make us avoid counting both cattle and fodder crops in the agricultural product of a country. This plan is however not quite satisfactory. For logically one ought to deduct the looms which a weaving factory buys as well as its yarn. Again, if the factory itself was reckoned as a product of the building trades, its value should be deducted from the output (over a term of years) of the weaving trade. Similarly with regard to farm buildings. Farm horses ought certainly not to be counted, nor for some purposes any horses used in trade. However the plan of deducting nothing but raw material has its uses, if its inaccuracy is clearly recognized.
i.e. a rate of profit increasing geometrically as compound interest does). And this plan is frequently adopted in practice for the sake of simplicity even where it is not theoretically quite correct.
Annals of Rural Bengal, ch. VI.), the failures were numerous, but only “those who drew prizes in the great lottery returned to tell the tale.” And at the very time when this was happening, it used commonly to be said in England that the families of a rich man and his coach-man would probably change places within three generations. It is true that this was partly due to the wild extravagance common among young heirs at that time, and partly to the difficulty of finding secure investments for their capital. The stability of the wealthy classes of England has been promoted almost as much by the spread of sobriety and education as by the growth of methods of investment, which enable the heirs of a rich man to draw a secure and lasting income from his wealth though they do not inherit the business ability by which he acquired it. There are however even now districts in England, in which the majority of manufacturers are workmen or the sons of workmen. And in America, though foolish prodigality is perhaps less common than in England, yet the greater changefulness of conditions, and the greater difficulty of keeping a business abreast of the age, have caused it commonly to be said that a family passes “from shirt sleeves to shirt sleeves” in three generations. Wells says (
Recent Economic Changes, p. 351), “There has long been a substantial agreement among those competent to form an opinion, that ninety per cent. of all the men who try to do business on their own account fail of success.” And Mr J. H. Walker gives (
Quarterly Journal of Economics, Vol. II. p. 448) some detailed statistics with regard to the origin and careers of the manufacturers in the leading industries of Worcester in Massachusetts between 1840 and 1888. More than nine-tenths of them began life as journeymen; and less than ten per cent. of the sons of those who were on the list of manufacturers in 1840, 1850 and 1860, had any property in 1888, or had died leaving any. And as to France, M. Leroy Beaulieu says (
Répartition des Richesses, ch. XI.) that out of every hundred new businesses that are started twenty disappear almost at once, fifty or sixty vegetate, neither rising nor falling, and only ten or fifteen are successful.
Political Economy, §311) that profits do not form a part of the price of manufactured products; and he does not limit that doctrine to short periods, for which, as we have seen, the income derived from all skill, whether exceptional or not, whether that of an employer or a workman, may be regarded as a quasi-rent. He uses indeed the word “profits” in an artificial sense; for, having excluded interest altogether from profits, he assumes that the “No-profits employer” earns “on the whole or in the long run the amount which he could have expected to receive as wages if employed by others” (
First Lessons, 1889, § 190): that is to say, the “No-profits employer” obtains, in addition to interest on his capital, normal net earnings of management of men of his ability whatever that may be. Thus profits in Walker’s sense exclude four-fifths of what are ordinarily classed as profits in England (the proportion would be rather less in America, and rather more on the Continent than in England). So that his doctrine would appear to mean only that that part of the employer’s income, which is due to exceptional abilities or good fortune, does not enter into price. But the prizes as well as the blanks of every occupation, whether it be that of an employer or not, take their part in determining the number of persons who seek that occupation and the energy with which they give themselves to their work: and therefore do enter into
normal supply price. Walker appears to rest his argument mainly on the important fact, which he has done much to make prominent, that the ablest employers, who in the long run get the highest profits, are as a rule those who pay the highest wages to the workman and sell at the lowest price to the consumer. But it is an equally true and an even more important fact that those workmen who get the highest wages are as a rule those who turn their employers’ plant and material to best account (see VI. III. 2), and thus enable him both to get high profits for himself and to charge low prices to the consumer.