who desire to do a larger trade at a lower rate of profit on the turnover than has been customary, but at a larger rate of profit per annum on their capital. If however there happens to be no great change of this kind going on, the traditions of the trade that a certain rate of profit on the turnover should be charged for a particular class of work are of great practical service to those in the trade. Such traditions are the outcome of much experience tending to show that, if that rate is charged, a proper allowance will be made for all the costs incurred for that particular purpose, and in addition the normal rate of profits per annum in that class of business will be afforded. If they charge a price which gives much less than this rate of profit on the turnover they can hardly prosper; and if they charge much more they are in danger of losing their custom, since others can afford to undersell them. This is the "fair" rate of profit on the turnover which an honest man is expected to charge for making goods to order, when no price has been agreed on beforehand; and it is the rate which a court of law will allow, in case a dispute should arise between buyer and seller,

Profits are a constituent element of normal

§ 4. During all this inquiry we have had in view chiefly the ultimate, or long-period or true normal results of economic forces; we have considered the way in which the supply of business ability in command supply-price. of capital tends in the long run to adjust itself to the demand; we have seen how under the action of the Law of Substitution it seeks constantly every business and every method of conducting every business in which it can render services that are so highly valued by persons who are able to pay good prices for the satisfaction of their wants, that those services will in the long run earn a high reward. The motive force is the competition of undertakers: each one tries every opening, forecasting probable future events, reducing them to their true relative proportions, and considering what surplus is likely to be afforded by the receipts of any undertaking over

the outlay required for it. All his prospective gains enter into the profits which draw him towards the undertaking; all the investments of his capital and energies in making the appliances for future production, and in building up the "Immaterial" capital of a business connection, have to show themselves to him as likely to be profitable, before he will enter on them : the whole of the profits which he expects from them enter into the reward, which he expects in the long run for his venture.

Much of the argument of Chapter V. as to the earnings of industrial skill is applicable to the earnings of business power. There are, however, some differences between the two cases, which call for our study.

ate with prices

§ 5. In the first place the undertaker's profits bear the first brunt of any change in the price of those Profits fluctuthings which are the product of his capital and in even (including his business organization), of his greater ratio: labour and of the labour of his employés; and as a result fluctuations of his profits generally precede fluctuations of their wages, and are much more extensive. For, other things being equal, a comparatively small rise in the price for which he can sell his product is not unlikely to increase his profit manyfold, or perhaps to substitute a profit for a loss. That rise will make him eager to reap the harvest of good prices while he can; he will be in fear that his employés will leave his employment or refuse to work. He will be more able and more willing to pay high wages; and wages but the wages will rise. But experience shows that (whether of employés lag they are governed by sliding scales or not) they their fluctuaseldom rise as much in proportion as prices; and tions are less. therefore they do not rise nearly as much in proportion as profits.

behind, and

Another aspect of the same fact is that when trade is bad, the employé at worst is earning nothing towards the support of himself and his family; but the employer's outgoings are likely to exceed his incomings, particularly if he

The profits of individuals differ more widely than

ordinary earnings do.

is using much borrowed capital. In that case his Gross Earnings of Management are a negative quantity; that is, he is losing his capital. In very bad times this happens to a great number, perhaps the majority of undertakers; and it happens almost constantly to those who are less fortunate, or less able, or less well fitted for their special trade than others. § 6. To pass to another point, the number of those who succeed in business is but a small per-centage of the whole; and in their hands are concentrated the fortunes of others several times as numerous as themselves, who have made savings of their own, or who have inherited the savings of others and lost them all, together with the fruits of their own efforts, in unsuccessful business. In order therefore to find the average profits of a trade we must not divide the aggregate profits made in it by the number of those who are reaping them, nor even by that number added to the number who have failed: but from the aggregate profits of the successful we must subtract the aggregate losses of those who have failed, and perhaps disappeared from the trade; and we must then divide the remainder by the sum of the numbers of those who have succeeded and those who have failed. It is probable that the true. Gross Earnings of Management, that is, the excess of profits over interest, is not on the average more than a half, and in some risky trades not more than a tenth part, of what it appears to be to persons who form their estimate of the profitableness of a trade by observation only of those who have secured its prizes. There are however reasons for thinking that the risks of trade are on the whole diminishing rather than increasing1.

1 There are other differences between the earnings of business power and of ordinary earnings, for a study of which, as well as of the relation in which earnings of management stand to the rent of exceptional ability, and of the conditions under which Profits are to be regarded as a Quasi-rent, the reader is referred to Principles, VI, VIII.

4

CHAPTER IX.

RENT OF LAND.

to inherent

§ 1. WE may call to mind that the land has an “inherent income of heat and light and air and rain, which man cannot appreciably affect; and advantages Income of situation, of which many are beyond man's attributed control, while but few of the remainder are the properties direct result of the investment of capital and of land. effort in the land by its individual owners. The supply of these properties is not dependent on human effort, and would therefore not be increased by extra rewards to that effort. On the other hand those chemical or mechanical properties of the soil, on which its fertility largely depends, can be modified, and in extreme cases entirely changed by man's action.

Now let us revert to our study of the tendency to diminishing return in agriculture; still supposing that the owner of the land undertakes its cultivation, Résumé of so that our reasoning may be general, and Book IV. independent of the incidents of particular forms Ch. II. III. of land tenure. We saw how the return to successive "doses," or applications of capital and labour, though it may increase for the first few doses, will begin to diminish when the land is already well cultivated. The cultivator continues to apply additional capital and labour, till he reaches a point at which the return is only just sufficient to repay his outlay and

reward him for his own work. That will be the dose on the margin of cultivation, whether it happens to be applied to rich or to poor land. An amount equal to the return to it will be required, and will be sufficient to repay him for each of his previous doses; and the excess of the gross produce over this amount is his producer's surplus. Supposing him to be a man of ordinary ability and enterprise and to farm fairly well, this will be what is commonly called the rental value of the land.

This surplus or rental value depends on, firstly, the richness of the land, and secondly, the relative values of those things which he has to sell and of those things which he needs to buy. And the prices at which the various requisites of the farm can be bought, and its various products sold, depend on his surroundings; and changes in that are continually changing the relative values of different crops and therefore the relative values of land in different situations.

Thus it is important to remember that inequalities of situation relatively to the best markets are just as powerful causes of inequalities of producer's surplus as are inequalities of absolute productiveness. But England is so small and so thickly peopled, that the cultivator can get nearly the same net price in whatever part of England he is; and English economists have ascribed to fertility the first rank among the causes which determine the value of agricultural land, and have treated situation as of secondary importance. They have therefore often regarded the producer's surplus, or rental value, of land as the excess of the produce which it yields, over what is returned to equal capital and labour (applied with equal skill) to land that is so barren as to be on the margin of cultivation; without taking the trouble to state that separate allowance must be made for differences in the expense of marketing. But economists in new countries, observing that the richest land may lie uncultivated if it has not good access to markets think of situation at least