VARIOUS SHADES OF PROFITS § 1. Review of the profit-concept. § 2. Skill in relation to risk. § 3. Union of chance and choice. § 4. Element of pure chance. § 6. Changes in transportation and in land-values. ˘ 6. The so-called unearned incre ment. § 7. Element of speculation in business. § 8. Specialization of risk-taking, in produce markets. § 9. Produce speculators as insurers.
10. Ignorant and dishonest speculation. 11. Fraudulent and illicit profits.
§ 1. Review of the profit-concept. Profit is the legal residual share of the total income yielded by an enterprise, the share (positive or negative, profit or loss) that is left to the owners of the enterprise. Every enterprise, however sim ple, involves ownership of agents and product, and between the investing and the accounting at the end of any period, there is financial responsibility and profit or loss. This may be minimized by one owner by contract with another, the one thus becoming more passive and safe, tho still having some risk, and the other, taking at a price the active control of wealth and services and selling the results for whatever he can get. The laborer still runs the risk of becoming inca pacitated by illness or accident, or of being thrown out of employment. The lender still has some risk of failure of the debtor, etc. But the laborer sells his labor, and the capitalist sells the use of his wealth—horses, lands, equipment, and of his loanable capital, and accepts a definite income and the legal responsibility of the borrower to repay the loan.
§ 2. Skill in relation to risk. In most enterprises and under normal conditions of business the largest factor in de termining whether there will be anything left for profits is 358 the skill with which the business is planned and managed, from the first investment to the last little detail by the well chosen agents of the enterprisers. There are many chances and risks, but few of them are completely objective, of a kind utterly beyond the control of the enterpriser. Even loss by lightning, flood, fire, and other "acts of God" (in legal phrase) are more or less liable according to the judg ment and foresight in the construction and location of build ings, care in their oversight, etc. This power to minimize risk, the restless watchfulness and the intuitive anticipation of dangers, and often the discovery of ways to convert them into advantages, is a large part of what is meant by skill of management. The risk of business is not that of the throw ing of dice in which (if it is fair) skill plays no part, and gains in the long run offset losses. Business risk is rather that
of the rope-walker in crossing Niagara ; the task is easily undertaken by the skilful Blondin, it is fatally dangerous to the man of unsteady nerve and limb. The skilled workman, handling, with sure touch, the delicate and costly materials, can not be said to be incurring a great risk of spoiling his work, however great the risk to the novice or the bungler.
Looking at this large phase of the problem, profits are seen to be due not to the existence of risks, but to comparative skill in taking risks which in many cases is the ability to make the risk dwindle or disappear. Some men are more able to perform the function of enterprise than others, and profits are high or low just as fruits are bountiful on fertile soil and scanty on barren soil. In this aspect profits in the long run are the share (non-contractual) of skill and ability in the function of enterprise; and our illustrations above have largely been drawn from industries in which this seems to be the true view.
§ 3. 'Union of chance and choice. But there is another aspect of the subject. Profits, just because it is the actual re sidual, is the most complex and varying share. The enter priser, to the extent of his credit and financial strength, undertakes to assume the risks for all the other factors. Profits is the catch-all for every unforeseen or variable change of price between each act of investment and the ultimate sale of the goods. Chance therefore has its part; but the tempta tion is to exaggerate its importance Many cases of profit said to be due to chance are found on closer knowledge to be due to superior judgment. They result from a union of happy chance with deliberate choice. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck ; but he has gone to a place where gold-mines are comparatively plentiful. If he stays at home it is more likely that he will stumble over an ash-heap. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of finding a good thing, usually gets the advantage, and men call it luck. The more the causes of suc cess in general are studied, the larger is found the element of choice, the smaller that of luck.