CHAPTER VIII.

PROFIT.

§ 1. Meaning and Reason of Profit. PROFIT is the reward of the labour of the employer. This reward is uncertain, variable, speculative; for the employer disburses fixed sums for rent, wages, and interest, without knowing how much the sale of his productions will return him. At the end of the year he calculates the total cost of his business, and deducts this from the sum of his receipts. The difference is his profit. Profit is, therefore, the surplus of the price obtained for productions over the costs of all kinds which have been incurred in creating them.

There are two elements in profit. The first rewards the skill and energy of the proprietor, and therefore increases in proportion to the greater knowledge and preparation which an industry demands, and the fewer attractions it possesses. It varies greatly in every industry according to the qualities of the individual proprietors, for it is on these that success principally depends, so that where one man is ruined, another makes a fortune.

The second element is risk. The farmer sows a field without any means of knowing what the crop will be worth, or whether it will not be destroyed by hail. The incidental risks must be covered by a premium of

insurance which goes to increase the profit; the morc risky the undertaking the greater ought the profit to be.

Profits will tend to a uniform level in all the different industries, inasmuch as enterprising men of business, furnished with fresh supplies of capital, engage in such industries as offer any unusual returns. This levelling process, however, is never accurately effected, since the fluctuations of industry and trade cause perpetual variations in the rate of profits.

2. Is the rate of Interest in Inverse Proportion to the rate of Wages?

Considering the wealth produced as a fixed quantity, Ricardo and his school have deduced from this that profits can only increase at the expense of wages. If an employer can pay exceptionally low wages, it is certain that the decrease in his expenses will increase his profit. His competitors, however, will soon obtain the same advantage, and the diminution in the cost of production will be followed by a fall of the selling price, and profits return to their former rate.

The truth of the matter is rather that profit, being also the reward of labour, will rise and fall simultaneously with wages. Where large profits are made the workmen can and ought to be well paid. In the United States profit and wages are high. In the States of Western Europe they are both much lower.

§ 3. Profit tends to Diminish.

The greater the productiveness of labour, the better will both master and workmen be rewarded by the large products which it creates. In a new country where the sources of wealth are numerous and little worked, masters and workmen can make large gains. In an old country, where every source has already been worked, persistent labour is needed for a livelihood, and skill or exceptional good fortune to make a fortune. Profits thus tend to diminish in proportion as the field of employment is limited when compared with the number of those who seek to employ their faculties, their arms, and capital.

The fall of profits is arrested by every improvement in the processes of labour by which it is enabled to produce more at a less cost. Railroads, for example, have given many people the opportunity of enriching themselves. In this may be seen the benefits which science confers alike upon master and

man.

CHAPTER IX.

THE REWARD OF CAPITAL.

§ 1. What Interest is.

THE third factor which contributes to production is capital, and this, like the others, must be rewarded. The reward which it receives is called interest.

For replaceable and circulating capital, which is consumed by the borrower, interest is usually reckoned at so much per cent. the year, e.g., five pounds for a year's loan of a hundred. For fixed capital which the borrower has to return in its original form, the reward is proportionate to the service rendered and the probable depreciation.

Two elements may be distinguished in the interest which is paid for the enjoyment of a capital: the first, an insurance premium to cover the risk of loss; the second, simply the hire of the capital. In a country where there are bad laws and bad judges, the lender of capital runs the risk of never recovering it; he will therefore stipulate for a premium at a sufficiently high percentage to at least cover this risk. It is for this reason that the rate of interest is always very high in the East-as much as fifteen or twenty per cent., or even more. The only means of reducing it is to make good laws and appoint upright judges.

The lender deprives himself of the use of his capital; the borrower enjoys and profits by it. It is therefore only natural that the second should pay the first an indemnity, or hire, for this enjoyment. This is the second element of interest.

The rate of this hire will be high if there are few lenders compared to the number of borrowers, low if there are many lenders and few borrowers; and this in accordance with the general law of supply and demand. Lenders in search of an investment will be numerous when there are many persons rich

enough to be able to save, and sufficiently economical to wish to do so. In Holland in the seventeenth century interest had fallen to three and even two per cent. Every one worked and traded, and no one spent all his income. Descartes was greatly struck at this circumstance. Ibi nemo qui non exercet mercaturam, was his exclamation. Borrowers, on the other hand, abound when the spirit of enterprise is developed, and at the same time nature offers numerous remunerative employments to industry. In the United States, the majority of undertakings, such as the cultivation of virgin soils, the purchase of building ground, construction of houses, mines, factories and railways, yield profits as large as ten, twenty, or thirty per cent. Although, therefore, there is no deficiency of capital, enterprising men are ready to pay six and eight per cent. a year for the use of it. Great fortunes are quickly made, and several cases might be cited of twenty millions sterling having been accumulated in a few years.

§ 2. Interest Tends to Diminish.

In countries like England where there is a dense population and wealth has long been abundant, the rate of interest tends to diminish for two reasons; in the first place, because the value of capitals which thrift is continually creating is reduced by their competition, and, in the second, because the fields of employment, i.e. the improvable sources of wealth, are ever diminishing.