Popular Science Monthly/Volume 42/November 1892/Are Business Profits Too Large?

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ARE BUSINESS PROFITS TOO LARGE?
By J. B. MANN.

THERE are four essentials to any successful business—viz., capital, labor, skill, and opportunity. The first three of these must be paid, and our question relates to the proportion of compensation to be awarded.

We must start by considering the circumstances of the case. If we take an ordinary country village, we will find several boys with the capacity to labor, but without capital and skill to conduct a large business, and from necessity they become laborers. Then we find two or three perhaps with business ability, but no capital, and if they can not borrow capital—and most of them can not at first—they become laborers also. Occasionally one is found like W. H. Vanderbilt, having both capital and skill, and he steps to the front and does business enough, or more than enough, for several villages. His wealth increases rapidly, and his power to accumulate gains all the time.

Now the laborer looks at Vanderbilt as a capitalist chiefly, and knowing that labor is just as essential to business as capital, naturally asks why it should not be as well rewarded. The answer always must be that it should, but this does not answer the main question as to the proper proportion of profits to be divided. Three things being essential, and each able to command pay, the portion of pay must be governed by circumstances. In the case of our village boys, one only can start in business, and nine start as laborers, so that there are in the beginning nine competitors for the rewards of labor, and but one for the rewards of both capital and skill in management. On the law of competition, which can not be evaded in the long run, this seems to put labor at a great disadvantage, but it is a disadvantage imposed by Nature, and so need not be discussed. The actual fact is, that there are three things equally essential and to be paid for the conduct of business. If we had thirty dollars to divide as the result of an enterprise, and should say that, as all three of the things were essential, each of them must have a third of the emolument, we would shoot wide of the mark. In that case, one individual would get twenty dollars, and nine would get only one dollar and eleven cents apiece. That would be absurd. But the poor man, looking to the owner of a hundred millions, imagines that the division has been something very much like it.

The poor man, however, is mistaken. There is no business of recognized legitimacy that pays labor only a third. There is no business that gives to capital and skill combined even ten dollars out of thirty. Labor gets more than two thirds of the income of most undertakings, and of many gets the whole, while the entire capital not only obtains nothing, but is itself lost in the venture, and its owner relegated to the ranks of labor. No man, employing ten hands at wages of three dollars per day each, expects to make five dollars per day; but that sum would only give him three dollars for his time—the same as his men get—and two dollars for his skill and the use of his capital. This is a case where the employer is possessed of ability to manage the ten men as laborers only, and for such a man five dollars per day for the necessary study, anxiety, and responsibility, can not be deemed out of proportion.

When the man of fifty looks at his boy associates and their careers, probably he will find that only one in ten has reached a handsome competence by his own exertions, and that one because he was energetic, faithful, competent, and thorough systematically from the start. If for a time he served under another, he was careful to do a little more than was expected of him, and did it well. This created confidence and desire on the part of his employer to see him prosper, and a disposition to assist him. In course of time his employer lends him capital, or makes him a partner in the business, and then his fortune is assured. Why did not the other ten boys do the same? Obviously because there was but one chance in ten of that kind, and the one got it, so the others had to be content to serve in less profitable callings.

The regiment has but one colonel, the company but one captain, the State but one Governor; and any great business has limitations to the number of bosses it can find use for. There must be operatives as well as managers, and generally capacity finds its way to the front, and incapacity goes to the rear, as a matter of course, or according to the law of gravitation.

When one finds an opening, and leaves the operative class for the managing class, the value of his service shows for itself in some way that commands recognition. Thus, in the early days of agriculture, farmers send their produce to market by a man who makes a business of marketing for others. He can handle the product of ten farms, say, and hence twenty farmers give a living to two middle-men. After a time a man turns up that is smart enough to sell the product of twenty farms, and obtain better prices for the producers, by taking off a little from the commissions, and soon he gets all the business, and his two rivals are obliged to retire from the field. When they are out, the profits which were divided between two are taken by one, less the small discount that he made to the farmers to secure their custom. Now, doing the work of two, he saves the time and the expenses on the road of one, and so, while they just made a living, he rapidly accumulates, and makes money faster than the farmers who raise the produce which he only sells. In a few years he is the richest man in town, and the farmers, looking only at the result, are dissatisfied, and though he has done the selling for them for less than they could possibly have done it themselves, and also for less than any other man had ever done it for that community, they complain of him as an extortioner, or robber of the poor men who have done all the hard work. To state it mildly, he is a non-producer who has eaten up the farmers of the town.

