The premiums are calculated high enough to take care of any conceiv able loss. A life insurance company is, we might almost say, absolutely certain that death claims cannot exceed the resources wherewith to meet the claims.

Numerous collateral benefits of insurance should be mentioned. Insurance facilitates credit, by enabling banks to be sure that the security for their loans cannot suddenly be wiped out. It is universal practice for banks to require fire insurance coverage on the commodity backing for loans, and it is becoming more and more common to safeguard character loans by requiring life insurance on the responsible parties. Insurance promotes thrift and accumulates capital. The billions of dollars of reserves of the insurance companies are a most important channel for the collection of savings from the mass of individuals, for investment in corporate enterprise. Insurance promotes high standards of consumption. The well-being of the masses is greatly enhanced by adequate life insurance. Untold misery is averted by life policies. Worry, bankruptcy, disaster, are prevented by property insurance. The happiness and welfare of the community is dependent upon insurance in all its forms. Insurance also stimulates increased production. Projects into which men would not dare venture on their own risk will attract them when risk can be covered by insurance. All forms and phases of modern business depend upon the protection afforded by insurance. Take away insurance and business would necessarily avoid the risk taking laden with imminent disaster.

Three main kinds of insurance are in common use. These may be listed as personal insurance, property insurance, and social insurance. Personal insurance includes protection against loss from death, from accident, or from sickness. The most important is protection from death, afforded by life insurance. Property insurance includes protection from fire, from marine destruction, from theft, from collision, from hail, from tornado, from default of debtors, and numerous other causes. The most important of these are fire and marine insurance. Title insurance and fidelity insurance are special forms of property insurance. Title insurance guarantees property owners against loss from defective title. Fidelity insurance and suretyship in general guarantees one party against loss from the acts of another. An employer is guaranteed against loss from the acts of his employees, a government is guaranteed against loss from dishonesty of public officials. The owner of a property in process of construction is guaranteed against loss by failure of contractors to complete the structure according to requirements. In all these instances, property rights are being protected against loss.

Social insurance is, strictly speaking, a subdivision of personal insurance. It involves forms of personal insurance which would not be provided without some form of social control. Social insurance applies chiefly to the masses who are unable or unwilling, if left to themselves, to provide ample protection against loss. The contingencies embraced

by social insurance are accident, sickness, old age, and unemployment. Since laissez faire fails utterly to secure adequate protection to the masses against these hazards, it is the function of the government to supply direction and control. Some form of compulsory regulation is essential. Accidents have been covered by workmen's compensation laws. These laws usually compel the taking out of insurance in some form, either through private companies, or state funds, or mutual associations, to reimburse the worker for loss due to accident. The cost may be defrayed in some cases by joint contributions of employer and employee, in others by direct payment of the employer as the responsible party. The fundamental principle involved is that the risk of loss through personal injury in the course of production should be borne by the industry itself.15

Compulsory sickness and old age insurance are extremely rare in the United States, but have been for some time an established policy in many European countries. Germany and England developed pioneer legislation in this field. Medical attendance, hospital care, partial wages during disability, funeral expenses, pensions for surviving women and children, were among the provisions of compulsory insurance against illness. Old age pension plans to prevent pauperism and misery were likewise developed by European countries. The United States has been slow to adopt similar measures, apparently under the feeling that they would be paternalistic or socialistic. In the United States, the mutual life insurance companies have done a great deal to spread insurance among the masses through the offering of small policies to workingmen's families, at premiums collectible in small weekly installments. Most of these policies are, however, too small to provide adequate assistance in time of need, and they are not a sufficient substitute for proper compulsory insurance against sickness and old age. Many trade unions have endeavored to fill the gap by benefit plans and mutual help policies.

Unemployment is a hazard which, in the main, arises through no fault of the worker. Seasonal and cyclical fluctuations of industry throw the worker out of a job. There is no sound reason why the employee should bear the full brunt of this loss. It should be distributed over the industry. Compulsory insurance against at least part of the loss from unemployment has been established in England and other European countries. Wisconsin has endeavored to secure compulsory insurance of this character, but has failed to secure its adoption by the legislature.16 Such unemployment insurance as exists in the United States is the result of the enlightened voluntary action of individual employers here and there who have installed their own forms of insurance," and of the collective bargaining of employer and employee, as

15 E. H. Downey, Workmen's Compensation, p. 21.

18 See discussion by John R. Commons, in The Stabilization of Business, edited by Lionel D. Edie.

17 Ibid., chapter by Henry S. Dennison.

maintained, for instance, in some of the garment trades. In general, however, unemployment insurance is in a backward stage in the United States.

Insurance in its major forms is a comparatively recent institution. It has existed in limited degrees for a long period, but only in recent decades has it become an integral part of the whole economic system. The growing intricacy of the money economy has seemed to require a corresponding development of risk taking by means of insurance. The pecuniary technique is dependent upon an insurance technique. Likewise, group action is seen to be necessary for community well being in the modern complex society. Laissez faire and extreme individualism were perhaps adapted to an agricultural type of state, but they break down in the industrial type of state. The industrial state requires the combination of risks and hazards through insurance, to the end that the individual shall not be forced to suffer intolerable loss.

