Time Will Run Back

Chapter 37

I’M still not reconciled, chief,” began Adams the next day, “to the unfair and unreasonable profits that some of these enterprisers are making. This creates great discontent—”

“Among those who haven’t made the profits?”

“Yes. And it doesn’t seem to me that such exorbitant profits are necessary to make your free market system work. Enterprisers should be content with a reasonable profit, and it seems to me that we ought to have a law fixing a reasonable profit, a fair profit.”

“What is a reasonable loss, Adams—a fair loss?”

“A ‘fair’ loss? Such a phrase is meaningless, chief.”

“Not any more than a ‘reasonable profit,’ a ‘fair profit.’”

“But surely—”

“Let’s see what an enterpriser is, Adams, and what function he performs. The enterpriser is the man who decides whether a new business shall be started, or whether an old business shall be contracted or expanded, or whether to turn from making one product to another. The enterprisers are the men who decide what shall be made, and how much of it, and by what method. There could be no more crucial function in any economy.”

“Isn’t it dangerous for any single group of private individuals to have such enormous power?”

“In the first place, they don’t have the power. Let me amend my previous statement. The enterprisers are the men who seem to decide what shall be made, and how much of it, and by what method. Under our new system the real decisions are made by the whole body of consumers. The enterprisers merely try to guess what the wants and preferences of the consumers are going to be. The consumers are the real bosses. If the enterpriser guesses correctly what the wants and preferences of consumers are going to be, if he correctly guesses that too much of one thing is being or is going to be made and too little of another, in relation to these wants and preferences, or if he knows how to make the wanted thing cheaper and better than his competitors, he makes a profit. If his guesses are wrong, or if he is less efficient or competent than his competitors, he suffers a loss. In short, the enterpriser is the man who takes the risk.”

“You mean he is a sort of gambler?”

“If you want to call him that, Adams. I prefer to call him the risk-bearer.”

“But the promoter is also a risk-bearer. So is the speculator.”

“True. The speculator, the promoter, the enterpriser, are various types of risk-bearer. But there is a vital difference, as I see it, between these and the gambler. The gambler deliberately invents his own risks. He doesn’t have to lose money simply because one horse can run faster than another. His risks are artificial. But in economic life the risks already exist; they exist necessarily; somebody has to bear them. The speculator, the promoter and the enterpriser undertake that function.”

“But why, chief, do the risks exist necessarily?”

“Because, if we look at the matter from the consumption end, nobody knows precisely what consumers are going to want, or what they are going to want most and what least, or what they are going to be willing to pay. And if we look at the matter from the production end, nobody knows, in farming, what the growing weather is going to be, or the amount of crop damage from storms or pests, or precisely where the storms or pests will strike. And in manufacturing, nobody knows, until it has been tried, whether a new method or a new machine will actually be more economical than an old one. Uncertainty regarding the future inevitably exists in human affairs, particularly in economic affairs. And somebody has to bear it.”

“Why can’t the government bear it?”

“That’s exactly the system that broke down, Adams. Bureaucrats tried to get around the consumption half of the problem by not bothering to find out what the consumers really wanted, by not permitting them freedom of choice, but by forcing them to take what the government chose to produce. And when it came to the production half of the problem the bureaucrats didn’t have to be as careful as the private enterpriser in estimating their relative chances of profit and loss, because they weren’t risking their own capital. They could simply throw their losses on the whole community.”

“But don’t these private enterprisers ever make mistakes?”

“They do; but there is a crucial difference. First of all, the losses caused by their mistakes fall primarily on the enterprisers themselves. And because they know this in advance, because they have the hope of big profits on the one hand and the fear of big losses on the other, they usually estimate very carefully before they go into a new venture. Therefore their mistakes are incomparably smaller and fewer than those of government bureaucrats. In addition to this, Adams, there is a relentless process of selection and weeding out going on all the time. If the enterpriser’s ventures are good, he can use his profits from them for still bigger ventures; if his ventures are bad, his losses prevent him from undertaking new ones.”

“And what is the test of whether his ventures are good or bad?”

“The test is whether he has been better able to foresee and satisfy the needs of consumers than his competitors have been able to foresee and satisfy them.”

“But don’t wage earners and the owners of capital, chief, also take risks? Don’t they suffer from the mistakes of the incompetent enterprisers?”

“Yes, and they also gain from the foresight or ingenuity of the good enterprisers. But it is because the enterprisers assume the primary risks that wage earners and those who lend capital at interest are able to minimize their own risks.... Let’s see how this works out. A man decides to launch a new enterprise. He goes to the owners of capital to raise funds, and if he gets the funds, he has to pay the market rate of interest. He rents a factory and has to pay the market rent. He hires workers and has to pay the rate of wages established by the market. Or perhaps he has to pay more than the previous market rate in order to bid capital and labor away from his competitors—”

“Then it isn’t necessarily the owner of capital who hires and ‘exploits’ workers?”

“No, Adams. That is just another Marxist error. It is the enterpriser who hires both labor and capital. In so far as the enterpriser puts some of his own capital into the business, he becomes both an enterpriser and a capitalist. But...”

