198. KNOWLEDGE AND INFORMATION IN RELATION TO RISK-TAKING Α' The ablest bankers, merchants, and investors collect data under twelve headings, or on about twenty-five subjects, as follows: I. Buildings and real estate: (1) including all new building and fire losses. II. Bank clearings: (2) total bank clearings, (3) bank clearings excluding New York. III. Business failures: (4) failures, by number, amount of liabilities, and percentage of failures to number of firms in business. IV. Labor conditions: (5) immigration figures. V. Money conditions: (6) money in circulation, (7) comptroller's reports, (8) loans of the banks, (9) cash held by the banks, (10) deposits of banks, (11) surplus reserve of banks. VI. Foreign trade: (12) imports, (13) exports, (14) balance of trade. VII. Gold movements: (15) gold exports and imports, (16) domestic and foreign exchange and money rates. VIII. Commodity prices: (17) production of gold, (18) commodity prices. IX. Investment market: (19) stock exchange transactions, (20) new securities. X. Condition of crops: (21) crop conditions and production of other commodities. XI. Railroad earnings: (22) gross and net earnings, (23) idlecar figures, (24) miscellaneous. XII. Social conditions: (25) political factors. The twelve headings already described are arranged so they may be grouped and classified under the three following divisions. These divisions are purely arbitrary, as every subject affects in some manner each of the three divisions. Corporations and merchants especially study: New building and iron production. Bank clearings Business failures Labor conditions Earnings, crops, politics, etc. Adapted by permission from R. W. Babson, "Barometric Indices of the Conditions of Trade," Annals of the American Academy of Political and Social Science, XXXV (1910), 596, 608-9. Bankers and others loaning money especially study: Money conditions Foreign trade Gold movements and foreign money rates Commodity prices Clearings, failures, politics, etc. 'Stock exchange firms, bond houses, and investors especially study: Prices and transactions Crop statistics Railroad earnings Social and political factors All figures on mercantile and monetary conditions Information dealing with the metal market may be grouped under three heads, viz.: (1) sources of current statistics; (2) trade papers publishing current information; (3) annual statistical publications. The following are the important ones: 1. Sources of Current Statistics A. United States Statistics: American Iron and Steel Association, 261 S. Fourth St., Phila- Copper Producers' Association, No. 1 Liberty Street, New Horace J. Stevens, ed. The Copper Handbook, Houghton, The Iron Trade Review, Cleveland, Ohio Engineering and Mining Journal, New York United States Steel Corporation Monthly Report of unfilled orders Customs House returns B. English and Foreign Statistics: Julius Matton, 25 Rood Lane, London Vivian, Younger & Bond, London 1 Adapted by permission from B. D. Mudgett, "Current Sources of Information in Produce Markets," Annals of the American Academy of Political and Social Science, XXXVIII (1911), 438–39. 2. Trade Papers Publishing Current Information The Journal of Commerce and Commercial Bulletin, New York The Iron Trade Review, Cleveland The Iron Age, New York Mineral Industry, New York Engineering and Mining Journal, New York American Metal Market and Daily Iron and Steel Report, pub lished by the American Metal Market Co., 81 Fulton St., New York The Steel and Metal Digest (monthly), published by the American Metal Market Co., 81 Fulton St., New York. Bulletin of the American Iron and Steel Association, 261 S. Fourth St., Philadelphia 3. Annual Statistical Publications Statistical Report of the American Iron and Steel Association, 261 S. Fourth St., Philadelphia Metal Statistics, published by the American Metal Market Co., 81 Fulton St., New York Publications of the United States Geological Survey Commerce and Navigation of the United States, published by the Bureau of Statistics, Washington, D.C. The Copper Handbook, published by Horace J. Stevens, Houghton, Michigan Comparative Statistics of Lead, Copper, Spelter, Tin, Aluminum, Nickel, Quicksilver, and Silver, compiled by the Metalsgesellschaft, the Metallurgische-Gesellschaft A.-G., and the Berg- und Metalbank Aktiengesellschaft, Frankfurt-am-Main, Germany Directory of Iron and Steel Works in the United States, published by the American Iron and Steel Association. 