Profit margin

“ They would not change unless gains to be made in the new industry were greater. Hence the gain is the difference only between the profits of the old and the profits of the new. The protectionists, however, when they talk about “creating an industry,” seem to suppose that the total profit of the industry (and some of them seem to think that the total expenditure of capital) measures their good work. In any case, then, even of a true and legitimate increase of industrial power and opportunity, the only gain would be a margin. ”

“ Assuming that the Trust is planning a new business and determining the most profitable output, it will limit that output not necessarily at the point where the selling price gives the widest margin of profit upon the expenses of [160] production, as might be the case at the point B in the diagram, but at the point F, where the margin of profit bears the largest proportion to the expenses of production, or in other words, where the area of absolute takings shows the largest surplus over the area of aggregate expenses. ”

“ In the dry goods business—either wholesale or retail—the margin of gross profit in notions is so small that it is doubtful if, when all legitimate expense is deducted, a net profit is realized. The salesman for a wholesale house whose sales of notions is largest, has made the poorest record; the manager who has kept the sales of the notion department at the lowest price—at the same time keeping his stock down—may be the most efficient. ”

“ There may be some disposed to question this, but when no man can calculate on entering into an operation within 15 or 20 per cent of the prime cost of his merchandise before it shall leave his hands, and his next-door neighbour may gain advantage over him to this amount, while the ordinary margin of profit seldom exceeds that range, it is difficult to arrive at any other conclusion. ”

“ 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. ”

“ But while, as this illustration indicates, the phenomenon of surplus profits becomes of very great importance when we seek to study the distribution of wealth, it need not detain us here. For the surplus element arises only in so far as the costs of a business are lower than the marginal costs; and it is the marginal costs, which, with good reason, we are now endeavoring to analyze. The marginal costs must include a normal profit, i.e. a profit which will cover earnings of management, the reward of risk and enterprise, interest on capital, but nothing further. ”

“ By profits, must of course be understood the rate of profit; for a lower rate of profit on a larger capital may yield a larger gross profit, considered absolutely, though a smaller in proportion to the entire produce. ”

“ What would be the consequence of this difference in the rates of profit for capitals employed in the different branches of industry? Why, the consequence that generally obtains whenever, from whatever reason, the average rate of profit comes to differ in the different spheres of production. ”

“ But the same amount of demand and the same price, which enable this least productive portion of capital barely to replace itself with the ordinary profit, enable every other portion to yield a surplus proportioned to the advantage it possesses. ”

“ The amount of all expenses, Including interest and salaries, is ascertained, and the total net profits shall be divided between the firm and the employés sharing in the fund. The amount of the net profit to be distributed will be that proportion of the whole net profit which will correspond to the proportion of the wages paid as compared with the entire cost of production and the expense of the business. ”

“ You compare a commodity, in the production of which the advances in labour remain the same while the profits of stock diminish, to another commodity 'obtained by a given quantity of labour, a given quantity of capital, and a given rate of profits.' Is not this supposing two rates of profit at the same time? ”

“ 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. ”

“ If the cost to make is less than the market, to bring the machine on the books at market would necessitate the taking of a profit of the difference between cost and market. No profit has been made, only a saving in capital investment. ”

“ The gross profit of a country is the actual amount of necessaries, conveniences, and luxuries, which are divided among its capitalists: but whether this be large or small, the rate of profit may be just the same. The rate of profit is the proportion which the profit bears to the capital; which the surplus produce after replacing the outlay, bears to the outlay. In short, if we compare the price paid for labour and tools with what that labour and those tools will produce, from this ratio we may calculate the rate of profit. ”

“ Capital and enterprise could, under such circumstances, be retained in the business at all only by an increase in the price of the product through reduced production, increased demand, or other means, so as to pay both the increase of wages and the usual interest of capital and profit to management. ”

“ If the surplus is no more than this, none but large masses of capital will be employed productively; and if it did not even amount to this, capital would be withdrawn from production, and unproductively consumed, until, by an indirect consequence of its diminished amount, to be explained hereafter, the rate of profit was raised. ”

“ You observe that in rich countries profits are often much higher, and in poor countries much lower than according to my theory, to which I reply that profits are very much reduced in the poor country by enormous wages; the wages themselves may be considered as part of the profits of stock, and are frequently the foundation of new capital. In rich countries wages are low, too low for the comforts of the labourers; too large a portion of the gross produce is retained by the owner of stock and is reckoned as profit. ”

“ 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 capital 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. ”

“ The third source of great wealth is manufacturing on a large scale. In this case the owner or borrower of capital plunders his employés who sell him their daily labor. The difference between the actual value of this daily labor, as expressed in the price of the articles it produces and the wages paid for it, forms the profit of the manufacturer, allowing of course, for raw material and other running expenses. ”

“ The profits of stock in different employments, having been shewn to bear a proportion to each other, and to have a tendency to vary all in the same degree and in the same direction, it remains for us to consider what is the cause of the permanent variations in the rate of profit, and the consequent permanent alterations in the rate of interest. ”

“ If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit, which, under free and active competition, can not long continue to be the case. ”

“ 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 effect will be, that the same profit of business will be divided among double the number of men, while, at the same time, rents and the price of provision in market will be double. The clear profit of the merchant will therefore be reduced to one fourth part of what it was two years ago. ”

“ 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 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. ”

“ When such profit is evidently not to be had, if people do not actually withdraw their capital, they at least abstain from replacing it when consumed. The cost of production, together with the ordinary profit, may therefore be called the necessary price, or value, of all things made by labour and capital. Nobody willingly produces in the prospect of loss. ”

“ To inquire searchingly into every nook and cranny of the business, to construct, as it were, for each part a separate balance-sheet of profit and loss, to expand in those directions where further development promises good results, and to curtail activity where loss is already evident, is the very essence of good management. Here, it will be observed, we are using language very similar to that in which we described the principles which govern a business man's expenditure. ”

“ 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. ”

“ The capitalist, then, may be assumed to make all the advances, and receive all the produce. His profit consists of the excess of the produce above the advances; his rate of profit is the ratio which that excess bears to the amount advanced. ”

“ In business life a distinction is pretty clearly maintained between the three kinds of income that have been described; namely, the reward of labor in all its forms, the reward of capital, going to whoever furnishes it, and the reward of a coördinating function, or the function of hiring both labor and capital and getting whatever their joint product is worth above the cost of the elements which enter into it. This essentially commercial margin of returns from production above all costs of production is profits in the strict sense and would be nonexistent in an absolutely static industry. ”

“ 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. ”

“ We therefore find existing conditions to be, in fact, low relative prices, high relative wages, coupled with a lessened margin of profits in ratio to our total product as compared to each decade of the last fifty years. But, on the other hand, our aggregate product has been so vastly increased that even at the lessened margin on each unit the aggregate of profits is greater than ever before. The rich have become richer. The people of moderate fortunes have become much more numerous. ”

“ 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. ”