And what has happened to the farmers has happened to all others. The competent manufacturer has come in, and by doing a much larger business has retired several incompetents to the ranks; the competent trader has done the same, the banker has done it, the expressman has done it, and all others have where there was a chance. From what has been said, it is apparent that the cost of living to the middle-men is not the prime factor in measuring the pay for their services. In the first case named, the farmers were satisfied with paying the larger commissions so long as the men earned only a living, they taking the living as the proper measure, and then they wanted to apply the same measure to the better man, and leave out of the account his better service and management, and lower commissions. They were more content with two dawdlers and inefficients, than with one brisk, energetic, and go-ahead fellow, who served them in better fashion.

It is found, after a term of years, that the one efficient man has saved a handsome property, and has money to lend to others to increase business, and that somehow his portion of taxes and public burdens is very large, and a material help to town expenses, while it is certain that the two men he displaced do not lend any money or pay any taxes of consequence, and probably never would had they retained the business which he took from them. The inefficients would have allowed matters to run along in a careless fashion, and they would have consumed their commissions in living expenses, so that nothing would have been added to the general stock; but the new and vigorous man having come in, the community, instead of having two poor persons who can pay no taxes for highways and schools, has a capitalist who does pay, and who also has money to lend to men who need. The common people in these days decry the richest man in town, and think him a detriment, a sort of incubus or dead weight which the people are compelled to carry, whose money has been made out of them by craft, and they imagine that had the laws of right and justice prevailed, their burden would not have existed. They do not for a moment dream that his capital would never have existed had the old dawdlers kept on to the end.

Nevertheless, they do believe in capacity, and they vote for the competent man for Governor, and town clerk, and assessor, and when they want a farm-hand or market-man they employ the best for the money, and only grumble after the service has been performed. They know that the best help is the cheapest all the time, save at the moment when they look at the aggregate reward in the lump. They know that a good hand is more profitable than two half hands, because the board of one can be saved. Now, the men who manufacture or engage in trade are the servants of the people as certainly as the Governor of the State or the county clerk. They combine materials and exchange goods for others simply because the others find it for their advantage to have them do it. I do not buy at the store because the merchant compels me, but because it is not profitable for me to keep store myself. By getting the manufacturer to take my wool and turn it into cloth I get more cloth. I create the manufacturer by asking him to help me to get the most cloth. In early times the shoemaker went from house to house with his lasts, leather, and patterns tied up in a sack and slung over his shoulder, and made and mended in the family kitchens. That kind of shoemaker long ago disappeared, and is no longer here to be laughed at. He was succeeded by one who stayed at home and worked in his own kitchen. The other went out of business because he came in. He drove the other out, and out to stay; he will never return; he demonstrated to people that the old cobbler was not the best resource for foot-gear, and the moment this was made plain the old system went under; he saved time in packing and unpacking, in traveling to and fro, in waiting, and in many ways made it more convenient all round, so that it was cheaper for customers and better for the workman to have the new system.

Later on the kitchen workman had to abdicate in favor of a man with a shop, a grindstone, shelves, better light and heat, and numerous appliances impossible in a farmer's kitchen. When this man had held the fort a while, the regular manufacturer, with a large building for cutting, sorting, storing, and caring for goods, put in an appearance, and the man with the small shop and comfortable loafing quarters stepped out in the same way and for the same reason that his predecessors had. The new-comer could do better service for less money; the manufacturer came because the world knew what it wanted and sought him. The world wanted some one capable of stopping the enormous wastefulness of the old system. The newest man has made the old cobbler and his ways appear ridiculous, and the operative of today lives better than the well-to-do farmer of 1786. If the old way is the better, there is nothing in the way of returning to it, only the one fact that people can not afford to. Let him that thinks the old plan the better start out with his bundle of lasts and kit and try to earn a living in the good old way.

Attempts at co-operation thus far have generally shown a strong if not fatal tendency to failure because of the difficulty of commanding the requisite skill and faithfulness in management. Co-operators are not willing to pay the price for service which their business needs in order to succeed. They always stand on the theory that the men who conduct great enterprises get too much for doing the business and the operatives too little. In course of time, and usually not very long time, their scheme goes down. This is because in the nature of things no hired person on a salary of fixed amount will all the time keep his wits alive and study into the small hours of the night devising ways and means to make money for other people. They propose in their constitution to take from capital and skill a portion of the profit that has usually been accorded to them and give it to labor; but after thousands of experiments during forty or more years of good business in this country there is hardly a single case of such undoubted success as to warrant the assertion that demonstration of feasibility has been attained. The combined skill of all the co-operators in half a century has produced no concern of magnitude. The almost uniform failures seem to prove that great management must have great compensation, and in endeavoring to get the skill without the pay the co-operators' dream has come to naught.

