Page 9, 11th October 1940

11th October 1940
Page 9
Page 9, 11th October 1940 — How can profits conform to the needs of justice?

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How can profits conform to the needs of justice?

WE are always being told about something called the profit motive without the operation of which we should never be able to get anything done. I suggest that when people

argue like this they are really guilty of a misnomer. What they really

mcan to convey is that when people do a job of work they want to be paid and that monetary rewards are a very great stimulus to performance. This is of course perfectly true and there is no reason why we should be ashamed of it, but it has really very little to do with the phenomenon of profit. When people speak of profit to-day they mean a gain in exchange by which a sum of money is tendered against the prospect of receiving a series of future payments which in their totality will be greater, than the original sum.

Profit in this broad sense includes interest, but the concept has a much wider scope than that of interest, Interest is the payment for the use of money pure and simple, or, if yOJI prefer to look a U that way, the payment that is exacted by the owner for not spending it but allowing somebody else to spend it instead—the " reward of waiting" as it is sometimes called. But profit is supposed to reward something on top of that, something which we rather loosely refer to as " risk " and that is where all The trouble starts.

Risk Alone Has No Reward Now in the 'first place nobody claims that mere risk by itself merits a reward—except of course where it has entertainment value. If my next door neighbour jumps from his eecond-storey window on to the garden lawn and then comes to me and expects a reward for this I shall not give him any money. I never asked him to jump out of his window and derived no benefit from it and as far as I arm concerned he might just as well have stayed put.

Clearly what we mean when we speak of a reward of risk is a tisk undertaken that is likely to be beneficial socially, the engaging by some person at his own expense in some socially desirable activity and the laying out of money to this end. The usual arrangement under which people obtain this type of reward is that they are allowed to pocket as much money as they can get out of the public by reason of this activity, i.e., the reward is the opportunity to secure an unlimited return.

Now there are several points to be noted here. In the first place the degree of risk varies with different undertakings. Some trades, such as publishing and mining, tend, of course, from their very nature to be speculative. But in the case of a very large number of undertakings risk has obviously been reduced to vanishing point, though such undertakings still maintain their claim that it should be rewarded."

Risk of Total Loss Low Investment to-day (by the term " investment " I understand the purchase of real assets and not of scrip) is carried on for the most part after the most careful nrarket surveys by highly experienced company executives and the risk of total loss is not measurably greater than the risk of gilt-edged becoming valueless through a currency collapse_ Yet the first expects a return that may attain any dimensions. while the second is content with ordinary interest. Why?

Surely the truth of the matter is that the expression " reward of risk " is in most cases just another misnomer. What the holder of equities exacts may more accurately be defined as the premium on the acceptance of a fluctuating return. In other words, he exacts something not really very different from pure interest, a payment for the use of money. But because the rate is liable to vary from year to year he demands a special payment in consideration of this. If this analysis is correet, and equity earmags are really only interest under a special form, it is surely obvious that justice does not enter into the matter. Although interest is not in itself unjust (see Canon Law) there is no such thing as a just rate of interest, and we can only distinguish between rates that are or are not oppressive. The tender cannot claim an inalienable right to 5 per cent. as opposed to 2 per cent, or 1 per cent.

In the same way we cannot to-day speak of a just rate of profit. Even where risk is present the magnitude of that risk varies and we have no means of assessing it actuarially. We have no means of estimating the probability that a successful specu

lativc enterprise might not have been successful and have therefore no means of adjusting the reward to the measure of the risk—which makes nonsense of any attempt to fix a just reward.

Clearly, if we are not to land ourselves into a veritable jungle of absurdities, we can only consider this whole matter from the point of view of expediency. We can offer inducements to individuals and other legal persons possessing accumulated funds to perform acts of investment of a kind which we think it desirable for them to perform, and the more cheaply we can get this done the better.

in a word, though the sweating of labour is a sin against justice yet justice is not violated by the sweating of capital, i.e., by compelling capital to do its work for the very lowest wages it can be driven to accept.

Individual Savings

The question therefore arises whether we could cause capital to be accumulated and invested at a far lower expense to the public than that public has to incur to-day. in the Matter of accumulation it seems now to be generally agreed that the return on capital has very little influence on the accumulation of private individuals.

But companies act under different motives. If companies did not see a prospect or getting a return on their money they might accumulate contingency reserves in cash, but they would not do much more than that. They would not seek to acquire new assets —and that would be a great loss to us all.

