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be overdone: future prices may be forced down to a point where the expected profits are turned into losses. And, mutatis mutandis, the same considerations hold true of "bear " operations, on the other side of the market. The possibility of being caught in a price movement of this sort, resulting from overspeculation, is one of the ordinary risks of this kind of profitseeking.

3. In most cases, as we have said, the two general sources of profits are blended. The great mass of business transactions are not so simple as those we have just considered. Profits are sought, not merely by buying one thing and then selling it, either immediately or at some other time, but also, and more generally, by buying certain things and then using them, combining them, in such a way as to get a new salable product, or at least a product to which new qualities have been added. Returning to the illustration of the house, we may assume that it may have been built to sell, and the things bought were, in the first instance, labor, building materials, and advances of funds with which to make payments. Or the house might have been built by a contractor, who first sold the house (for "future delivery ") and then bought the labor and material and advances necessary for its construction. And so in agriculture, manufactures, and commerce generally: the entrepreneur buys some things labor, land or its use, capital goods in various forms, advances of loanable funds and sells other things - the commodities or services that are his " products."

The inconsistencies and maladjustments in the general price situation of which he tries to take advantage are, in short, the differences between the prices he has to pay for the things he uses in making and selling his products and the prices he gets for his products. If competition worked with absolute promptness, smoothness, and efficiency, things would sell at prices equal to their expenses of production, and the most the entrepreneur could get would be, as we have seen, his entrepreneur's wage.

The time element, involving the possibility of gains (or losses) from price changes, also enters in, because most of the expenses

of production are incurred either before or (in the case of contracts for future delivery) after the price which can be got for the product is finally determined.1

Marginal Productivity and Profits. In our discussion of the law of diminishing productivity 2 we took no account of pure profits. We saw that in any undertaking a definite part of the product had to be imputed or attributed to each productive agent, and further, that the amount of product so attributed to any unit of a productive agent was the amount dependent upon the use of that particular unit. But this does not mean that in any undertaking the sum of those parts of the product which have to be imputed to particular productive agents will exhaust the whole product. Moreover, it is not wholly correct to think of the product as being created by the "application" of labor and capital to land or of land and capital to labor.

In any business undertaking, the one thing always given or fixed (at any one time) is the general object of the undertaking, the business scheme, the productive or acquisitive plan of the entrepreneur. In carrying out his plans, in securing a product and a market for it, the entrepreneur has to utilize productive agents. In combining them, in applying them to his general profit-seeking plan, he encounters the law of diminishing productivity, and, normally, pushes each particular kind of expenditure up to the marginal point. If he is successful there will be a surplus over and above his aggregate expenses. That is, his total product will more than cover the "specific products" that have to be imputed to the various productive agents he utilizes. This surplus, of course, is his profits.3

1 Entrepreneurs are often able to eliminate or shift part of this price-fluctuation element in profits (with its accompanying chance of loss). The building contractor may, for example, contract for his materials when he enters into a contract to build a house. Manufacturers of flour and of cotton goods, as well as grain and cotton buyers, are able largely to shift the risk of price fluctuations to professional speculators by means of the process known as "hedging," which will be described in Chapter xxix.

2 See Chapter xix.

Although the present chapter is concerned only with profits in competitive undertakings, this analysis of the relation of profits to the law of marginal productivity holds true also of monopoly profits.

Profits for the Industry and Profits for the Establishment. We must note at this point an important difference between the production of standardized goods where one establishment's product is like another's — and the production of goods or services which are marked off or distinguished as the output of particular establishments.

In agriculture, for example, standardized products are produced for a general market. If certain farmers make larger incomes than their neighbors it is generally because they are more efficient farmers and earn a larger entrepreneur's wage. This may show itself in two ways. First, a good farmer will get a larger product with a given expenditure. He will apportion and use his productive agents to better advantage. Second, because he gets a larger product by means of a given expenditure, he will be able to push his expenditures further before coming to the margin beyond which it will not pay him to go. That is, he can advantageously "farm on a larger scale" than his less efficient neighbors. But while these advantages increase his entrepreneur's wage, they do not, in themselves, create pure profits.

