The Entrepreneur a Passive Functionary under Static Conditions.—Purely passive is the function of the entrepreneur under static conditions. In so far as any effect on his income is concerned he might as well reside in a foreign land as in the one where his business is located, provided always that the management were unaffected. When the same man is both entrepreneur and manager, the absence of the first of these functionaries would mean the absence also of the second, and that would cause trouble; but the purely mercantile operation of getting a title to a product and then surrendering it can be carried on as well in one place as in another. The entrepreneur in his capacity of buyer and seller does not even do the work which purchases and sales involve. That is commonly done by agents. Some of it, of course, may be done by the responsible manager himself, and if that person is also the entrepreneur, it follows that he does a part of the commercial labor of his business. In this, however, he goes beyond his function as entrepreneur. In that capacity he does, as we have said, no labor of any kind. Sales and purchases are made in his name, but he does none of the work that leads up to them.[1]
How the Entrepreneur contributes to Production under Dynamic Conditions.—In a dynamic state the entrepreneur emerges from this passive position. He makes the supreme decisions which now and again lead to changes in the business. "Shall we adopt this new machine?" "Shall we make this new product?" "Shall we enter this new market?" are questions which are referred to him, and on the decisions he reaches depends the prospects of profit for the business. This activity is not ordinary labor, but in a true sense it is a productive activity, since it results in placing labor and capital where they can produce more than they have done and more than they could do were it not for the enabling act of the entrepreneur which places them on a vantage ground of superiority. This subject will be discussed in a later chapter and in connection with other phases of economic dynamics.
Values at a Static Level only when Entrepreneurs' Gains are Nil.—Any net profit on an entrepreneur's part means that his product is selling for more than the elements of it have cost him. But this is a condition which, if labor and capital are as mobile as the static hypothesis requires that they should be, will cause this entrepreneur and others to move labor and capital into his industry, thus increasing its output and lowering the selling price of its product. If there is no such action going on, it shows that the entrepreneurs have no incentive for taking it.
Values at a Static Level only when the Gains of Labor in the Different Industries are Equalized.—If labor is creating more in one subgroup than in others, as it often is in a dynamic condition, that fact means that some entrepreneurs are making a profit, and, according to the principle stated in the preceding paragraph, this means that values are not at their static or "natural" level. If, owing to new methods or to some other cause, a given amount of labor[2] in the subgroup that produced the A´´´ of our table creates an amount of that product which sells for more than the B´´´ or the C´´´ which labor of like quantity makes, then the manufacturers of A´´´ would obviously get a margin of profit. They would not be obliged to pay for labor any more than the market rate, and that, as we shall see, cannot exceed what labor produces in the groups B´´´ and C´´´. In A´´´ the labor creates more and the employer pockets the difference. In saying this we assume one fact which we undertake later to prove; namely, that there is a definite amount of each product which can be attributed to labor alone as its producer. Capital and labor work together, but each is, in effect, the creator of a certain fraction of their joint product.
Values Static only when the Gains of Capital in Different Industries are Equalized.—If capital is creating more in one industry than in another, there is a margin of profit for the entrepreneurs in the exceptionally productive industry. They pay as interest on the capital they use only the market rate, which is what equal amounts of capital can produce and get elsewhere. If they produce more in the one group, the entrepreneurs there can pocket the excess as they did in the case of the product of labor. We assume that there is everywhere a definite product that can be attributed to capital alone.
Values Normal when Moneys paid out by Entrepreneurs equal Moneys Received.—In the preceding paragraphs we have spoken of exchange values as being static under certain conditions, but we might have expressed the essential fact by saying that prices are static under these conditions since the money a product brings is a true expression of its value. If A´´´ sells for as many dollars as does B´´´, the two things exchange for each other. In like manner the product of labor and that of capital may be expressed in terms of money, since the quantities of goods which they respectively make sell for certain sums. Wages and interest are nearly always conceived in terms of money. The commercial mode of computing costs of production and returns from production is to translate them into moneys paid by entrepreneurs and moneys received.
Costs of Production as related to Static Incomes.—What to an entrepreneur are costs are to workmen and capitalists incomes. The one pays out wages and interest, and the others get them; and these two sums are normal when together they equal the prices received for goods produced. The entrepreneur is the universal paymaster, and in a static condition all incomes come from his hand.
FOOTNOTES
[1] The holders of common stock in a corporation are always entrepreneurs, and they are also capitalists if the stock represents any real capital actually paid in. If the bonds and the preferred stock represent all the real capital that there is, any dividends that may be paid on the common stock are a pure entrepreneur's profit. If, on the other hand, the stock all represents money actually put into the business, the dividends on it contain an element of net profit if they exceed simple interest on the capital and insurance against the risks that are not guarded against by actual insurance policies. If the rate of simple interest is four per cent, and the value of the unavoidable risk is one per cent, then a dividend of six per cent contains a pure entrepreneur's profit of one per cent. In dynamic conditions such a return is often to be expected, and we shall soon study the conditions that afford it.
In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. A small remainder of risk is still entailed upon the capitalist if he leaves his money in this business. The death of the managing partner, the defaulting of payments for goods sold, the chances of unwise or dishonest conduct on the part of clerks or overseers, always impend over a business, but these dangers are at a minimum when the man who is at the head of the force of managers has capital of his own in the business. Risks are at a static level only when they are thus reduced; and for our present purpose it is best to consider that competition has eliminated the establishments where any recklessness has been shown in the management, and that the unavoidable remainder of risk resolves itself, nearly enough for practical purposes, into a deduction from the product which the surviving establishments turn out in a long period of time. A small percentage of their annual gains, set aside for meeting unavoidable losses, will make good these losses as they occur and leave the businesses in a condition in which they can yield as a steady return to owners of stock, to lenders of further capital, and to laborers all of their real product.