Net profit

“ Relatively to the man of enterprise, whose specialty always supposes other manufacturers cooperating with him, profit is what remains of the value produced after deducting the values consumed, among which must be included the salary of the man of enterprise,—in other words, his wages. Relatively to society, which contains all possible specialties, net product is identical with gross product.
But there is a point the explanation of which I have vainly sought in Say and in the other economists,—to wit, how the reality and legitimacy of net product is established. ”

“ If the business is a partnership, this section should show in detail the distribution of net profit among the several partners according to the agreement among them as to the proportions in which they are to share gains or losses. If a corporation, it should give the disposition made of the net profit in the way of dividends to the stockholders, and any other appropriation made of these profits, including transfer to surplus. ”

“ All of this attests the statement made above that the formulation of a satisfactory working rule for the determination of net profits, from the business standpoint, is extremely difficult. It should be said, of course, that in some respects the idea of net profit as used in economics differs from that used in business; the chief difference being that interest on invested capital is in economics looked upon as an expense deduction before the determination of profits. ”

“ Variable capital, v, is the annual wages bill. Surplus, s, is annual rent, interest, and net profit, so that v + s represents net national income. (In this introduction surplus is used interchangeably with rent, interest and net profit.) Constant capital, c, represents at the same time the contribution which materials and capital equipment make to annual output, and the cost of maintaining the stock of physical capital in existence at the beginning of the year. ”

“ A net profit must be made, markets established and maintained, production managed in a reliable and flexible manner, and so forth. Given the tremendous power of SRS, severe economic distortions are conceivable across the board. ”

“ We must next distinguish between gross profits and net profits. The merchant or manufacturer naturally desires to do a large business, he points with pride to the increase in his sales this year over last year. The larger his turnover the smaller the proportionate amount of his overhead expenses that must be borne per unit of product, and other economies follow large-scale production or distribution. ”

“ The normal situation is that the business enterprise is aiming at net profits, having an interest in large sales, heavy transactions and gross profits only so far as these are expected to lead finally to net profits, the real goal. ”

“ That the net profits of the business would be largely increased through the reduction of friction; the larger incentive of labor; the increase in the physical capacity of the workers to produce; the saving of useless waste; and through the absence of strikes and lock-outs; as in all of such increase in net profits the capital would be an equal sharer with its employees. ”

“ The market wage of our industry is paid to Labor and a minimum of 6% is paid to Capital. After these have been paid, together with regular operating expenses, depreciation reserve, taxes, etc., and after the Sinking Funds have been provided for by setting aside 15% of the next profits for Labor and 15% for Capital, the remaining net profits are divided 50% for Capital and 50% for the operatives, and the latter sum divided in proportion to the amount of each one's pay for the period.... A true partnership must jointly provide for losses as well as for the sharing of profits.... ”

“ In the accounting for an ordinary partnership, such items as interest on capital investments, salaries to partners, etc., are not to be considered as expense items to be deducted from profits before the net earnings are determined, but as a part of the net profits to be distributed to the several owners of the business. The payment of salaries and interest on capital is made simply for the purpose of distributing net profits according to certain methods agreed upon by the members of the firm. ”

“ The owners, however, of those portions of the produce enjoy a privilege; they obtain a value which yields them more than the ordinary profit. If this advantage depends upon any special exemption, such as being free from a tax, or upon any personal advantages, physical or mental, or any peculiar process only known to themselves, or upon the possession of a greater capital than other people, or upon various other things which might be enumerated, they retain it to themselves as an extra gain, over and above the general profits of capital, of the nature, in some sort, of a monopoly profit. ”

“ If it is strong and increasing, he will feel sure that the consumers will repay the whole cost of production, interest and capital included, and in addition the legitimate profit attached to the business. ”

“ The one school bases its main contention on the economic theory of profits; namely, that profits represent the balance remaining after deducting the cost of land, capital, and labor. The function of the entrepreneur, it is contended, does not in itself involve the owning of capital. Profit is the reward for combining the other factors of production and assuming the risk involved. Interest is a cost for the use of capital and it does not matter who owns the capital. ”

“ Profits an element in Cost of Production. Thus far of labor or wages as an element in cost of production. But in our analysis, in the First Book, of the requisites of production, we found that there is another necessary element in it besides labor. There is also capital; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the abstinence of all the persons by whom the remuneration of the different classes of laborers was advanced. The return from abstinence is Profit. ”

“ Returning to the question of interest on actual capital,—i.e., the excess of value produced over the cost of production,—the question as to what determines the value of a product leads to the assertion that capital-profit must be due to an advantage which the producer possesses over the marginal producer. ”

“ Who would lend at 5 per cent. per annum to agriculture, to manufacturers, and to commerce, when a borrower may be found ready to pay an interest of 7 or 8 per cent.? That sort of income, which is called profit of stock, would rise then at the expense of the consumer. Consumption would be reduced by the rise in the price of produce; and the other productive services would be less in demand, less well paid. The whole nation, capitalists excepted, would be the sufferers from such a state of things. ”

