In the above, we have spoken of a rate of exchange and a rate of interest. There would be but one for a given period of time if there were no risk involved or if the degree of risk were uniform. As a matter of fact there are at any given time and place and for any given period, as many different rates of interest as there are different degrees of risk. Also, rates of interest, having been determined, do not stay deter mined, but the process of determination and re-de termination is going on continuously.
Interest enters into all human valuations in which time is involved. It is one of the elements that con nect the prices of land and equipment with their rental values. It connects the prices of all durable goods, productive or consumptive, with the probable values of their services, tho distinct from them. It con nects but holds apart the values of the economic con tributions of the production factors and the contract prices of their services—wages, land rent and equip ment rent. Interest is another force therefore which contributes to the business man's profit.
If the business man contributes his own labor of planning, organizing and directing to the combina tion, this labor will contribute to the total product and the value of this contribution also will be left in his possession and contribute to the excess of his income over his outgo. A large part of modern industry, however, is not directed by the enterprisers (the stock holders) but by hired managers.
While interest enters into all valuations involving time, owing to lack of uniformity in information and variations in the imagination's power to see the possi bilities of a given situation, the valuation process works imperfectly and many anomalies appear that offer special profit opportunities to those who can recognize and seize them. The first to discover or recognize the merits of an improved process or in vention, to foresee a calamity or a bumper wheat crop, those who can most clearly trace and foresee the ef fects of a war, are able to buy at one set of prices and sell at a higher, or sell at one set, and buy back at a lower.
Monopoly is another force which widens the breach between the buying and the selling prices. Habits formed among the purchasing public also often keep them buying a well known brand of an article at prices which have little reference to their cost, and have built up a value for "trademarks" or "good-will."
8. Elements of business chief elements of business profits therefore are compensation for risk assumed, interest on advances out of capital, malad justed values, monopoly, consumers' habits (good will) and the enterpriser's own contribution to the product in his capacity as a worker. Many will ob ject to the last on the ground that the enterpriser who contributes his own labor should allow himself a salary and count it as one of his expenses, because he could sell his services to someone else for a salary. It must be remembered, first, that should he follow this al ternative his contract salary would be merely a guar anteed commutation of his economic share of the prod uct of the other business organization; secondly, that he who undertakes the risks of industrial society can guarantee others' shares but cannot guarantee his own. If he employs his own capital and contributes his own labor he cannot assure himself interest on his capital or a salary for his labor, because the risks of others which he assumes may go against him—indeed they often do.
He may, if it amuses him, resolve his "net income" into parts and say this part represents interest on invested capital, this part represents salary, this part represents compensation for risk, and so on. And it may be of some advantage in helping him to de termine whether it would not have been more ad vantageous to lend his capital to some one else at con tract interest and sell his services to some one else for a contract salary. But which part of his net in come is actually due to the one cause or the other is not actually determinable.
9. Methods of measuring profits.—There are two methods of measuring profits, the Income Sheet Method and the Balance Sheet Method.
The Income Sheet Method sets forth the business income during a given period and its costs, the excess of income over its cost being called "net income" or profit. Another way of expressing it is to say that it deals only with turned capital. The "cost of in come" is the amount of initial capital that has com pleted a turn-over during the period (or so nearly completed it that for practical purposes it is consid ered as completed) . The "income" is the cash that has been received (or nearly received as in case of accounts and notes receivable). The profit is thus the increase of the turned capital.