PROFITS AND COSTS 1. The broader meaning of profits. f 2. Conception of pure profits. 3. Dual character of investment profit. f 4. Enterprise and risk.
I 5. Pure profit the most variable income. 6. Meanings of cost. 1 7. Superficial view of costs and prices. I 8. Costs adjusted to prices of products. f 9. A single factor of a single product. f 10. The gene alogy of value. 1 11. Money cost derived from price of products. 1 12. Cost an expression of consumers' estimates. Notes On other meanings of profit and The source and cause of profits.
We may see this in reviewing the examples above. In the small furniture shop profits includes all economic incomes in the business, whether from the investment or from the joiner's own labor. It is an inclusive term for the usances of tools, shop, materials, and land, and for the services of the owner, whether as investor, manager, or handworker. It embraces all the economic yields which by theoretical analysis can be carved out of it. As the business develops, profits, as thus used, means more or less according to circumstances which must be ascertained from the context. If the investor owns all his buildings and land, machinery, and sources of ma 343 terials, and has no borrowed capital, then profits includes all that is left of cash receipts after paying wages (and salaries), but wages may be more or less according as the investor takes a more or less active part in the management. If in the one business the buildings, water power, lands, etc., are fully owned, and in another business with exactly the same product all 'these things are hired, profits in the former would be much greater. While the business is owned by an individual or by partners, profits may include whatever is attributable to the owner for his management; or a fair salary may be estimated for this, and only the remainder be counted as profits. Like
complications, or even more troublesome ones, are found in the case of corporations. The one company owns all its pat ents, the other pays royalties; the one has all its capital rep resented by paid-up stock and the other has more or less of outstanding bonds the interest of which is a "fixed charge" to be deducted before counting the residual share of profits. The possible variations are endless, but these illustrations suf fice to show that profit in any such general sense is not a sci entific term for the purpose of studying the forms of income ; it has not even a precise practical § 2. Conception of pure profits. Is there then, no exacter conception of profits possible? Among these various mean ings is there one not preempted by another term, one which expresses a sort of income found in practical affairs, which business men are constantly trying to estimate and of which economists must take account? Let us try to express such a conception in this definition : Pure profit is the income of the active capitalist as such, attributable solely to the active capital-investment in the particular enterprise. It is an in vestment-profit. The amount and rate of investment-profit is peculiar to each business and indeed to each investment it is never an agreed price, or a contractual payment. It is the residual after the actual contractual dues have been paid, and the estimated value of other factors (such as the services 1 See note, On other meanings of profit, at end of chapter.
of the manager, etc.) have been deducted. The investment profit concept is most nearly exemplified in practical affairs in the bookkeeping of a corporation. Out of gross receipts must be paid all rents, interest, maintenance and deprecia tion of the plant, price of materials, wages, salaries of man agers and officers, fees of directors, etc.; the residue is the amount which may be paid as dividends to stockholders (or added to surplus) without impairing the capital investment.