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fact finding, statistical reports, and the providing of fundamental information of value to business.

Instead of stimulating profit, the Government may limit profit by regulation of rates and prices. Price fixing was resorted to widely during the World War, and had a restraining effect upon the accumulation of business profits. In peace times, however, price fixing encounters the opposition of both business and public opinion. This opposition is, of course, simply the state of mind which happens to prevail for the time being. It may be merely a temporary individualism; it may be a permanent individualism. One branch of enterprise

. does, however, come within the scope of Government control.

This branch is public utilities. Federal and State Governments have established commissions empowered to set maximum rates for railroads, for gas, light and heat companies, for street cars, for telephone and telegraph systems. Rate regulation is usually supposed to aim at providing a fair rate of profit on a fair valuation. What is fair is capable of widely different interpretations. Perhaps the idea which runs most commonly through definitions of fair rates is that scale of rates which will yield for the bulk of the industry the amount of profit necessary to attract capital to that industry. The consensus of opinion among public utility commissions has been that the profit necessary to attract capital is between 5 and 8 per cent on the investment. lation of public utilities has become an accepted and established part of the technique of doing business.

A third method of Government control of profit is to set the terms and conditions under which business may be carried on. The common law constitutes a mass of decisions affecting contracts and property rights. These are a set of rules for the conduct of business, and are the terms under which business may strive for profit. Legislation against monopoly, restraint of trade, unfair competition, collusion in price making, and the like provide further rules for business operation. opinions of the judiciary constitute a vast array of precedents for the guidance of profit making. Prosecution of law violation aims to prevent illegal accumulation of earnings. The law and the courts lay down the rules of the game. Business is allowed to make profit only by obeying these specified rules.

Finally, the Government may by taxation seize the profits that have been made. Progressive income taxation, or excess profit taxation, applied to the earnings of corporations and individual businesses, are the most common methods of taking profit away from the concerns that have made it. Even where price fixing or rate regulation is in force, many corporations are able, because of low costs, to make exceptional profits. These profits can in part be diverted to Government revenue by taxation. Concerns in any line of business which earn above the average profit, and especially those concerns in the so-called superprofit group, are denied undue gains by the inroads of taxation. Such taxation, within proper limits, averts excessive inequality in profit mak

ing. Overdone, it stifles business. Moderately done, it diverts extraordinary personal gains to the use of the entire community.

The Government may stimulate profit, limit and regulate it, set the terms and conditions of its accumulation, or tax it out of private hands after it has been made. In any case, Government policy has a fundamental bearing upon profit making. The economic functions of Government are intimately interwoven with the business process of gain and loss.

Profit, Surplus, and Dividends.-Profits after taxes are divided between dividends distributed to stockholders and surplus retained in the business. The following table shows the proportions in which this division has been made in different years. Also, it shows the ratio which corporate surplus bears to total national income in different years.

Year

Per Cent Dividends and Surplus Are of Profits, Average All Corporations * Per Cent Corporate Sur

plus is of Total Na

tional Income f Dividends

Surplus

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• National Bureau of Economic Research, Income in the United States, Vol. II, p. 327; also David Friday, Profits, Wages, and Prices, pp. 62, 117, 124.

National Bureau of Economic Research, Income in the United States, Vol. I, p. 35.

The bulk of the division over this period has centered within a range where from 40 to 60 per cent of profits is disbursed as dividends. The proportion which goes to surplus depends primarily upon whether business is in a state of prosperity or depression. When prosperity is widespread and profits are large, corporations set aside large reserves. When depression ensues and profits are low, corporations are able to set aside very slight reserves and often are obliged to dip into past surplus to pay current dividends. The division of profits into dividends and surplus largely reflects the ups and downs of the business cycle.10

For statistical calculations, see 0. W. Knauth, Journal of the American Statistical Association, Volume 18, p. 164 ff.; and W. I. King, idem., p. 464 ff.

10 The table at the bottom of page 238 shows variations between industries in per cent of profits disbursed as dividends in 1922.

This variation of corporate surplus is further brought out by the varying per cent which corporate surplus is of national income. Corporations normally lay aside from 2 to 9 per cent of the national income before distributing the remainder of their net earnings to the owners of the business. The share thus laid aside tends to be greatest when the share of the national income going to profits is greatest.11 Corporate surplus is greatest when profits are greatest and least when profits are least.

The greater part of this surplus is reinvested in the business. It is saving, devoted to the provision of capital. Profit put back into the

. business directly constitutes a most important source of capital accumulation. For the decade ending 1920, corporations saved directly in the neighborhood of 40 per cent of their net earnings. If we add to this saving by corporations the similar saving out of profit by a wide variety of noncorporate businesses, the aggregate of business savings out of profit amounted during the period 1909-1917 to 50 per cent of the total savings of the nation. We may conclude, therefore, that one of the most important uses to which profit is put in modern business is reserves for capital. Such capital expenditures increase the facilities of production, improve the productivity of labor, make possible greater per capita output of wealth, and augment the material income of the community as a whole.

