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and especially for the services of those who, having business ability but no capital of their own, desire to reap some Earnings of Management as salaried officials of a great undertaking. And as has already been observed, CoCo-operation. operation promises, more than any other form of business association, to turn to good account the capabilities of the working man for the higher posts of business management.

Thus then each of the many modern methods of business has its own advantages and disadvantages: and its application is extended under the action of the Law of Substitution in every direction until that limit or margin is reached, at which its special advantages for that use no longer exceed its disadvantages.

a wide

§ 5. The supply of business power is large and elastic, since the area from which it is drawn is wide. Every- The supply of one has the business of his own life to conduct; business ability is drawn this, if done well, affords to some extent training from for business management; and there is therefore area, no other kind of highly paid ability which depends so little on labour and expense applied specially to obtaining it, and which depends so much on so-called "natural and is nonqualities." And, secondly, business power is specialized. highly non-specialized; because in the large majority of trades, technical knowledge and skill become every day less important relatively to the broad and non-specialized faculties of judgment, promptness, resource, carefulness and steadfastness of purpose.

adjustment of Earnings to the difficulty and importance of the

And we may conclude that the rarity of the natural abilities and the expensiveness of the special The training required for the work affect normal Earnings of Management in much the same way as they do the normal wages of skilled labour. In either case a rise in the income to be earned fairly accusets in operation forces tending to increase the supply of those capable of earning it; and in either case the

work done is

rate.

extent to which the supply will be increased by a given rise of income, depends upon the social and economic condition of those from whom the supply is drawn. For though it is true that an able business man who starts in life with a great deal of capital and a good business connection is likely to obtain higher Earnings of Management than an equally able man who starts without these advantages; yet there are similar, though smaller, inequalities between the earnings of professional men of equal abilities who start with unequal social advantages; and the wages even of a working man depend on the start he has had in life almost as much as on the expense which his father has been able to afford for his education1.

1 Some difficulties in obtaining accurate knowledge of the true Earnings of Management in different trades are indicated in Principles VI. VII. 7.

CHAPTER VIII.

DEMAND AND SUPPLY IN RELATION TO CAPITAL AND BUSINESS POWER, CONCLUDED.

We have next

§ 1. THE profits of a business are the excess of its receipts over its outgoings, and the annual rate of profits is the ratio which the yearly profits bear to the capital invested. We have next to inquire whether there is any general tendency of the rate of profits to equality.

to examine the tendency of the

rate of profits

to equality.

between large

The first difficulty arises from the fact that the outgoings of a business and therefore its profits are not always estimated in the same way. This was well pointed out by Adam Smith; who said: "The whole drugs which the best employed apothecary in a large market-town will sell in a year may not perhaps cost him above thirty or forty pounds. Though he should sell them, therefore, for three Variations in or four hundred or a thousand per cent. profit nominal profits this may frequently be no more than the reason- and small busiable wages of his labour in the only way in nesses. which he can charge them, upon the price of the drugs. The greater part of the apparent profit is real wages disguised in the garb of profit. In a small seaport town a little grocer will make forty or fifty per cent. upon a stock of a single hundred pounds, while a considerable wholesale merchant in the same place will scarce make eight or ten per cent. upon a stock of ten thousand."

The greater part of the nominal inequality between the normal rates of profit in small businesses and in large would disappear, if the scope of the term profits were narrowed in

Correction of

an anomaly of classes of services.

language.

the former case or widened in the latter, so that it included in both cases the remuneration of the same There are even reasons for thinking that the rate of profit, rightly estimated, on large capitals tends to be higher than on small. For of two businesses competing in the same trade, that with the larger capital can nearly always buy at the cheaper rate, and can avail itself of many economies in the specialization of skill and machinery and in other ways, which are out of the reach of the smaller business: while at most the only important advantage, which the latter is likely to have, consists of its greater facilities for getting near its customers and consulting their individual wants. In trades in which this last advantage is not important, and especially in some manufacturing trades in which the large firm can sell at a better price than the small one, the outgoings of the former are proportionately less and the incomings larger; and therefore, if the profits be reckoned in the same way in both cases, the rate of profits in the former case must be higher than in the latter.

But these are the very businesses in which it most frequently happens that large firms after first crushing out small ones, either combine with one another and thus secure for themselves the gains of a limited monopoly, or by keen competition among themselves reduce the rate of profit very low. There are many branches of the textile, the metal, and the transport trades in which no business can be started at all except with a large capital; while those that are begun on a moderate scale struggle through great difficulties, in the hope that, after a time, it may be possible to find employment for a large capital, which will yield Earnings of Management high in the aggregate though low in proportion to the capital.

There are some trades which require a very high order of ability, but in which it is nearly as easy to manage a very large business as one of moderate size. In rolling mills, for instance, there is little detail which cannot be reduced to

routine, and a capital of £1,000,000 invested in them can be controlled by one able man. A rate of profits of 20 per cent., which is not a very high average rate for some parts of the iron trade, would give the owner of such works Earnings of Management amounting to more than £150,000 a year. And since iron-masters can with so little additional effort get the Earnings of Management on an increased capital, wealthy men remain in the trade longer than in most others; and the competition of the great iron-masters with one another is said to have reduced the average rate of profits in the trade below the ordinary level.

The rate of profits is low in nearly all those trades which require very little ability of the highest order, and in which a public or private firm with a good connection and a large capital can hold its own against new-comers, so long as it is managed by men of industrious habits with sound common sense and a moderate share of enterprise. And men of this kind are seldom wanting either to a well-established public company or to a private firm which is ready to take the ablest of its servants into partnership.

rison between

We may then conclude, firstly that the true rate of profits in large businesses is higher than at first sight General result appears, because much that is commonly counted of the compaas profits in the small business ought to be classed large businessunder another head before the rate of profits in es and small. it is compared with that in a large business: and secondly that, even when this correction has been made, the rate of profits declines generally as the size of the business increases. § 2. The normal Earnings of Management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. Individual trades have indeed peculiarities of their own; and all rules on the subject are liable to great exceptions. But gene

Profits are high where the Circulating capi

tal is large relatively to the

Fixed.

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