By thus identifying $30,000 of the initial cash capi tal with the 30,000 units of finished goods made dur ing 1915, we are able to identify $27,500 of it with the 27,500 units sold during that year, and in turn to trace this $27,500, and the $10,000 paid for personal services in effecting the sales, to the $55,000 of cash income obtained in the sale of these goods. By this means we can say that during 1915, $37,500 of initial capital completed a turnover, i.e., completed a cycle from cash to cash, and was turned into $55,000. The profit is $17,500. In like manner we can identify $47,500 of "initial" capital ($22,500 of the "original" and $25,000 of the $55,000 of cash obtained during 1915) with the 47,500 units of goods sold during 1916 and thus trace this and the $15,000 paid for personal services in effecting sales, making deliveries, etc., to the $95,000 of income obtained thru their sale. Thus we can say that this income cost $62,500 or that $62, 500 of initial capital was turned into $95,000, a fact which represents a profit of $32,500.
In all the above illustrations cash is paid out im mediately for salable goods, or for machinery, ma terials, fuel, water, personal services, and the like, that are wanted not for their own sake but for the cash income which, directly or indirectly, they are the means of obtaining. Their cost is the cost of this in come. Business is carried on in terms of the medium of exchange—cash. Typically it starts with cash, which is paid to create a situation from which cash is abstracted. This completed cycle may be termed a "turn-over" of the initial capital involved. If more cash results eventually than was paid out, there is a profit. If less cash results eventually, there is a loss. Continuous business consists of continuous recurrences of these operating cycles each starting and ending with cash.
4. Business profit.—A "business profit" may be de fined as that increase of cash which tends to occur by buying at one set of prices and selling at a higher.
The explanation of profit—the explanation of why the cash income normally is greater that the cash outgo necessary to obtain it—belongs to the economist. Yet a brief summary of economic theory on this point is not out of place here because of the bearing which this explanation has upon certain vexing accounting problems.
5. Economist's distribution of productive forces.— The economist thinks of human beings as cooperat ing with nature as represented in land and in natural laws by means of tools and equipment, in the produc tion of wealth and its distribution; the total product of their cooperative efforts being divided among these factors. He thinks of part of the product being as cribable to the labor of each human being who works, part of it as ascribable to each article of equipment, part of it as ascribable to the land, and part of it as as cribable to those human beings who plan, organize and supervise the work. In an industrial society in which each member is intelligent the economist argues that each person who cooperates in the work and the owner of each land and equipment factor, tends to get as his share of the product of the joint effort, that which he or his factor contributes to the whole product.
The economist's method of thinking what the eco nomic contribution of any factor to the whole product is, is to think of the effect of withdrawing from the combination one unit of the element in question,—one unit of labor, or one unit of land of a given grade, or one unit of equipment of a given description—keep ing the quantities of all the other elements constant but rearranging them to the best advantage, then ob serving by how much the total product of the reduced combination falls short of that of the original. This part of the product which disappears when one unit in the particular factor in question is withdrawn and which reappears when that unit is restored to the com bination, is thought of as economically ascribable to that unit, and if all the units of the given element are just alike, that quantity is ascribed to each unit. The quantity ascribed to one unit is termed "the marginal product" of the factor in question. Thus the econ omist conceives of a marginal product of labor of each grade, of land of each grade, of equipment for each purpose and of each variety.
There are, perhaps, some logical difficulties and cer tainly some tremendous practical difficulties connected with the above described concept. But assume its validity for the sake of a starting point. If industry were carried on as a purely cooperative enterprise— each workman contributing his labor, each equipment builder the service of his equipment, each land owner the service of his land, each manager his labor of or ganizing, planning and directing, and the product be ing divided only after it appeared—if it were prac ticable to measure the economic contribution of each individual factor; if each human participant had com plete knowledge of the situation and all were of equal degree of intelligence and under the same degree of economic pressure, then perhaps each individual factor would tend to get his marginal product or the money value of it as his share. But industry is not carried on under this purely cooperative plan. On the contrary, one class in industrial society—the busi ness man, or "enterpriser," or "entrepreneur"—buys the shares of the other factors at prices fixed in ad vance by contract, and in most cases pays for these shares in advance of their appearance and sale. He buys the workman's share and the hired manager's share when he pays them money-wages or money-sal aries ; he fixes the prices of their shares when he fixes their wage or salary rates. If he leases the equip ment, he fixes the prices of these shares in the lease when he fixes the rental or royalty to be paid for the use of the equipment; if he buys the equipment the purchase price thereof is the amount paid for the equipment builder's share. The contract rental fixed in the lease fixes the purchase price of the land owner's share.