Further Essays in Economics
Leon Maclaren

IV

ENTREPRENEUR'S PROFIT

THE entrepreneur receives his profit as tenant in occupation of the land on which his undertaking is established. His profit will be the amount of rent left to him after secondary claimants have had their share. The whole rent produced by his undertaking will, of course, fluctuate from time to time. On the other hand, apart from taxation, the secondary claims will be fixed by agreement. He takes the risk of secondary claims exceeding the total rent and involving him in loss, and seeks his reward in the excess of rent over them.

The entrepreneur is a creature of the enclosure of land. His particular talents become of outstanding importance where wages are so low that most people are unable fully to equip their own labour. He exists, therefore, in conditions where rent varies immediately and directly with the efficiency of labour and wages do not. Therefore, because he is intimately concerned with the quantum of rent, he is equally concerned with the productivity of labour. Not unnaturally, he will lend favourable attention to any scheme calculated to increase its productivity. He employs men primarily to obtain rent, and is apt to view increases in wages with the same doubts as he regards increases in taxation, or the rate of interest. They threaten his share of the rent, and are, in most instances, to be resisted. There will be times, of course, when a judicious increase in wages may reasonably be expected to result in a sufficient increase in the productivity of labour to increase his rent as well. Indeed, any arrangement which draws more from labour than the labourers take back in wages, will be welcome to him. At many points, therefore, though by no means at all, his immediate interest is opposed to that of his employees. His gain is their loss; his loss, their gain. This is a fundamental fact of human relationships, where some men live on rent - a fact which inevitably has sharp political and economic consequences.

Yet it has to be conceded that, given the enclosure of land and the depression of wages to the least the labourer will accept, the work of the entrepreneur effectively increases the productivity of labour. Indeed, by his operations, he raises the standard of living in the community at least in material respects: and labourers equipped through his agency may make a country much stronger in war than those whose economy is based on rack-rented tenants and small proprietors.

Nor does he accomplish this easily. He needs skill and imagination, and carries a world of anxiety. He is responsible not merely for the wealth required to equip his own endeavour, which is trouble enough for any man, but for the wealth required to equip all his employees. He is concerned not merely with his own skill and contribution to life, which would surely be more than sufficient to absorb his whole attention, but is directly concerned with the quality and pitch of endeavour of all his underlings as well. For those who take the enclosure of land with all its results for granted, it is distressingly difficult to decide whether to support and sustain those who rebel against the power of the entrepreneur because of the injustices suffered by labourers, or to support the entrepreneur in his efforts to exact the maximum contribution from the rest of mankind.

The fruits to be garnered by the successful entrepreneur in wealth, prestige, and power over men, appear from a distance to be very attractive. By following him, skilful, determined men and women may escape from the servitude of wages into the plenitude of rent. The number of people seeking to exercise their innate executive ability is therefore not surprising. Amongst such people, competition is fierce. They are subject, as are others, to the pressure of the landlord's claims, and will assess the minimum profits which they are willing to accept very low. Upon this narrow margin the success and failure of their undertakings will depend.

When trade is bad and rent shrinks to less than the secondary claims upon it, the entrepreneur is faced with a difficulty. He cannot control taxation: the landlord's and the moneylender's claims will be fixed by agreement and must be met. To keep in business under such conditions, he must restore his rent sufficiently to cover these claims. In times of falling trade, the only way by which rent can be increased is by reducing wages. The employer faced with failure will look to see which of his employees can be dismissed. Having thus reduced his staff, and spread dismay throughout his undertaking, he is in the best position directly to reduce wages. He will, perforce, be the human agency through which the laws governing the distribution of wealth will operate. To superficial observers, he may too easily appear as the monster exploiting the people to preserve his profit.

Naturally, he is concerned with his profit, for it is the criterion of his success. When he finds his margin of profit too low, he will seek other ways of increasing it. A very obvious way is to increase his output, and, by this means, increase his receipts, and obtain a larger profit upon the same low percentage. To do this, of course, he must acquire more land and employ more labourers; and to succeed in this, he must sell what his employees produce.

Now there is an interesting difference in the scope of a man's activity when he receives his reward in wages instead of rent. A man who relies upon his own labour for his claim upon wealth, is limited by the contribution he is able to make. This, in turn, is limited by his energy. For example, a young professional man who must rely on his own endeavour, a doctor or barrister, starts by doing anything anyone will employ him to do, however humble. As he gains in skill and understanding of his profession, work will accumulate, until the day comes when he simply cannot do it all. Then he begins to turn work away. It is at this point that he begins to shape his career; at this point when he begins to select and discard. This is natural enough, for only in the light of experience can a man learn what he wants to do. Moreover, when a man thus discards work, he makes way for another, who, in turn, may select and discard. Each will have different talents, skills and preferences, and the variety of these qualities will match the variety of their customers' tastes in a manner no man could foresee, let alone devise. Indeed, their customers' tastes will give direction to their energy, while their skill and devotion will help to form their customers' tastes.