If the farmer gets pure profits it is because he has successfully tried some new crops or some new methods, or because he has been individually fortunate in some other way, or because he and other farmers have been able to sell their crops at profitable prices. This last point is the important one. agriculture and other industries producing standardized products for a general market, by far the most important profits (and losses) are those which come to the industry as a whole. Except for the effect of such things as local droughts or frosts or blights, when the wheat growers of the country prosper they prosper together, and when they lose they lose together,and so with the corn growers and the tobacco growers and the cotton growers. Wars, tariffs, crop failures abroad, these and other things like these will affect the demand for their products. The supply will depend in part upon weather conditions, but more largely upon the amount of these crops that farmers as a group have thought it worth while to plan to grow.

These conditions of supply and demand are absolutely beyond the control of any one individual producer. A succession of profitable years is sure to result in an increased output, with lower prices and lower profits. In agriculture, as everywhere, there are rewards for the efficient and energetic producer, but, with minor exceptions, his chances of getting pure profits are dependent upon the fortunes of the industry as a whole.

In the fields in which each entrepreneur can mark off his product or his establishment as his own, we find a very different situation. The manufacturer or jobber who can in some way identify his products by special brands, and the retailer, dealing directly with the consumer, are able to secure pure profits (and to run the risk of corresponding losses) on their individual undertakings, over and beyond such profits and losses as may come from general business fluctuations.

Here also the entrepreneur is limited by the law of diminishing productivity, and here also he normally pushes his expenditures of all kinds up to the margin. And (if he is his own manager) he will get a larger or smaller entrepreneur's wage according as he can get a larger or smaller product per unit of expense. But many of his expenses will be what we have called "competitive investments," that is, they will be devoted to creating a market for his products rather than to creating the products. The quantities that he can profitably produce and, within limits, the prices he can charge, will be determined very largely by his success in inducing purchasers to prefer his goods or his store to others. The profits of cotton growers are directly conditioned, as we have seen, by the aggregate demand for cotton and the aggregate supply of cotton. But with the retail dealer and with the manufacturer of breakfast foods or canned fruits thes or soap or motor cars or fountain pens or almost a er kindranded merchandise, profits depend very la for one store or for on is not merel tries; it establish

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same field are losing, and may gain even in the face of a generally unprosperous condition of business.

Good-will. It very often happens that the entrepreneur who has developed his business to a profitable point is able to attach some degree of permanency to his profits. A merchant often relies to a very considerable extent upon the patronage of an established clientele of customers, and he in turn may prefer, other things being equal, to purchase his goods from particular wholesale houses. Manufacturers and wholesalers, too, try to build up a habitual preferential demand for their products. When a business undertaking is sold as a whole, its established connections of this sort enter into the price paid for it, under the head of "good-will." This good-will element is generally measured by the difference between the selling value of the business as a whole and the selling value imputed or ascribed to its specific assets in the form of capital goods and accounts receivable (minus its specific liabilities). In the sale of a newspaper it often happens that its good-will (its established advertising and subscription patronage) is the only thing actually transferred. This does not mean, however, that the selling price of the good-will of an establishment necessarily corresponds to a capitalization of its pure profits. The goodwill may be, in individual cases, very much less than the aggregate amount of the expenses incurred in the past in the effort to build it up. And when once sold at a fair price, the purchaser acquires no peculiar power of getting unusual profits. For him the price paid for good-will is an investment, and he has to deduct interest on the investment before he can count his income as profits. In short, he has to start afresh, with no differential advantage.

Good-will is to be attributed, in large measure, to the economic inertia and friction which result from the fact that buyers are guided to a very large extent by custom and habit rather than by nscious choice. However, in many small transactions, for omers to attempt to buy always at the lowest price would in a waste of time and energy disproportionate to the gain. aside from the influence of custom and habit, there may

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