SECTION III
THE MORAL ASPECT OF PROFITS
CHAPTER XV
THE NATURE OF PROFITS
We have seen that rent goes to the landlord as the price of land use, while interest is received by the capitalist as the return for the use of capital. The two shares of the product which remain to be considered include an element which is absent from both rent and interest. The use for which profits and wages are paid comprises not merely the utilisation of a productive factor, but the sustained exertion of the factor's owner. Like the landowner and the capitalist, the business man and the labourer put the productive factors which they control at the disposal of the industrial process; but they do so only when and so long as they exercise human activity. The shares that they receive are payments for the continuous output of human energy. No such significance attaches to rent or interest.
The Functions and Rewards of the Business Man
Who is the business man, and what is the nature of his share of the product of industry? Let us suppose that the salaried manager of a hat factory decides to set up a business of the same kind for himself. He wishes to become an entrepreneur, an undertaker, a director of industry, in more familiar language, a business man. Let us assume that he is without money, but that he commands extraordinary financial credit. He is able to borrow half a million dollars with which to organise, equip, and operate the new enterprise. Having selected a favourable site, he rents it on a long term lease, and erects thereon the necessary buildings. He installs all the necessary machinery and other equipment, hires capable labour, and determines the kinds and quantities of hats for which he thinks that he can find a market. At the end of a year, he realises that, after paying for labour of all sorts, returning interest to the capitalist and rent to the landowner, defraying the cost of repairs, and setting aside a fund to cover depreciation, he has left for himself the sum of ten thousand dollars. This is the return for his labour of organisation and direction, and for the risk that he underwent. It constitutes the share called profits, sometimes specified as net profits.
This case is artificial, since it assumes that the business man is neither capitalist nor landowner in addition to his function as director of industry. It has, however, the advantage of distinguishing quite sharply the action of the business man as such. For the latter merely organises, directs, and takes the risks of the industrial process, finds a market for the product, and receives in return neither rent nor interest but only profits. In point of fact, however, no one ever functions solely as business man. Always the business man owns some of the capital, and very often some of the land involved in his enterprise, and is the receiver not only of profits but of interest and rent. Thus, the farmer is a business man, but he is also a capitalist, and frequently a landowner. The grocer, the clothier, the manufacturer, and even the lawyer and the doctor own a part at least of the capital with which they operate, and sometimes they own the land. Nevertheless their rewards as business men can always be distinguished from their returns as capitalists and landowners by finding out what remains after making due allowance for rent and interest.
It is a fact that many business men, especially those directing the smaller establishments, use the term profits to include rent and interest on their own property. In other words, they describe their entire income from the business as profits. In the present discussion, and throughout this book generally, profits are to be understood as comprising merely that part of the business man's returns which he takes as the reward of his labour, and as insurance against the risks affecting his enterprise. Deduct from the business man's total income a sum which will cover interest on his capital at the prevailing rate and rent on his land, and you have left his income as business man, his profits.