Risk Taking and Speculation.-Certain forms of speculation represent specialization in risk taking. Speculation in produce, such as cotton or wheat, tends to transfer the risk of marketing grain from farmers and manufacturers to specialists in risk taking. The speculators are large scale buyers of products, who make their purchases because they have estimated that demand some time in the future will enable them to sell at a profit. The speculative community feeds out the total supply gradually and by small degrees, for if the whole supply of a commodity, wheat for instance, were thrust upon the market instantaneously, consumers could not take up the supply. Gambling, whether on the market or elsewhere, is not to be defended.18 But speculation, which "tends to increase the supply of things where and when they are likely to be most wanted, and to check the supply of things where and when they are likely to be in less urgent demand," is of the utmost service in keeping the adjustments of supply and demand gradual and smooth.19 Speculation which interprets market news as only shrewd and brilliant experts can interpret it, and buys and sells the country's or the world's supply of a commodity at times and prices which maintain a steady flow of goods toward the consumers who want and need them, is a force for equilibrium and poise in the market. Speculation connotes in the popular mind hazard and risk on a gigantic scale. It is true that speculation entails enormous risks, but the risks are not created by speculation. The risks exist already. The risks of adjusting local, national and world supply in any commodity to local, national, and world demand, exist from the very nature of the circumstances.20 Speculation concentrates the risks of that adjustment, but it does not create them. Take away speculation, and the risks would still exist. But

18 In August, 1921, Congress passed a law regulating speculation and the exchanges. The law restricts gambling features of dealing in futures, restricts false market information, and aims to prevent market manipulation.

19 A. Marshall, Industry and Trade, p. 253.

20 H. C. Emery, Speculation in the United States, p. 141. "Speculation consists in assuming the inevitable economic risks of changes in value."

they would be scattered, broadcasted among hundreds of thousands and millions of people who have not the genius to shoulder the risks effectively. The speculator concentrates on his shoulders the natural risks of production and marketing, and is able to handle the risks efficiently because of his superlative genius for absorbing and interpreting market news, and of making forecasts, with scientific accuracy and on a gigantic scale, of the future market needs of the consumers of the world. The less difficult adjustments can be made by the interpretation of market news which the ordinary man in the market is able to make, and remarkable uniformity of action and judgment is arrived at in this commonplace way. But the greater and more intricate adjustments between supply and demand can be made smoothly only by men who are able to assimilate the vast amount of data on world markets and who are willing to shoulder the concentrated risks of speculation in the hope of making large profits.

Speculation in the great produce markets makes possible a special form of risk transference known as "hedging." By hedging, a flour manufacturer, for instance, can buy cash grain as raw material for his mill at the current price, and then can make a second, independent contract to sell grain in the future. If the price falls during the next few months, he will have lost on his cash grain, because he will have paid more than subsequent prices warranted. But he will make up this loss by his futures contract. When it is time to deliver grain under the futures contract, he can buy the grain at the low price then prevailing. But his sale price will be at the high point fixed at the time the futures contract was originally entered into. What he loses on cash grain, he will make up on futures grain. The making of future sales and purchases creates the possibility of hedging, and thereby creates the possibility of shifting risk from the manufacturer to the speculator. Numerous forms of hedging are practiced, but all have the general effect of shifting risk to the shoulders of those specialists who are most able and willing to bear risks.

Speculation in stocks and bonds on Wall Street does not always lead to a similar degree of risk transference. Too large a part of stock speculation is closely akin to gambling. Underneath this surface of gambling, however, there is a substantial element of risk specialization. The risk of loss through fluctuations in security values is concentrated in the hands of stock exchange speculators. Stock speculation tends to keep the market values of shares very close to the true values of those shares as reflected in the earning power of business.

The point to be emphasized here is that speculation is a form of risk taking. A great deal of speculation is a means of shifting risk to those who are most willing and able to bear it. Some kinds of so-called speculation are pure gambling. In general, speculation performs an indispensable and useful economic function, in concentrating risk in the hands of specialists in risk taking, who are most competent to bear the risks successfully.

Conclusion. The looseness of so many of the concepts which have been treated in this chapter does not mean that such concepts are without value in economic thought. They are, on the contrary, invaluable, as far as they go. They are indispensable to business analysis, but they are not enough to afford a complete and realistic understanding of the profit economy. For the most part, the present chapter has been devoted to the classical economic theories of profit and risk. These are important and essential. But they are not enough. They leave a great part of the phenomena of profit unexplained. They require to be supplemented by a number of more specific considerations. They lead into problems of many kinds, but do not furnish a method of solution. Consequently, the following chapter endeavors to carry the analysis of profit further by a more concrete study of various questions. With the present chapter as a background, the more concrete analysis should lead to greater definiteness in the understanding of the whole subject of profit.

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