The

physical plant is the same. The tangible goods are the same. material equipment is the same. The natural resources are the same. The capacity to produce goods is the same. But the capacity to produce profits is not the same and therefore the value of the entire physical wealth is not the same. Physical goods versus monetary values, material things versus dollar values, tangible wealth versus pecuniary wealth,such are the contrasting aspects of the modern property markets. To understand the business aspect of modern economic life, one must focus attention upon the value making forces. Value making in the business sense is capitalization of prospective profit making.

Profit and Wages.-The struggle which persists between capital and labor centers in large measure upon a desire to obtain as large a share as possible of the national income. Labor desires to make the share of wages as high as possible. The division of the proceeds of industry is, therefore, a major point of contention. How much shall go to profit and how much shall go to wages are questions of fundamental concern. In order to analyze the problem, it is necessary to ascertain some of the pertinent facts bearing upon it.

One conspicuous fact appears to be that the division of the national income results in considerable variation in the relative size of profit and wages in different years. In 1909, wages and salaries constituted 68.7 per cent of our national income. In 1916 their share had fallen to 66.7 per cent. But in 1918, it had risen to 77.3 per cent. The share of wages was nearly one-sixth greater in 1918 than in 1916. The following data show the variation in the wage share as compared with the share of management and property from 1909 to 1918.6

DIVISION OF COMBINED NET VALUE PRODUCT OF MINES, FACTORIES, AND LAND TRANSPORTATION BETWEEN EARNINGS OF EMPLOYEES AND RETURNS FOR MANAGEMENT AND THE USE OF PROPERTY, 1909-1918

6 National Bureau of Economic Research, The Income of the United States, Vol. I, p. 97.

The foregoing figures come down only to the year 1919. Similar data computed by David Friday indicate that the share of labor was even larger in 1919 than in 1918. Data from the reports of the Treasury Department on Statistics of Income indicate similar variations from 1918 to 1922. Personal income derived from dividends was 14 per cent of total personal income in 1918, but only 10.9 per cent in 1919, 10.2 per cent in 1920, 10.6 per cent in 1921, and 10.7 per cent in 1922. While dividends were becoming less important as a source of personal income, wages and salaries were becoming more important. Whereas wages and salaries constituted only 47 per cent of total income in 1918, they mounted to 47.9 per cent in 1919, 57.2 per cent in 1920 and 59.2 per cent in 1921.

From such data, it is obvious that profit and wages do not receive fixed proportions of the national income from year to year. In the postwar period, labor received a growing share of the total income. Indeed, the share of labor in this period became unusually large, and constituted a material improvement in the position of labor. If labor could hold the high proportion of income which it won during these years, such a favorable position would seem to be a substantial achievement in the direction of labor welfare.

The labor group bettered themselves during the post-war period, but for a period of two decades prior to that time, labor had suffered an opposite fate. Year by year the total income of the nation increased, but real wages were either stationary or actually declining. Labor's share of the steadily increasing national income declined. The lesson of the experience would seem to be that labor cannot count automatically on receiving its proportionate share from an increase of national production. Labor's concern is not merely how much shall be produced, but how large a share of that product shall revert to labor. Profit's concern is not merely how much shall be produced but how large a share of that product shall revert to profit. The records of the past show clearly that neither capital nor labor has received a fixed and absolute share. On the contrary, they receive varying shares from year to year, depending upon the conditions peculiar to the time.

7 Distribution of Value added by Mining, Manufacturing, Railroad and Public Utility Corporations.

The drastic proposal is often made that profit be considered an unearned income and therefore be divided among the laborers as increased wages. The chapters dealing with wages deal with this matter statistically. At this point, we may simply point out that statistics of income show that in the aggregate very little increase in income could accrue to wage earners if profit were wiped out. The hope of labor progress is not from dividing profit up among the masses in petty amounts. The hope lies in an increase of the aggregate of production, and an assurance that labor shall receive its proportionate share of the increase. A greater total product, and an adequate share in that total, is the sound basis for labor progress. It is certainly a more constructive method than the device of increasing wages by decreasing profits. The latter is narrowly limited in its possibilities; the former is positive and permanent.

Profit and the Consumer.-There has been a popular notion that profit is a tax on the consumer. To test this notion, it is necessary to discriminate between two classes or sources of profit. One class of profits undoubtedly constitutes a gouge out of the consumer. This class of profits includes gains from monopoly control, from unfair competition, from restraint of trade, from exorbitant price boosting in order to take advantage of sudden spurts of demand or of temporary conditions of imperfect competition. In all such cases, profits do add to the expense of goods. They are a kind of tribute exacted from the consumer, by virtue of the strategic advantage held by certain business concerns. This power to take toll of the consumer tends to succumb to the gradual force of competition. But the process of competition is so prolonged and delayed that a very considerable part of business all of the time finds itself able to make a profit by adding to the burden of the consumer.

A second class of profits, on the other hand, involves no added burden to the consumer. Profits derived by producing at lower cost than other concerns are the gains of efficiency. The goods are sold at the price charged by other concerns. No price boosting takes place. Exceptional efficiency and exceptional lowness of cost are the cause of such profit, and these in no way constitute a gouging of the consumer. Likewise, if profit is made by quantity output, so that a small margin of profit is made on each unit of product but a large total profit is made from the great number of units turned out, there is no burden placed upon the consumer. The profits are due to the economies and advantages of quantity production. Prices are not boosted, they may even be lowered. Consumers are not taxed. High profits of this type are not the cause of high prices. The profits of efficiency and of quantity output are not an added burden upon the consumer.

