which takes up and distributes the strain resulting from variations in the momentum and rate of movement of in dustry. The enterpriser feels first the influence of changing conditions. If the prices of his products fall, the first loss comes upon him, for the goods already made must be sold. Further loss is avoided as best it can be by paying less for materials and labor. At such times the wage-earners look upon the employer as their evil genius, and usually blame him for lowering their wages, not the public for refusing to buy the product at the former high prices. When, however, prices rise, enterprise gains through selling at higher prices the stock on hand that has been produced at low cost. Enter prise is placed between the forces of competition, between owners of resources and ultimate consumers, between laborers and the final purchasers of labor's services. The enterpriser's economic survival is conditioned on vigilance, strength, and self-assertion.
Profits therefore fluctuate more from industry to industry and from man to man than do other incomes. The variations of the market may sweep away not only all "profits," but all the invested capital. As a consequence, profits may be at other times very high, for enterprise will not take the risk of great losses unless there is a chance of large gains. While the income of the salaried man is occasionally advanced, and then for long periods remains unchanged, the profits of enter prise come in waves. In seasons of prosperity profits in many enterprises swell with a dramatic swiftness while rents and wages move tardily upward. Then again for years profits fall to a level hardly exceeding a low interest on the capital invested or leave many businesses for a time with a loss. Reasons for this result will be shown more in detail under cost of production.
§ 6. Meanings of cost. The profit in enterprise results from the surplus of sales (receipts) over costs (expenses). Few words are more often heard in business than cost, or with more varied shades of meaning.
In a general sense cost always means something given up, parted with, paid, to get something else. Often this outlay takes the form of pain, fatigue, or irksomeness of labor, tho this is a psychic cost, better termed sacrifice. Thus it is said : he got it at the cost of tireless effort ; it cost him his health. When the worker who is free to determine the length of his working day stops work, he reveals that his valuation of his labor just at that point is greater than the valuation of the product that will come from further labor—the one negative and the other positive in the balance. Psychic cost thus rises to the level of more or less conscious estimation at certain points and, like psychic income, has its part in many ways in the choices made by individuals. It is not, however, the ob jective measure of cost in the transactions of trade.
In another sense cost is applied to any objective good or any gratification which could have been chosen, but which was given up when another choice was made. This is alter
native cost, called by some, opportunity cost. It is an option relinquished. One may stay at home and read a book or go on a picnic; the pleasure of reading a book will cost the pleasure of the picnic. A good dress may cost a vacation that must be given up for it. In this sense, each thing is a cost of every other thing that might be chosen in the place of it, tho the alternative cost thought of is usually the most im portant excluded option. Alternative cost, like psychic cost, is individual, and is significant at the moment of choice but is not the measure in which business outlay is expressed.
The sense in which cost is mostly used in business in the common phrase "cost of production" is money cost. It ex presses not the pain of the laborer in doing the work, not the sacrifice of the owner of the capital in saving the money, but merely the sum of money paid out by the producer. Costs, proceeds, and profits are all in business practice reckoned in terms of money. The enterpriser invests in order to realize profits. Enterprise is investment, the putting of capital into concrete forms of wealth ; and it is in turn the sale of wealth, a process which might be called divestment. The realization of profit means getting out a total sum of capital greater than was put into the business. Capital is thrown into the melting pot, and is taken out crystallized into new forms of wealth which may or may not bear a greater price than the costs. The price of the products depends on the valuations of pos sible purchasers. The customers may be foolish men with unwholesome desires, and profit-making may result from pan dering to their vices; but in any case the enterpriser finds himself limited by this condition : to gain a profit he must produce a surplus of value (as judged by his customers) be tween costs and selling price.' § 7. Superficial view of costs and prices. It is well after this discussion of costs to consider their relation (as a more fundamental problem of theory) to prices and values. The business man, as such, is rarely interested in this question. He knows that many influences unite to determine the cost of the factors he buys, but they are distant; he cannot influ ence them, and in the single stage of his production his costs seem to fix the price of his products. In some purchases, how ever, and on the stock exchange, a remarkable power of noting and analyzing the more distant influences is displayed. But in general a superficial view of value is taken in business; it does not pay to do otherwise. The active investor simply takes the price of various factors as he finds them, and seeks to combine them and to sell them when and where he can reap a profit. Yet if he is asked, What determines the prices of goods? he probably replies, "They are fixed by cost-of production." 5 This is the way it appears from the enter priser's point of view as he is deciding whether to extend or contract his production and sales, whether to raise or lower his prices.