It must be carefully noted that the above reasoning assumes not only active competition but the absence of change as regards the expenses of production per unit of product which representative firms incur. If conditions are changing so that these expenses vary constantly even the most persistent competition may fail to cause the price of the product to correspond accurately to the normal expenses of production. It would tend always toward such correspondence, but it might never attain to it. In actual practice market prices seldom do conform exactly to normal prices, and no explanation of distribution is complete which fails to make full allowance for discrepancies between the two. By reference to normal prices, as standards, however, the circumstances determining the shares in distribution can be quite as logically and more easily explained, than they could be if the tendency of competition to bring market prices to the normal were ignored. The prominence given to normal prices in these pages is thus a convenient logical device for simplifying what would otherwise be bewilderingly complex. As a tion. Normal prices for competitively produced goods just cover The Shares the expenses of their production-the allowance for the re- in Distribuplacement of capital goods, rent, interest and wages. usual thing these four items of expense are incurred by the enterpriser before production is concluded and before he knows what prices he is going to get for his products. He buys his materials, tools, machinery and other capital goods at current prices, he borrows capital to pay for them, and perhaps to pay wages, at current rates, he hires workmen and leases land on the terms fixed for him by general market conditions rather than on his own terms, and all of these arrangements are entered into before the product is ready for sale. It is in this contracting to pay the expenses of production before the product is ready for sale or the price to be received for it known, that the principal risks of business, which it is the enterpriser's function to incur, consist. When prices are normal the representative firm receives from its sales just enough to cover its expenses of production including an adequate wages-of-management. Any deviation from the normal means extra profit or unexpected loss to the enterpriser Competitive oly Profits. or to stockholders, who are the risk-takers in corporate undertakings. The market prices of goods may differ from the normal and Monop- prices corresponding to the normal expenses of producing them, either because conditions are changing and competition has not yet adjusted supply to demand at the new normal price level, or because competition is itself absent and monopoly stands as a barrier to such an adjustment. In the former case we have to do with what we may call a competitive profit (or loss) in the latter with monopoly profit. The Law of 107. From the point of view of production rent, wages Competitive and interest are expenses while competitive and monopoly Distribu- profits are surpluses due to deviations of market prices from tion. the normal. From the point of view of distribution all five are shares into which the money income derived from a country's industries, that is, the gross money return less the deduction required to replace and maintain the fund of capital, is divided. It is the task of the theory of distribution to explain what causes, at last analysis, determine the size of these different shares. In the following pages we have attempted to prove the thesis that competition tends to secure for each factor in production a share of the money income corresponding to what it itself produces. Every circumstance which causes market to diverge from normal prices interferes with this result and occasions profit or loss to enterprisers above or below their proper wages-of-management. The chapters on Competitive Profits and on Monopoly Profits discuss the circumstances that may cause such divergence and the shares of income to which they give rise. The chapters which follow on Rent, Wages and Interest attempt to show that each tends to be the share of the normal price corresponding to what the factor concerned contributes to production. Finally the concluding chapters on Value and Distribution recapitulate the explanation in more general terms and add the last link in the chain of reasoning by indicating the causes that control the supplies of workmen and of capital goods. An explanation of the causes that determine the shares into which the net product is divided is by no means a complete account of the influences which make some men rich and others poor. There are a great many circumstances that affect the distribution of wealth that are uneconomic in character. For example, no one factor is more potent in deciding that some shall be rich while others are poor than the inheritance of property. On this topic the economist should have something to say, but it is said more appropriately in connection with the discussion of the justification of the institution of private property itself and of inheritance taxes (Sections 290 and 291) than with the theory of distribution. In the same way the philanthropies of public-spirited citizens in endowing art galleries and other institutions for public enjoyment and instruction and the intelligent expenditures of municipalities in supplying free schools, playgrounds and parks, contribute important elements to the real incomes of the citizens of every community, but these contributions are not subject to economic law. The theory of distribution is necessarily limited to the division of the money income among those who on one ground or another have an economic claim. It must be supplemented by a study of many other factors to furnish a complete understanding of the causes of wealth and poverty. REFERENCES FOR COLLATERAL READING *Clark, Essentials of Economic Theory, Chaps. V. and VII.; *Fetter, Principles of Economics, Chaps. VI., XXX., XLII. and XLIII.; *Marshall, Principles of Economics, Book VI., Chaps. I. and II.; *Carver, Distribution of Wealth, Chap. III. CHAPTER XII DISTRIBUTION: COMPETITIVE PROFITS § 108. Competitive profits (or losses) arise in consequence of deviations of market from normal prices. We must now inquire into the causes of such deviations. As every business man knows, the conditions under which he must carry on his business are largely determined for him rather than by him. Knowledge of the best ways of producing things has become common property, and for the most part he must employ methods which are equally open to his competitors. Moreover there are current rates for the different productive factors and usually he must pay these or find himself unable to command the land, workmen or capital goods he requires. But notwithstanding the limiting influence of conditions, there is always in progressive communities a debatable margin where the intelligence, originality and daring of the enterpriser have full scope. He is free to determine what goods he shall produce, what quantity he shall produce and, to some extent, by what methods he shall produce. At the debatable margin the enterpriser exercises what we may conveniently call his power of substitution. The substitutions open to him are of two kinds. First, there are substitute uses to which the different factors of production may be put. Pieces of land may be used for different crops or building sites, workers may be employed at different tasks, and capital goods, except those that are highly specialized, may be made to aid production in different ways. In general enterprisers tend to devote each particular factor to that use in which it affords the largest return. Second, there are substitute combinations of the factors of production that may be made for the accomplishment of the same productive purpose. For example, dirt may be moved by many men and little capital in the form of hand shovels or by few men CAUSES OF COMPETITIVE PROFITS 199 and much capital in the form of steam shovels. Shoes may be made largely by hand or largely by machinery. A given crop may be raised on one piece of land without capital in the form of special fertilizers or on another with fertilizers. In deciding between these and alternative combinations enterprisers tend to choose the ones that are cheapest in the given situations. If all changes were suspended and monopoly did not intervene, enterprisers would use their power of substitution until each factor was assigned to that branch of production in which it afforded the largest return and until in each branch of production just that combination of factors was made which was found to be most economical under the given conditions. As a result industrial society would be brought to the state of normal equilibrium. All prices would be stable; production, distribution and consumption would follow one another with undeviating regularity, and the profits of enterprisers would just cover their wages-of-management. In actual industrial society, far from being suspended, changes are of frequent occurrence, and it is because of them that competitive Definition profits, that is, profits in excess of the wages-of-management of Competinot due to some monopolistic advantage, arise. tive Profits. The most important changes that commonly occur, and, Their therefore, the principal causes of competitive profits are: Causes: (1) price fluctuations, which may be confined to particular commodities or general; (2) the introduction of novelties; (3) improvements in methods of production; (4) variations in climatic or other natural conditions; (5) the exploitation of new lands and natural resources, and (6) modifications in the current rates of remuneration of other factors in production. Each one of these causes merits separate consideration. Prices. § 109. That fluctuations in the prices of particular com- Fluctuamodities are one of the most common causes of profits is a tions in fact familiar to every business man. In making their calculations for the future enterprisers estimate the prices they will have to pay for the materials, etc., which they must use and the prices they will receive for their products. If materials become cheaper or products dearer after they are embarked on their undertakings their profits will be larger than was |