Where, however, a man lives not upon the wages his labour brings him, but on the rent produced by an undertaking under his control, his sphere of action is not thus circumscribed. Provided he can obtain land and labour, he may extend his activities indefinitely. The pressure of secondary claims upon rent, tending to reduce the entrepreneur's margin of profit, spurs his own desire to increase his income by increasing his sales. However, as there is necessarily a limit to the number of articles of a particular kind that can be sold at any time, a point is soon reached where the output of any undertaking can only be increased by invading the market of another. This incursion leads to trade wars in which no quarter is given. Master-men, aided by their servants, set out deliberately to capture whole markets. It is not a process of selecting and discarding, but of accumulating.

In such a struggle, the chances of the combatants are far from even. Suppose, for example, the contestants indulge in a price war, each seeking to undercut the other. The ability of each to withstand the strain will vary enormously with the financial structure of their undertaking. Take first a case where the tenant owns the land on which his undertaking operates; next, where he pays a relatively low sum to his landlord under an old lease; and, thirdly, where the tenant has recently purchased the land and has borrowed funds to do so. (This analysis is developed more fully in Essay III.) Assuming the industry of each to be equally productive, the results are as follows:-


Fig.1

The effect of a price war on the receipts of each undertaking would be to reduce its profit until it became a loss. Plainly, their capacities to withstand this reduction would vary so substantially between these three examples that the result is almost a foregone conclusion. The corresponding advantages and disadvantages illustrated here are only one kind out of several. The undertakings may be on sites of widely differing productivity; equipment may be substantially better in one than in another; and so on.

The unequal struggle that ensues when such undertakings invade each other's markets, has been called "competition," and, accepted as such, has brought this healthy emulation into contempt, and even hatred. When two runners, after a period of training, are stripped for the race, poised on the mark ready for the starter's shot, a spectator may talk of competition. Where, however, one has been kept in prison and starved for six months, and stands at the line with a heavy weight tied to one foot, no one would seriously talk of competition. It would be a hopeless handicap. Competition pre-supposes equality of opportunity. Moreover, though only one may win, all can enjoy and be the better for a competition in skill. Competition does not involve battering your competitor to death. That is not competition - it is war.

Now, when an army overcomes its enemy, it does not leave the field for a new, perhaps more dangerous, champion to seize. It occupies the ground, and consolidates its position. Equally, when one undertaking overwhelms another, it buys it out, takes its land and its best employees, and shuts it down, and does whatever else it can to secure the market thus conquered against new entrants. This is the process of monopolisation - so common a feature of modern times.

However, it is not only the aggressive, gluttonous entrepreneur, hungry for wealth and power, who acts thus. In times of boom, as after a depression or a war, there are many commodities in very keen demand because people have for years been unable to acquire them. In these conditions of expanding trade in particular fields, undertakings may be established and grow beyond normal dimensions without impinging on one another at all. When the inflated demand is met, however, and the market for these commodities shrinks towards its normal dimensions, the undertakings engaged in these trades will all find their trade falling. Not unnaturally, those engaged in them will seek to replace their falling trade by having recourse to each other's markets. Here they will cross each other's path, and a struggle will ensue - the more intense because it is in defence of their positions. In this struggle, prices will be cut, margins narrowed, and those who undertook secondary claims in interest, landlord's claims, and the rest at the height of boom conditions will probably fail. When, finally, the industrial cycle swings downwards, the struggle will become a struggle for existence.

Not unnaturally, those who survive this bitter experience will not wish to endure it again. They are likely to set down their evil plight to price cutting; price cutting to what they call competition; and they will seek to protect themselves against a repetition of this experience. Traders will form associations to ring the market against newcomers, and to fix prices. National monopolies will form international cartels. Under intense public pressure Governments will restrict and regulate production and international exchange.

These panic measures are taken because people do not understand what is wrong, and have mistaken symptoms for diseases and effects for causes. They close whole industries against new entrants, and bring Governments into industry, rather as the ancient Britons are supposed to have brought Hengist and Horsa and their war-like hordes into these islands. They come as protectors and finish by being masters. Thus the road by which some men escape from being employees into becoming masters is shut, and those already established in monopolised markets are threatened with state control and nationalisation.

Now the essence of monopoly is that it enables the monopolist to prevent men entering the monopolised industry except as servants or agents of the monopolist. There are probably no complete monopolies, apart from public utilities, in the sense that no one but the monopolist is in or can get into the particular trade on his own account, There are, however, many industries - fats, chemicals, petroleum, steel, non-ferrous metals, bricks, cement, sugar, flour, to mention only a few - where the monopoly is so extensive as to be very serious in its social effects. Plainly, where men prosper, not in relation to the contribution which they make to life, but in relation to the extent to which they prevent others from contributing according to their kind, their prosperity is anti-social and malignant.

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