He paused, trying to think his way through the next point.

“But what, chief?”

“Well, all enterprisers, Adams, have to pay the same market prices for the same quantity and quality of money capital, factory and office space, raw materials, labor services, and so on. These prices are formed by the competition of the enterprisers against each other, just as the prices of consumer goods are formed, finally, by the competitive bids of the consumers. And it is the prices of consumption goods that determine how high the enterprisers are willing to bid, and can afford to bid, for labor services, money capital and production goods. Each enterpriser, therefore, when competition forces him to do so, is willing to bid for the factors of production a total price equal to the price that he could get from consumers for what he produces—”

“With some allowance for the sheer labor and headache of being an enterpriser!”

“With some allowance for that, of course. But such an allowance would be the imputed value of his managerial labor, which would really be a sort of wage or salary, and not part of what we might call his pure profit.”

“Go on.”

“Well, in order that an individual enterpriser may make a profit, Adams, the total income that he can get from the sale of his finished product must be greater than the total income he lays out in paying for the factors of production.”

“Obviously.”

“But the competition of enterprisers in keeping up the prices of the factors of production means that in order for an individual enterpriser to make a profit, he must have better foresight than his competitors in meeting the wants of consumers. If he has only average foresight he makes neither a profit nor a loss. And if he has worse than average foresight he makes a loss.”

“What do you think would happen, chief, if all enterprisers had perfect foresight?”

“If everybody had perfect foresight no one would make either a profit or a loss. Mutual competition would force up wages, machinery, and raw material prices to the point where the total would just equal the total that everybody got for his finished product.”

“And what happens under present conditions, chief?”

“Under present conditions, as I have already pointed out, those enterprisers with the most foresight make the biggest profits. Those enterprisers with less than average foresight pay for their errors with losses.”

“And the net result?”

“The net result is that profits and losses cancel each other out.”

“You mean that, on net balance, profit doesn’t exist at all?”

“Not, on net balance, as an isolated thing. When we have allowed for the wages of labor, the rental for land, the interest on capital and the wages—or presumptive or imputable wages—of management, then there is no net sum left over for profits. Or at least not in a stationary economy. In an expanding economy, in which capital is constantly increasing, there is a transient profit. But even that is constantly tending to disappear into higher wages or higher prices for productive goods or lower prices for consumers.”

“Your argument, then, as I understand it, is that profits are not made at the expense of wages.” “My argument, Adams, is that in a stationary economy—that is, in an economy that is neither declining nor growing—profits at one place are canceled out by losses at another. Profits, in other words, are not a net price or cost that the community has to pay to the riskbearers. The unsuccessful risk-bearers themselves pay that cost. The people who talk of ‘unreasonable’ profits, as I reminded you a while back, never mention ‘unreasonable’ losses. Any attempt to take away profits from the successful would destroy the vital function that enterprisers play in the private enterprise system.”

“And that function is—?”

“That function, Adams, is to provide the maximum of goods and satisfactions for consumers. That function is to diversify production in accordance with diverse needs and wants, to bring about a balance in the production of thousands of different goods and services. And our private enterprisers perform this function so wonderfully well that I’m even afraid that future generations, who haven’t known the horrors of central governmental planning under socialism, will take the performance of that function for granted. They may think it is something that happens ‘automatically.’ They may even forget that this is a central problem that any economic system has to solve.”

“But does the individual enterpriser, chief, or do even enterprisers in general, deliberately try to solve that problem?”

“No, Adams. Yet each of them helps to solve it incidentally and unconsciously by constantly watching his own income account and his own balance sheet. If there is a profit in making shirts, he makes more of them, so eventually bringing down their price and the profit in making them. If there is a loss in making stockings, he makes fewer of them, or is forced to stop making them altogether, so raising their price and eliminating the loss of more efficient producers in making them. It is precisely because each enterpriser is trying to maximize his profits and minimize his losses that he serves the consumer best and serves the community best. It is the ‘invisible hand’ again.”

“And it is this process also, chief, that solves the problem of economic calculation, over which you and I sweated so much?”

“Precisely. It decides what things are grown or made, how much of each is grown or made, and how each is grown or made. It is the free price system, the relationship of prices to costs, the incidence of profits and losses, that tells the enterpriser which is the most economical way of making a thing—in other words, which is the way that uses up the minimum value of resources in relation to the value of the product. The enterpriser can’t learn this from the engineers and technicians. They can only give him part of the answer. The final answer he gets from his bookkeeper.”

“Which is another way of saying, chief, that he gets the answer from the markets.”

“Which is still another way of saying, Adams, that he gets the ultimate answer from the free choices of consumers.”

“But I’m still bothered, chief, and I’m sure most people are still bothered, by the huge profits made by a few enterprisers. Surely such huge profits aren’t necessary in order to get them to produce the right goods!”

“Your trouble, Adams, and the trouble of these people you speak of, is that you and they still persist in looking only at the winners of the biggest prizes. You assume these to be typical; you forget about the offsetting losses of the losers. Let’s look at a lottery. Let’s say that the man who runs the lottery sells 1,000,000 goldgrams worth of tickets, and hands out 900,000 goldgrams in prizes, keeping 100,000 goldgrams for himself.”

