In 1921, about one-third of all business done yielded no net profit. In 1917, about one-sixteenth of all business done yielded no net income. This difference between an exceptionally poor year and an exceptionally good year suggests the changes constantly taking place in the relative size of the no-profit group of business concerns.

The existence of this no-profit fringe of business is significant from many economic standpoints. From the standpoint of price, the conclusion to be noted is that prices need not be high enough to cover the costs of this unfortunate lower layer of business concerns. Prices need be only high enough to cover the costs of 80 to 90 per cent of the business done. In price fixing or public utility rate regulation, this means that prices or rates need not be fixed at a point high enough to protect the weakest fifth or tenth of the concerns. Rates need only be high enough to protect four-fifths to nine-tenths of the concerns. In purely competitive pricing of goods, the price arrived at tends to be high enough to afford at least a living profit to only 80 or 90 per cent of the business done. Competitive price, in other words, tends to squeeze out of existence the least effective concerns. From the standpoint of efficiency, the conclusion seems to be warranted that the real struggle for survival of the fittest is constantly going on within this no-profit group. Many will fail outright; many others will return to the fold of profit making in later years. It is here that the battle for life and death is waged. A process of elimination and selection is continually going on. It is persistent and inescapable. It is more drastic in some industries than in others. It is more drastic in some years than in others. But whatever the industry or whatever the year, the weeding out process insistently continues.

The Central Profit Group.-H. L. Secrist has found that in retail clothing stores from 1916 to 1920, the majority of business was done at a profit which closely approached the average profit for the industry as a whole. The bulk of the business-ranging from 57 to more than 90 per cent, but more often varying from 65 to 70 per cent-gained a profit that was less than 20 per cent above or below the average rate of profit. This central group, comprising the majority of the business, stood between the relatively small number of no-profit concerns at the bottom and the relatively small number of super-profit concerns at the top.

A somewhat similar conclusion has been drawn from the cost studies of the Federal Trade Commission. L. H. Haney concludes from these cost studies of various branches of business, "A majority of plants are grouped not far from the average cost, with relatively small groups of high-cost and low-cost companies at the extremes." The distribution of profit is assumed to be virtually the same as the distribution of costs, and on this assumption, the conclusion is drawn that the majority of concerns earn not far from the average profit.

Bureau of Business Research, Northwestern University School of Commerce, Series II, No. 9, pp. 17-19.

7 Journal of the American Statistical Association, Volume XVII, pp. 141-153.

This conclusion, however, does not indicate how high the average rate of profit might be. It does not indicate whether the average rate is about the same for all industries or varies greatly from one branch to another. The classical economic theory has taught that the average of each separate industry will tend to be a normal average. This theory of a normal average may be tested by statistical studies of profits in various branches of industry.

8

From data contained in income and excess profits tax returns for 1917, it has been possible to deduce the variations in average profits of 108 different trades and industries, comprising 26,477 individual firms. The following table shows the varying averages of profit on invested capital for a partial list of the 108 different industries.

There is a very wide range of variation, from the lowest of 8.96 per cent to the highest of 60.33 per cent. Ten lines earned over 39 per cent, whereas ten other lines earned under 18 per cent. The remaining 88 lines ranged between 18 per cent and 39 per cent. Obviously there appears no such phenomenon as a normal average of profit common to all types of industries. Moreover, at least during the year 1917, it was not true that various branches of industry hold out equal expectations of profit to persons of equal abilities and equal capitals. What was true in this respect for 1917 is probably true for other years. In any given

8 Ralph C. Epstein, System, October, 1924, p. 420, and November, 1924, p. 565. Data derived from Letter of Secretary of the Treasury, Corporations Earnings and Government Revenues, in response to a Senate Resolution of June 6, 1918. Absolute size of the averages is affected by the fact that corporations listed are only those earning more than 15 per cent on their capital stock in 1917. Relative size of the averages, and variations of averages between different trades, are the striking facts presented from this data.

9 See p. 209 for profit variations in 1919, 1920, 1921, as reported under the income tax law for corporations earning net income. Data are derived from reports on Statistics of Income, published annually by the Commissioner of Internal Revenue. See also David Friday, Profits, Wages and Prices, pp. 40-45.

year, statistics of profit show no normal average for industries in general. Instead, they show striking inequalities and variations from industry to industry.

The variation in average rates of profits is accompanied by an equally wide variation in the rates earned by the central group of concerns in different industries. Central group variations are as great as average rate variations. The central group of one branch of industry may earn 5 per cent; the central group of another branch, 15 per cent; the central group of another branch, 50 per cent. Each group is central with respect to its own respective branch of industry, but gives no indication whatsoever of what the earnings may be in the central group of other branches. Each central group follows its independent course, regardless of any assumed normal average.

Not only are there wide profit variations between industries in any given year, but also there are wide variations in the same industry from year to year. The return on the total investment for 84 coal wholesalers from 1913 to 1922 varied from 6.6 per cent in 1921 to 49.0 per cent in 1920.

Persons, Foster and Hettinger, The Problem of Business Forecasting, p. 217. Net profit as used in this table includes interest on investment.

The variations in the table on page 209 for the years 1921, 1922, 1923, are based upon the number of dollars earned on each $100 of capital.1o It is apparent that there is no normal average of profits which a single industry or the general group of industries tends to earn. The variation in the mass is probably best shown by the net income and net deficit of corporations as reported in federal income tax returns.

The contrast between the high profits of 1917 and the low profits of 1921 is extreme. It brings out sharply the variations in earnings. from year to year. It gives no basis for the assumption that profit

10 According to data computed by the Standard Statistics Company, 1924. Net earnings as here used are computed by methods similar to those outlined in the footnote on page 204. Minus signs indicate a net deficit for the year. Capital is here taken as surplus added to par value of all securities outstanding. On the same point, the following diagrams of profit variations in twelve different branches of industry are of value. The data were collected by the Federal Reserve Bank of New York. See Monthly Review, March 1, 1924, p. 8.

adheres closely to some normal level. The conclusion warranted by the facts is summarized as follows by Friday, "To the extent that economists and the general public have based their reasoning about normal profits upon an assumed minimum toward which profits tend or an average around which they group themselves closely, they have proceeded upon

an erroneous assumption. The most that can be said for normality of profits is that the amount of capital that earns the average rate of profits will remain a fairly constant percentage of all capital. Also, that the amount of capital that earns less than the average rate or more than the average remains about the same one year with another. But

the average itself is highly variable and the diversity of earnings for individual establishments is enormous. There is a pronounced variation of earnings from industry to industry within the same year and in the earnings of the same establishment from year to year.'

"11

The Excess Profit Group.-In a group of 31,045 corporations in 1917, more than one-tenth of the net income after taxes went to corporations earning more than 50 per cent on invested capital, and about

11 Profits, Wages and Prices, p. 45. Profit as used here refers to the income computed by methods outlined above, footnote to page 204.

2 per cent of the net income after taxes went to corporations earning more than 100 per cent on invested capital. Since the average return

ANNUAL NET PROFITS OF 203 MANUFACTURING, MERCHANDISING, AND PUBLIC SERVICE CONCERNS, AND OF THE CLASS I RAILROADS

for the entire group was 16.9 per cent, it is obvious that a small group at the top earned profit far in excess of the general run. A similar situation is found in the net income of 10,020 corporations for the years