“ The profit is shared between the banker, who receives interest, and a succession of borrowers, mostly for short periods, who, after paying the interest, gain a profit in addition, or a convenience equivalent to profit. The capital itself in the long run becomes entirely wages, and, when replaced by the sale of the produce, becomes wages again; thus affording a perpetual fund, of the value of $200,000,000, for the maintenance of productive labor, and increasing the annual produce of the country by all that can be produced through the means of a capital of that value. ”

“ As competition becomes keener and the margin of return per unit of product becomes smaller, he has to increase his volume of business to secure the same amount of profit as when he did a lesser volume of business.
To produce goods it is necessary to use the saved wealth of former periods to pay the expenses of materials, labor, management, etc., of the present period. One must consume wealth to produce wealth. After his product is made, he must seek the best market for its exchange or sale. ”

“ The net output thus obtained is obviously for each industry the only fund from which first, wages, salaries, interest on capital, rent, royalties and profits are, or can be, paid, and secondly, taxes, rates, depreciation, advertisement and sales expenses. ”

“ To an individual, with a capital of 20,000l., whose profits were 2000l. per annum, it would be a matter quite indifferent, whether his capital would employ a hundred, or a thousand men, whether the commodity produced sold for 10,000l., or for 20,000l., provided, in all cases, his profits were not diminished below 2000l. Is not the real interest of the nation similar? Provided its net real income, its rent and profits be the same, it is of no importance whether the nation consists of ten or of twelve millions of inhabitants. ”

“ The efficiency of the new manufacturing processes has provided a large surplus of goods that must be taken somewhere, exchanged for food and raw materials, which must, in turn, be brought to the producers of manufactured goods. In the course of these transactions, a generous share of the values produced goes, in the form of profit, to the owners of the industry, another considerable portion goes into reinvestment, thus swelling the volume of productive capital.
The increased wealth, the larger capital and the greater amount of surplus all make possible the maintenance of a larger population. ”

“ The gross revenue of all the inhabitants of a great country comprehends the whole annual produce of their land and labor; the net revenue, what remains free to them after deducting the expense of maintaining; first, their fixed; and, secondly, their circulating capital; or what, without encroaching upon their capital, they can place in their stock reserved for immediate consumption, or spend upon their subsistence, conveniences, and amusements. Their real wealth, too, is in proportion, not to their gross, but to their net revenue. ”

“ The gross produce of industry consists of two parts; one portion serving to replace the capital consumed, while the other portion is profit. Now equal capitals in two branches of production must have equal expectations of profit; but if a greater portion of the one than of the other is fixed capital, or if that fixed capital is more durable, there will be a less consumption of capital in the year, and less will be required to replace it, so that the profit, if absolutely the same, will form a greater proportion of the annual returns. ”

“ Thirdly, and lastly, the machines and instruments of trade, etc., which compose the fixed capital, bear this further resemblance to that part of the circulating capital which consists in money; that as every saving in the expense of erecting and supporting those machines, which does not diminish the productive powers of labor, is an improvement of the net revenue of the society; so every saving in the expense of collecting and supporting that part of the circulating capital which consists in money, is an improvement of exactly the same kind. ”

“ Dynamic State.—Entrepreneur's profits, when they exist, mean that this equilibrium is disturbed, and when it is so, mobility of labor and capital affords the guaranty that a new equilibrium will be established if no further disturbances follow. As we have said, profits attract labor and capital, increase the output of those goods which yield the profit, and reduce the prices of them to the no-profit level. Workmen and capitalists then get from the entrepreneur as wages and interest all that he gets from the public as the price of his goods, except what he pays for raw materials. ”

“ Wages, profit, and rent, are the three original sources of all revenue, as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.
Whoever derives his revenue from a fund which is his own, must draw it either from his labour, from his stock, or from his land. The revenue derived from labour is called wages; that derived from stock, by the person who manages or employs it, is called profit; that derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money. ”

“ In manufactures, the same number of hands, assisted with the best machinery, will work up a much greater quantity of goods than with more imperfect instruments of trade. The expense which is properly laid out upon a fixed capital of any kind, is always repaid with great profit, and increases the annual produce by a much greater value than that of the support which such improvements require. ”

“ The fact is that the net income is less than a fair interest on the actual cost of the roads, and perhaps not one per cent. on the nominal value as shown by capitalization. A road has cost five millions; the nominal value is twenty millions; the net income is six per cent. on four millions. Take out a dozen corporations which are wholesomely managed, and the rest of the companies are, in varying degrees, bankrupt as to their nominal capitals and unprofitable as to their actual cost. ”

“ If the market price rises high above the cost of production, producers make a profit greater than the average profit made in the country. This induces them, by the appropriation of new land and the employment of new labor and capital, to increase their business. ”

“ He is paying money away on every side, which he would not do if he did not expect a return, with a profit. By all these operations—by the [Pg 367] work of his horses and his labourers—by the increase in number, and the increase in value of his flocks and herds,—and by the harvest after the seed-time,—new produce is created which produces a return of capital, and ought to produce a profit if that capital is properly expended. The hope of profit sets the capital to work, and the capital sets the labour to work. ”