or taxed away it would reduce the incomes of those who had shown the propensity to save, either automatically or for the deliberate purpose of getting interest. They would therefore have less from which to save. Granting that others would find their incomes correspondingly increased, still, these would necessarily be the ones who had not previously saved much capital, and the probabilities are against the assumption that they will now save enough to compensate for the diminution in the amount saved by the previous savers.

Another error or oversight of those who argue that interest might be destroyed or taxed away without greatly reducing the total saving is the assumption that only a few marginal savers would be affected, or that the great mass of savers are not marginal savers and would not be affected by such a policy. As a matter of fact, every saver is probably a marginal saver to some extent; that is, every saver is probably induced to save a little more when interest is possible than he would be induced to save if he were not permitted to receive interest. Marginal saving takes place, therefore, along an extended line and not simply upon a single point on that line. If practically every saver in a vast number were to save only a little less when the inducement of interest is removed, there would be a considerable reduction in the total saving.

CHAPTER XL

PROFITS

What are profits? Profits may be broadly defined as the income of the independent business man who receives neither stipulated wages, rent, nor interest. In a somewhat narrower sense they include whatever he has left over after he has allowed himself interest on his own capital, rent for his own. land, and wages for his own labor. This would seem to narrow the meaning of profits down to the reward for taking risk, though risk must be defined rather broadly. The enterpriser, as the independent business man may with fair accuracy be called, is essentially the man who undertakes something and relieves others of a part at least of the risk which they would otherwise have to take.

It would be quite possible, for example, for a group of laboring men to borrow capital, build their own factory, and run it. But if they did so they would always be in danger of losing not only what they themselves had invested but even their wages for a time; that is to say, if there should come a bad season, when the demand for products fell off, they might have to work for very low wages or for none at all. If some individual or group of individuals will undertake to run the business for them and guarantee them a certain fixed rate of wages, they are relieved of a part of that risk.

Profits as payment for insurance. Again, the men who furnish the capital may jointly assume all the risks of the enterprise. They may, however, be in part relieved by having one individual or group of individuals undertake the business and guarantee them interest on their capital. In such a case, however, the enterprisers usually have to invest some of their own capital. In such cases they, the enterprisers, put their own

capital in the most hazardous position. This is virtually the distinction between common stock and preferred stock in a corporation. Those who own the common, stock take the greater risk. So long as the enterprise is running at all, the owners of the preferred stock must get their interest, whether the owners of the common stock get anything or not; but if the enterprise is very successful, the owners of the common stock get larger returns than the owners of the preferred stock. These larger returns over and above the rate of interest will be called profits.

The lure of an enterprise. In a smaller business, run, let us say, by an individual rather than by a corporation, the individual may borrow a part of his capital, and in this case, so long as he is in business at all, he must pay interest on what he borrows, whether he has anything left for himself or not. In case the business succeeds very well he gets a surplus which may be called profit. The lender of borrowed capital gets no more than the stipulated rate of interest. It is the function of the independent business man or the enterpriser to insure the other participants in the industry against at least a part of their risk. He cannot, of course, relieve them of all risks. Any income which the insurer gets over and above the normal rate of interest on the capital which he himself puts in may be called profit. This is the lure which induces men to undertake risks of this kind.

This suggests a functional theory of profits which fits in with the functional theories of value, wages, and interest already described in the previous chapters. The function of high profits is to induce a larger number of men to undertake independent enterprises. Where a larger number of such enterprises are needed, there are only two ways of getting them started. One is for the community as a whole to take a part of the social income and by authority invest it in new enterprises; the other is to offer a special inducement to private individuals to undertake the new enterprises voluntarily. This is usually done by

the offer, on the open market, of high prices for the products of the enterprise.

Necessity of taking risk. Risk-taking is no more meritorious in itself than is waiting or working.. It is meritorious only when it results in increased production and well-being. Still, the well-being of society or the increased production of the goods which society needs makes it absolutely necessary that some risks should be taken. Risk is therefore something which cannot be avoided. These risks are of many kinds and degrees. The tastes of the people may change so that the product of a contemplated enterprise may be no longer desired. Some new invention may render obsolete the processes used and the machinery which has been installed. Strikes, insurrections, wars, and unforeseen physical calamities, such as fires, storms, and earthquakes, must also be taken into account. It would be very difficult to imagine any productive undertaking that did not involve risk. In the case of the farmer bad weather, insect pests, and diseases of all kinds threaten to decrease or destroy his income. Risk-taking is therefore as necessary as working or waiting in order to get effective production under way.

Irksomeness of risk. Unless, however, risk-taking were in some way irksome or disagreeable, it would not deter men from entering business, and there would be nothing here that would have to be paid for. That is to say, if people did not dislike to take risks there would be no hesitancy in entering a risky occupation. It would therefore not be necessary to offer a reward to induce men to enter it. In fact, so many would crowd into hazardous enterprises, and so increase the competition, as to leave no surplus for risk-takers as a class, the losses of some balancing the gains of the others. This is what actually happens in those fields, such as pure gambling, where men gamble for the excitement. But since risk-taking is sometimes irksome or disagreeable and since, in such cases, men would rather not hazard their accumulations and their present income, they must be paid something as a lure, or attraction to overcome this dis

inclination. So few crowd into these enterprises as to leave for those who do make the venture comparatively little competition. This enlarges their opportunities for a profit and may leave the whole class with a surplus. The reason here is precisely the same as the reason for paying wages or interest or for paying the price of any commodity. The function of price, in a free country, is to overcome the disinclination to work, wait, or take risks. Risk is, in such cases, a part of the cost which the price must, in the long run, cover.

It has already been suggested that some risk is not burdensome and in many cases is actually exhilarating and attractive. The tendency to gamble is so strong in some people as to lead them to hazard not only wealth but even life and limb on dangerous enterprises. Different individuals, of course, differ in this respect, as they do in the inclination or the disinclination to work or to wait. There are also different kinds of hazards which appeal to different people. A study of lotteries shows that there is a greater propensity to hazard small sums, even on the remote chance of winning a large prize, than to hazard a large sum on the chance of winning a small prize, even when the chance is so large as to amount almost to a certainty. This might be tested by a laboratory experiment. The student is advised, however, not to try an actual experiment of this kind, because it is against the law; but it is not against the law to imagine such an experiment, and he is therefore recommended to try the experiment in imagination.

Let him, in imagination, offer for sale two kinds of lottery tickets, contained in boxes which we will designate as Box A and Box B. Let him put in Box A 2000 tickets, all of which are blanks but one. Let this one be good for $1000. In. Box B let him put 2000 tickets, only one of which is a blank, all the rest being good for $1000 each. Let him experiment by trying to sell these two sets of tickets and see what price he can get for them. Now mathematically the tickets in Box A are worth 50 cents apiece; that is to say, one who bought them all at 50 cents apiece would neither gain nor lose. Those in Box B are mathematically