“Very reasonable of him,” said Adams sarcastically.

“I’m not interested in him for the moment,” continued Peter. “I’m talking about the subscribers to the lottery. Collectively they must lose money.”

“Collectively they lose 100,000 goldgrams.”

“Right, Adams. But each individual who subscribes dismisses this collective result from his mind, if it ever occurs to him. He subscribes precisely because he hopes that he, individually, will be a winner. He is not interested in the fate of the other subscribers. Now if the people outside the lottery looked only at the winners of the huge prizes and thought these were typical, and forgot about the huge mass of losers, and if they began to talk as if these winnings were made at their—the outsiders’—expense, they would be talking the same way you are talking about profits under our new free enterprise system.”

“But aren’t these big profits, chief, at the expense of workers?”

“You will usually find, Adams, that the enterprisers who make the biggest profits pay the highest wages. If the profits of the successful enterprisers are at the ‘expense’ of anybody, I should say that they were mainly at the expense of the unsuccessful enterprisers who made the poor guesses and misdirected labor and capital.... And why should you assume that the high profits of the successful enterprisers are any more at the expense of their own workers than at the expense of the owners of their borrowed capital, or of the consumers?”

Adams seemed lost in thought.

“I’m still interested in that lottery you were speaking of,” he said at length. “Considered collectively, the subscribers lost because each nonetheless expected that he would be the exception that would win a prize. May not something like that happen in the case of your enterprisers?”

“It is not impossible,” said Peter. “It may be that each enterpriser becomes an enterpriser partly because he is unduly optimistic in nature, and partly because he overestimates his own abilities. If that were so, more people would become enterprisers than conditions would justify; or they would bid higher for the factors of production than the prices and sales of their finished product would eventually justify—and so the enterprisers as a whole, instead of breaking even, might have more losses than profits.... That might reflect itself in a sort of concealed way say in most enterprisers merely getting too small a return, relatively, for their own labor of management. In that case, the consumers and workers, or the community as a whole, instead of having to pay a price for the vital service that enterprisers perform, would get those services, on net balance, for less than nothing.”

“Then it wouldn’t be very accurate, chief, to call your new system a ‘profit’ system?”

“Certainly not in a declining or even in a stationary economy. It is, of course, a profit-seeking system. But then I suppose there is a sense in which all of us are seeking ‘profit’ under any conceivable system. We speak of spending a ‘profitable’ evening when we mean merely that we have enjoyed ourselves. We say that reading a book has been ‘profitable’ when we mean that we have been instructed by it. ‘Profitable’ action of any sort is merely action that achieves, or partly achieves, the end we are seeking, regardless of whether that end is self-regarding or not.... I can’t understand this unpopularity of ‘profit’ except as envy of the successful. Why should there be any more stigma attached to the word ‘profit’ than to the word ‘wage’ or ‘salary’? Why should one form of income be considered less honorable than another? Why should the people who are afraid to take risks begrudge the rewards of those who have taken them successfully?”

Adams was thoughtfully silent again. “You have answered all the objections I can think of for today,” he said at last. “You are right. You have invented a wonderful economic system—”

“We did nothing more than merely make it possible.”

“You have invented, chief—or made possible—a wonderful economic system. And one of its chief merits, I now agree, is that it rewards people in proportion to their foresight and their production—their ability to provide others with what those others want. And this supplies the maximum incentive, I also concede, to everybody to sharpen his foresight and to increase his production.... But may not the very virtues of the system finally bring about its undoing? How will we be able to protect this system, for instance, against the incessant criticism of the unproductive and the unsuccessful? For no one is ever willing to attribute his failure to himself. He will attribute that failure to the ‘system.’ He will never see his own shortcomings, but will find a thousand shortcomings in the system. And if you answer one of his criticisms—no matter how crushingly—he will bring up another, ad infinitum. Always he will dream of a system in which, in the world of his imagination, he will be at the top, and the presently successful at the bottom.”

“But won’t the successful, Adams—or, as I hope, the disinterested—always be there to answer the criticisms of the unsuccessful?”

“I doubt, chief, that there will be a decent balance. Nearly everybody wants to be a writer; and therefore writers will seldom get the monetary rewards of speculators and enterprisers; and therefore the writers will be envious of these rewards; and the writers will always be more articulate, more plausible, than the successful businessmen.... And then there’s another point. Success is relative. Measured in wealth and income, everybody will be less successful than somebody else, except the one richest man in the world. And therefore even those who have much more than the average wealth and income will be unable to understand why others, surely no more intelligent, industrious or farseeing than themselves, have more wealth and income still. Everyone will be willing to take it for granted that those who have less than himself have less because they have contributed less value to the world. But almost no one will be willing to admit that those who have more wealth and income than himself have it because they have contributed more value to the world. And so your new system will daily be exposed to the danger that—”

“Oh, come now,” said Peter, laughing. “Stop imagining things!”