Principles of Political Economy / Abridged with Critical, Bibliographical, and Explanatory Notes, and a Sketch of the History of Political Economy

by John Stuart Mill

Inasmuch as risk is the cause affecting the rate of interest, it would be much simpler to consider the whole reward for abstinence as interest, the rate of which is affected by the risk; and to carefully exclude from the profits of capital the payment for “assiduity and skill,” which is distinctly wages of labor. The “wages of superintendence,” as every one on a moment's reflection must admit, have no necessary connection whatever with the possession of capital. The thing with which the laborer is occupied does not give the reason for associating his [pg 218] wages with the name of that thing; because a highly-qualified manager supervises the operations of capital, it does not follow that he has capital, or should be regarded as being paid for the possession of capital. The man who shovels ashes is not paid wages of ashes, any more than a man who superintends other people's capital is paid the reward of capital. The payment for services, in the one case as in the other, depends upon the skill of the manager, just as it does with an ordinary mechanic, rising or falling with his fitness for the peculiar work. Skill as a manager is the cause; the amount of the remuneration is the consequence. If so, then the wages of superintendence have no logical connection, in the economic sense, with capital as the thing which determines the amount of its reward, any more than it affects the wages of any and all labor. The payment for the use of capital, simply as capital, may be seen by the amount which a widow who is not engaged in active business receives from her property invested as trust funds. Moreover, it is less and less true that the manager of the operations of industry is necessarily the capitalist. To see this, mark the executive managers (called “treasurers” by custom) of cotton and woolen mills, who receive a remuneration entirely distinct from any capital they may have invested in the shares of the corporation; and the officials of the great mutual insurance companies, who receive the wages of managers, but for managing the capital of others. A large—by far the largest—part of what is usually called profit, therefore, should be treated as wages, and the forces which govern its amount are the same as those affecting the amounts of all other kinds of wages, such as are discussed in the preceding chapter. The acknowledgment of this distinction is of extreme importance, and affects, in a profound way, the whole question of distribution. To include “wages of superintendence” in profits of capital is to unnecessarily complicate one of the most serious economic questions—namely, the relations of capital and labor.

§ 2. The Minimum of Profits; what produces Variations in the Amount of Profits.

The lowest rate of profit that can permanently exist is that which is barely adequate, at the given place and time, to afford an equivalent for the abstinence, risk, and exertion implied in the employment of capital. From the gross profit has first to be deducted as much as will form a fund sufficient on the average to cover all losses incident to the employment. Next, it must afford such an equivalent to the owner of the capital for forbearing to consume it as is then and there a sufficient motive to him to persist in his abstinence. How much will be required to form this equivalent depends [pg 219] on the comparative value placed, in the given society, upon the present and the future (in the words formerly used): on the strength of the effective desire of accumulation. Further, after covering all losses, and remunerating the owner for forbearing to consume, there must be something left to recompense the labor and skill of the person who devotes his time to the business.

Such, then, is the minimum of profits: but that minimum is exceedingly variable, and at some times and places extremely low, on account of the great variableness of two out of its three elements. That the rate of necessary remuneration for abstinence, or in other words the effective desire of accumulation, differs widely in different states of society and civilization, has been seen in a former chapter. There is a still wider difference in the element which consists in compensation for risk.

The remuneration of capital in different employments, much more than the remuneration of labor, varies according to the circumstances which render one employment more attractive or more repulsive than another. The profits, for example, of retail trade, in proportion to the capital employed, exceed those of wholesale dealers or manufacturers, for this reason among others, that there is less consideration attached to the employment. The greatest, however, of these differences, is that caused by difference of risk. The profits of a gunpowder-manufacturer must be considerably greater than the average, to make up for the peculiar risks to which he and his property are constantly exposed. When, however, as in the case of marine adventure, the peculiar risks are capable of being, and commonly are, commuted for a fixed payment, the premium of insurance takes its regular place among the charges of production, and the compensation which the owner of the ship or cargo receives for that payment does not appear in the estimate of his profits, but is included in the replacement of his capital.

The minimum of profits can not properly include wages of superintendence, nor is it so included, practically, in Mr. Mill's [pg 220] discussions on the minimum of profits in a later part of this volume. The operation of the various elements in changing the amount of profits might be expressed as follows: As between different countries and communities, who have a different effective desire of accumulation, profits may vary with the element of interest and risk; within the same district, where interest is generally the same on the same security, profits may vary with the risk attached to different industries; and, within the same occupations, interest and risk being given, the wages of superintendence may make a greater variation than either of the other two causes—since a skillful manager may make a large return, a poor one none at all. Or between two employments, interest and risk remaining the same, wages of superintendence sometimes produce a wide difference.

The portion, too, of the gross profit, which forms the remuneration for the labor and skill of the dealer or producer, is very different in different employments. This is the explanation always given of the extraordinary rate of apothecaries' profit. There are cases, again, in which a considerable amount of labor and skill is required to conduct a business necessarily of limited extent. In such cases a higher than common rate of profit is necessary to yield only the common rate of remuneration.

All the natural monopolies (meaning thereby those which are created by circumstances, and not by law) which produce or aggravate the disparities in the remuneration of different kinds of labor, operate similarly between different employments of capital.

In this passage Mr. Mill points out distinctly that the movement up and down in the wages of a manager are governed by the same laws as those which regulate differences in the different rewards of labor, but yet he connects it improperly with capital. It will be seen that Mr. Mill uses the term “gross profit” on the next page in order to avoid the difficulty, which rises unconsciously in his mind, of the anomalous presence of the wages of the manager in the question of profit.