PER CENT OF PROFITS DISBURSED AS DIVIDENDS IN 1922

Industry
Agriculture and related industries
Mining and Quarrying
All Manufactures
Food Products, Beverages and Tobacco
Textile and Textile Products
Leather and Leather Products
Rubber and Rubber Goods
Lumber and Wood Products
Paper, Pulp and Products
Printing and Publishing
Chemicals and Allied Substances
Stone, Clay and Glass Products
Metal Manufactures and others
Construction
Transportation and other Public Utilities
Trade
Service
Finance
All Others

Per Cent Dividends
Are of Profit

43.1
67.4
44.9
45.9
42.9
27.6
25.4
45.2
49.2
44.8
52.3
34.2
41.1
43.3
72.4
35.1
43.7
54.1
54.7

Total

49.6

Compiled from Senate Document No. 85, on Distributed and Undistributed Earnings of Corporations, in the form of a letter from the Secretary the Treasury, in response to a Senate Resolution of Jan. 7, 1924.

11 See p. 230 for table giving data as a basis of comparison.

This practice of business has an important bearing upon the proposal often made to increase wages by decreasing profits. If wages obtained in that way were spent by labor for immediate consumption, there would be a famine of productive capital, a dearth of savings. The inroad upon corporate surplus would have serious effects upon capital accumulation. It is, of course, conceivable that labor would

, save its increased wages. 12 If labor saved an amount equal to what corporate savings would have been, obviously the total supply of capital would not be undermined. It would mean that the same total capital was being provided but by the channel of savings out of larger wages instead of surplus set aside out of profit. If labor seized as much as one-half of present profit, and spent the amount, the result would be disastrous to the accumulation of productive capital. If labor seized one-half of present profit, and saved the amount, labor would not thereby raise its own standard of living perceptibly. What it saved it could not consume.

However, in the course of time, labor's position would be considerably advanced. Labor would own a mass of securities and properties. This reserve of personal wealth would be a great asset in the protection of family income, and in the accumulation of moderate individual fortunes. Moreover, the possession of all such capital savings would give labor an income from owning which now accrues to business concerns. If labor did the saving which is now done by business, labor would reap the interest and dividend returns on those savings which now go to business. These considerations are important in proposals to reform the economic world by a more democratic distribution of wealth.

A further feature of the situation is the comparative stability of surplus and dividends.18 Accounting practice tends toward a policy of maintaining dividends as evenly as possible in good and bad years alike. This attempt to stabilize dividends requires that in times of high profits, large reserves be set aside against the probability of low profits in later years. It also means that in times of low profits, the only means of keeping up dividends is by dipping into accumulated reserves. In many cases, dividends in poor years are paid entirely out of past surplus. Surplus acts as a shock absorber between good and bad years. It is an instrument of conservative financial policy, and of stabilization of returns to investors in the business.

The uses to which profits are put are not fixed and stereotyped. The proportion used as surplus and dividends respectively is governed from year to year by the needs of the business situation. These needs involve capital accumulation, emergency reserves, and stability of dividends.

The Profit Motive and Social Well-being.-Extreme opposite views of the profit motive are held by the socialist and the capitalist. The

12 See below, pp. 289, 414, for data bearing upon the actual uses of labor incomes in modern wage groups.

13 The diagram at the bottom of page 240 showing net quarterly profits of the United States Steel Corporation available for dividends, compared with dividends

profit motive receives from the socialist scathing denunciation, from the capitalist lyric adulation. A comparison of these opposite views furnishes a basis for critical analysis.

The modern socialist indictment of profit is summarized as follows by Sidney and Beatrice Webb in a discussion of The Decay of Capitalist Civilization.14

In the first place, the bulk of the people live in penury and a large number of them are perpetually threatened by starvation. In the second place, this penury and its accompanying insecurity are rendered more hideous and humiliating by the relative comfort and luxury of the proprietary class, and by the shameless idleness of some of its members. The worst circumstance, however, is the glaring inequality in personal freedom between the propertyless man and the member of the class that lives by owning. Hour by hour, day by day, year in and year out, the two-thirds of the nation who depend for their daily or weekly housekeeping on gaining access to the instruments of production find themselves working under the orders of the relatively restricted class of those who own these instruments. The sanction for the orders is not legal punishment, but, ultimately, a starvation which is supposed to be optional.

Who can measure the diminution in health, in happiness, in morality, and in intelligence caused through the profit maker by the defilement of air, water, and land, and the destruction of all amenity and beauty in the surroundings of countless millions of his fellow citizens? In pursuit of the limitless natural

actually disbursed, indicates the policy of stable dividends, in spite of fluctuating profits and surplus.

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1915 1916 1917 1918 1919 1920 1921 1922 1923 The diagram is as compiled by the Pollak Foundation from the Annual Reports of the United States Steel Corporation.

14 Pp. xv, 118, 131, 186, 195. See also R. H. Tawney, The Acquisitive Society, and Bertrand Russell, The Prospects of Industrial Civilization.

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