Profits the Reward of Management 1

business, wages, capital, production, enterpriser, net and ability

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3. What are profits?—Putting it roughly, profits are the surplus over the expenses of production. Measured by time, they are the income secured by the enterpriser in one year; measured by the commodity, they are the returns over the expense of production that arise from the sale of a single commodity. Even tho the professional economists have a good deal of difficulty in defining profits, most readers probably feel that here is a simple matter too philosophically treated.

The early Russian trader put his stock of money in his boot and his pack on his back when he started out in the morning. In the evening he emptied the boot and the sack on the floor and counted the contents of each; for one contained his expense money, and the other the returns from the sales of the day. Accord ing to his bookkeeping, profits were the difference be tween those two piles on the floor. It is, however, important to note the conunents of the economists.

Marshall regards profits as analogous to wages, since they are composed of the interest on the capital of the enterpriser and the remuneration of his own labors. He writes: Whatever remains of his profits after deducting interest on his capital at current rates, may be called his earnings of undertaking or management.

Walker calls profits a payment earned by the pos sessors of exceptional business ability in proportion as their ability is greater than that of the least efficient producers. In his own words: Profits arise out of the differences in productive efficiency among the employers actually engaged in the business for the supply of any market.

The calls upon the enterpriser are numerous indeed. The items of fire insurance, liability, insurance of workmen, taxes, wages, supplies, repairs, bad debts and depreciation, to say nothing of materials, must be allowed and paid before the enterpriser can claim any profits. He must replace capital itself ; he must have wages for his managerial skill; and, after all, he may find a return unaccounted for except as the result of superidr ability. Hence, it is imperative to make the distinction between the returns that may be called gross profits and those that are final or net profits.

4. Gross and net profits.—The term, gross profits, is used to denote the total returns to capital. These may be enumerated as follows: (1) replacement for wear and tear of plant; (2) insurance against risk of possible casualties, such as fire, flood and loss of business; (3) the interest on capital; (4) wages of su perintendence, and finally, (5) net profits, or the reward of exceptional ability or unusual opportuni ties in production.

In the discussion of interest, the requirement of re placement costs was considered at some length. It was shown that the custom of setting aside a sum suffi cient to meet the exigencies of business enterprise is but the natural result of experience and prudence. The -remaining items are usually included in the cus tomary profits that the enterpriser feels he must have in order to continue business. Since replacements and insurance charges cannot be included under the items of wages or materials, they may be regarded as a part -of gross profits. Another term, necessary profits, has been used to express the requirements of the profits essential to hold men in business. Like the cases of the laborer and the capitalist, the case of the marginal producer can be utilized to illustrate a vital point in this discussion.

Conceive of the market at any given time as re quiring an amount of materials sufficient to meet the demand, one will see that there must be the re quired number of enterprisers to furnish the supply and carry on the business of production. To the man at the margin, who comes in or goes out with the market variations, necessary profits are the return upon capital and the wages of management. Since he could secure the interest upon his capital if he lent it to someone else, and since he could obtain wages of superintendence elsewhere, he must, on the aver age, have a return equal to these items, or drop out. Such profits, however, are not differential; that is, there is no return that cannot be accounted for as an interest payment, or as wages of management. The industrial world is familiar with profits that vaily amazingly with the cleverness or the reliability of the individual; these are net profits.

The struggle of concerns to hold their place on the margin of production is one of the tragic features of business. Changing methods, freight differentials, better machinery, more efficient sales methods, all these considerations and many more bring the prob lem of holding trade to the door of many a business man every day of the year.

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