Consequently, whether or not the making of money injures the consumer depends definitely upon how the money is made. Some pecuniary profit is due to taking advantage of the consumer by boosting prices; some pecuniary profit is due to cheapening costs without affecting prices.

to the consumer. To test the effect on the consumer, it is necessary to make the distinction between the two classes of profits.

Profit and Inflation.-In later chapters dealing with business cycles and with price movements, the fact is established that profits are unusually great during a period when prices in general are rising. A period when the average level of prices is rising is called a period of inflation. Inflation gives rise to bountiful profits for the bulk of business men. Deflation, or falling prices, on the other hand, gives rise to heavy losses and to severe diminution of profits.

8

The reason is elaborated later, but may be briefly stated here. When prices are rising, business buys at today's scale of prices. But business sells at tomorrow's scale of higher prices. When the price level is rising, the scale of selling prices tends to outdistance the scale of buying prices for the individual concern. Inflation lays a perfect foundation for buying low and selling high. Deflation works to an opposite result. Business then buys at today's high prices, but sells at tomorrow's lower prices. Deflation reverses the price spread, and lays an inevitable foundation for buying high and selling low.

The profits of inflation are unearned profits. They are unearned in the sense that they arise through no virtue, merit, or action of the business man. They arise, due solely to an external cause, that is, to a rising price level. The business man did not generate inflation. He has no power to bring it on or to halt its course. Inflation is the product of excessive issues of bank credit and of government notes. The banks and the governments determine whether inflation shall exist or not. They determine the matter by the expansion or contraction of money and credit. If financial policy of banks and governments leads to inflation, then business reaps exceptional profits. Business has done nothing exceptional to earn the exceptional profit. The only exceptional force, inflation, is one which business did not create and which business cannot take away. It has been said that when inflation occurs, business cannot help making profit. Without any superior efficiency, without any unusual effort, business then wins extraordinary gains. Likewise it is true that when deflation comes, business cannot help suffering losses. Without any slackening of efficiency, without any lessening of effort, business then incurs extraordinary losses. The profits of inflation are unearned profits; the losses of deflation are unearned or undeserved losses. Profit and loss of this kind must be set down wholly to chance.

The profits of inflation are due to no special greed or avarice on the part of business. This fact, however, is not at all conceded by public opinion. The public fastens the stigma of profiteering upon the gains of inflation. During a period of inflationary profits, agitation runs high for the prosecution of the business concerns which are winning high profits. The public attributes such profits to selfishness, to exploitation, to monopoly, to violation of the law, to conspiracy, to malice aforethought. But it is not high profits which make inflation. Rather, it is 8 See below, p. 521.

inflation which makes high profits. The inflation is due to over-expansion of finance, not to greed for profit. The inflation is due to a cause which business did not make and which business cannot control. The cause of inflation lies outside the jurisdiction of business. The results of inflation fall into the lap of business. The golden harvest of profit goes to business. Rising prices showered rising profits down upon business.

Just as the public misunderstands the cause of profiteering during inflation, so it misunderstands the proper remedy. Instead of passing laws to forbid further price increases, or of bringing profiteers into courts for prosecution, or of preaching to business the duties of selfrestraint in pursuit of gain, the measure which most of all is needed. to deal with inflationary profits is to stabilize price levels. To stop profiteering, stop inflation. To stop inflation, stop the over-issue of money and credit. The technical consideration involved in such a price policy is taken up later in chapters dealing with money and banking. At this point, it is sufficient to emphasize the fundamental principle that profits due to inflation can be stopped only by first stopping inflation itself. Price stabilization by a suitable financial policy on the part of banks and governments automatically puts an end to profiteering. This is the logical economic method of dealing with the situation, and makes all other popular proposals irrelevant and futile. When we eliminate inflation, we eliminate at the same stroke the profiteering which has been the creature of inflation.

Profit and Government.-Government policy relates to profit in a variety of important ways.

The Government may encourage and stimulate profit by legislation and by administrative policy. A cardinal example of such help is the protective tariff. Protective duties are aimed toward an improvement in the profit-making power of domestic business. The method involved is an excellent illustration of the contrast between pecuniary profit and physical production. The tariff restricts the amount of tangible goods available for the use of the nation as a whole. The rates keep goods out of the country, and limit the goods which consumers can obtain. But this restriction of physical goods is a direct pathway to an increase of money profits. Business profit under the tariff accrues from arbitrarily limiting the country's supply of goods. Likewise, administrative branches do all in their power to encourage exports of goods. Business profits depend upon the amount of goods sold. The gain of society, on the other hand, would require not that we get rid of as many goods as possible by exports, but that we get as many goods as possible by imports. The whole network of tariffs is formed because of the distinction. which is at the heart of modern business, between productive gain in the physical sense and pecuniary gain in the money sense. The tariff is, in essence, a governmental device for increasing money profit by decreasing physical product. Other measures of Government stimulation. of profit are common. One of the most important is scientific research,