Now, this is equivalent to saying that the world finds its business can be done at less cost than by co-operation. The latter fails because it is undersold and unable to compete with such skill as gets the better pay.

Had Commodore Vanderbilt been content with the salary of a steamboat captain he would never have developed into a great business man and railroad manager. The prospect of great emolument brought into exercise great powers, so that he cheapened transportation in an astonishing degree and yet made money to an astonishing amount. The people who saved four or five dollars in a round trip between Boston and New York, and the people who got their barrel of flour twenty-five cents less because he ran a railway to Chicago, enjoyed the sensation at the time, but, when they saw his fortune, could not refrain from tears to think of the merciless robbery they suffered at his hands. It is the old story of the farmers and the market-men told at the beginning of this paper. The thing happened and succeeded, not because Vanderbilt was a robber, but by virtue of his giving better terms to people who had to travel and had to eat bread. His inducements were such that he got the business. Suppose he and some others of the same kind of enterprise had not come upon the stage, what would have been the result? Evidently the old ways of business would have continued. We should still be going to Buffalo on canal-boats and creeping along the streets of our cities in dilapidated omnibuses, still be doing our journeying in stagecoaches over dusty roads and tedious hills at a great sacrifice of time, money, comfort, and strength. The enterprise of the money-makers has profited everybody else by exciting production and accumulation. The money-makers have taken pay not out of labor, but out of the increased production and savings which their efforts have secured. Individuals have sometimes suffered. The omnibuses were killed when the horse-car came, and A. T. Stewart did the business of a hundred small shopmen; but the people at large saved time in getting where they were compelled to go in one case, and got what they wanted at less cost in the other. The street railroad makes ten times the money that the stages did, and the people save money and time. The people can do better by buying of Stewart, and therefore they buy. They enriched him to the tune of thirty millions, clean cash. This is a great fact; but it does not show great robbery. It may show the very opposite. The very class of persons who find fault with Stewart for crushing out so many small dealers are the same parties that say the great curse of society is the number of middle-men it has to carry. If there were anything in this, then Stewart certainly operated in the right direction by getting rid of a portion of the incumbrance; and he got rid of it in the right way, for he allured the customers to his shop by giving better bargains. Something was saved to buyers when they patronized him. Each buyer carried away a little bonus when he left Stewart's store. Something better than a chromo was obtained. It was a cent a yard on cashmeres, perhaps, an eighth of a cent on calico, a shaving on tapes, and a trifle on a paper of pins—just enough to get so much of the trade of the small fellows that they must retire.

Of course it follows that, if he still made too much profit, then he ought to have sold cheaper yet, so as to have driven out another lot of traders. But when we say "ought" in such a case, we must have some rule of a practical nature by which to determine the matter. This we do not have. We know that this merchant sold goods at so little profit that he ruined hundreds of competitors, and compelled their retirement from the field. Shall we say that they ought to have sold any lower? How can we ask him to sell at a profit on which the average trader breaks and starves? Shall we say that he did so much business that he was able to do it for less? But that does not meet the point. That is only saying he should have done less, and not that he should have done it cheaper. Society had no claim on him in this regard, and would have made nothing had it tried to enforce any. Had society asked him to sell less, all the goods not sold by him must have been sold by others, and at as high or higher rates. So society would not have been relieved of its burden of parting with so much of its product as was represented in the commissions or profits taken by Stewart.

But there is another view of it that brings us to the same conclusion. Stewart was in business for about forty years, and for many years sold twenty millions of goods per year. Had he sold but fifteen millions per year at a profit of five per cent, and invested the profit with his usual sagacity, he would have been worth more than thirty millions at the end of his forty years. That he left but thirty millions proves that his profit was not over five per cent on the average. The margin for labor to gain from is, therefore, in the neighborhood of five per cent, because Stewart has proved that the ordinary man can not part with more than that and continue in business. In other words, business stops when the margin goes down much below that rate.

There are some lines of business in which the profit is at times more than five per cent, but in the long run the average can not amount to more than that. Competition increases from year to year, and profits tend downward all the time; consequently, it takes more talent and energy to make fortunes now than it did a few years ago. It is not so easy for a laborer to become a boss as it formerly was; and as the chances for rising to bosshood grow less, the hatred of bosses increases. This is a symptom of discontent, and an evidence of the unreasonableness of the philosophy which is at the bottom of the schemes for relief. Capital must be paid, skill must be paid, and, if they are each paid but two per cent of the accruing profits, one per cent only remains for labor to get as its share, and this to the laborer whose wages are one dollar a day would amount to but three dollars a year. That is something, to be sure, but as a means of elevating the laboring classes is of no account.