199. THE ENTREPRENEUR AS A RISK-TAKER' The incomes which business men secure through their ability to adjust themselves to changes in the market, though not technically produced, are yet in a sense earned. By putting their capital at hazard and agreeing to pay stipulated wages, rent and interest, for the factors which they hire, they relieve the owners of these factors from a I Adapted by permission from T. N. Carver, The Distribution of Wealth, pp. 269-75. (The Macmillan Co., 1904.) certain amount of risk. Even these men may lose through the failure of a business man, but not, under the law, until he has lost all his own capital. Their risk is therefore reduced by having his capital placed in the position of greatest hazard—that is, in the position where losses strike it first and never reach the other factors until it has all been wiped out. In so far as these other factors are made somewhat safer by this process they can well afford to receive something less on the average than they might otherwise receive, leaving the business man something of a surplus in the long run to compensate him for his greater risk. This part of the business man's profits is analogous to the profits of an insurance company, which are, of course, different from the premiums received. The real reward of the insurer, whether he be an ordinary business man or a chartered insurance company, is to be found in the excess of gains over losses. In the case of the insurance company it is the total premiums received for assuming the risk minus the losses consequent upon assuming the risk. Here the question arises: How does there happen to be a difference? Why will the patrons of an insurance company pay it more than their total losses, thus leaving the company a profit? Evidently because the risk to the insurer is less than to the insured. In the case of fire insurance, for example, the loss to the insurer in case of fire would include only the money value of the buildings and goods destroyed; but in the case of the insured it would also include shrunken credit and crippled business. Having capital of his own, his credit is good for a certain amount in addition, but a part, at least, of that credit vanishes with his capital. More important still is the effect of a large and sudden loss as compared with small annual payments upon his consumption. It is evident that in the case of the business man, as was shown to be true in the case of the insurance company, so much of his gross income as is necessary to cover his real risk, or to make good his losses, is not to be classed as profits. Only that which he wins because of favorable changes in the market, over and above what he loses because of unfavorable changes, can be so classed. How does there happen to be a surplus in this case? It must be, as in the former case, because the risk to him is less than it would be to those whom he relieves of it. As compared with the laborers, it is probable that a given loss would affect him less seriously than it would them. The loss of any considerable part of their wages, which would frequently happen it they bore their own risk, or took their own chances with the market for their products, would mean serious deprivation. But there is no reason for believing that a given loss would on the average affect the business man less seriously than it would the landlord and the capitalist of whom he hires his land and capital. They are usually in as good a position to bear a loss as he is. But there are reasons for believing that the skilful business man will experience fewer losses than would be experienced by those whom he relieves of risk, whether they be laborers landlords, or capitalists. This is due to no actuarial principle, as in the case of the insurance company, but to the business man's superior foresight and skill in avoiding losses. That is a part of his special function, and in the performance of it he can be assumed to develop special skill. This part of his income is, therefore, due to the fact that he is able to avoid losses more effectively than the others whom he relieves of their risks. Even if he pays them what they might be expected to earn on the average and in the long run-counting the losses with the gains resulting from fluctuations of the market and other fortuitous circumstances by so managing the business that the losses are reduced and the gains increased, the business man will find himself in the possession of a surplus without having robbed or outbargained anyone. This means that this part of his surplus is due to the fact that he is able to reduce the risk which he assumes below that which the others would have had to carry if he had not relieved them. But even if the business man is not able to avoid losses more successfully than the others whom he relieves of risk, he may still secure an income through his function as a risk-taker. The owner of any factor of production will ordinarily accept as hire something less than its average marginal product, on condition that he is relieved of risk. See also 100. 326. The Enterpriser. The Entrepreneur and the Capitalist. 327. The Functions of the Entrepreneur. 328. Is the Entrepreneur Active or Passive? 200. THE RISK THEORY OF PROFIT' [NOTE. The following statement is designed to show on what grounds some writers regard profits a return for risk-taking.] First, the distinguishing peculiarity of the entrepreneur is not that he is a co-ordinator, but is to be found in his ownership of the product. Taken by permission from F. B. Hawley, "The Risk Theory of Profit," Quarterly Journal of Economics, VII (1892–93), 478–79. |