Now here we must not fall into a confusion of ideas. I have spoken above of a tate of profit, and by this I mean a rate of retained profit, i.e., profit after deduction of taxation, but even if we favour a very high rate of taxation this does not mean that we should interfere with the making of a profit, provided it is made by socially desirable means, and that it does not amount to " profiteering," i.e., enriching oneself out of other people's necessity.

Must Work at a Profit In the first place it is absolutely necessary, even in a collectivist State, that the great majority of undertakings should work at a profit. If they do not work at a profit they will work at a loss, and if the majority of its undertakings work at a loss a collectivist community would in due course find itself bankrupt in exactly the same way that a capitalist community would find itself bankrupt.

In the second place, the easiest and most painless way of performing the necessary but disagreeable task of creating savings is to let them he created through profits, Same people have argued that because money savings tend sometimes to Martin investment there is a tendency in our econamy to oversave. I ant convinced that this is a fallacy. On the contrary: if human needs are to be fully supplied (and In particular if the needs of backward races are to he fully supplied) am certain that both ornir annual savings and our collective investment must vastly exceed their pre-war levels—and I rather think I ant in good company here.

As long, therefore, as shareholders' interests dominate industry our problem is to find a means of inducing companies to work for a profit and nevertheless to limit the " muscling in " of the mere render to this process as much as we can. To put the matter in a nutshell, we must find out whether holders of equities will agree to accept a fluctuating return, and even on occasion take the risk of total loss. without receiving what is to-day the equity holder's traditional right, vie., the possibility of receiving a return of unlimited magnitude.

We Could Do This

I think there is no doubt whatever that we could do this. In my view equity holders should be paid pure interest, and on top of that should be allowed to retain earnings accumulating to a point where their total accumulated earnings (i.e., the accumulated nett profit whether distributed or undistributed) exclusive of interest equal, together

wilh the value of their investment, a sum equivalent to double their original outlay. After that retainable earnings, whether dist] ibuted Or undistributed, would be limited to a fixed annual percentage or the capital invested. The balance would be taxed away.

This, you will understand, is nothing hut a general line, a statement of principle. I have no space here to go into the complexities of working it out, but I think some such general principle could be applied. Where we are concerned with genuine risk such a system would be very much to the point ; for the offer would in effect be one of " double or quits," which is a chance that gamblers have always been ready to take.

I freely admit, however, that such a system would gradually destroy a great part of the conditions of its own operation, since savings would be more and more diverted out of the hands of companies, and the financing of new investment would become more and more the concern or a publicly responsible authority—which is presumably what those many Catholics who ask for the public control of credit really desire.

Just Price Intimately bound up with this whole question is the conception of a just price. Now there seem to be two views of what a just price really Means. One set of people try to base it on cost, while the others, who are to my mind much more difficult to follow, seek to arrive at the conception of a just price from what might be called the consumer's end without any reference to costs. This latter view is expressed in the followino typical and representative passage:

" Justice means in this connection social

equality, aequalitas rei ad rem, an equal distribution of rewards. A distribution of rewards in accordance with the social value of the services performed ought to be the principle underlying the determination of price of goods and services, and therefore of the size of incomes."

I must confess that I can attach no intelligible meaning whatever to these sentences, though perhaps there are those who can. What, for instance, is the " social value " of transporting a third-class passenger from Paddington to Oxford and how is it to be estimated? In order to assess that value we should presumably have to know the results for the rest of their natural lives of transporting to Oxford all the people who would he transported to Oxford while is given price was in force, and then place some monetary valuation on the total. How this is to be done I am at a complete loss to know.

But the other method of approaching the problem is not very satisfactory either, since profit necessarily enters into total costs, and If we cannot assess a just profit we cannot possibly assess a just price.

Getting Round But Not Answering the Difficulty Some people get round this difficulty by gaily ignoring the existence of absentees' profits altogether and simply concentrating on pure manufacturing costs, but even this does not leave us any better off, since manufacturers' costs vary, and if, as those who maintain this view of the matter contend, the just price is the minimum price for an article which is consistent with the adequate supplying of the needs of all those engaged in its production, we ate more at sea than ever. For if a price which just enables one

manufacturer to comply with this condition makes it possible for another to become a millionaire, then the just price for one cannot possibly be the just price for the other —and incidentally, as I have already indicated, if you do not allow somebody, whether he be an institution or a man, to make substantial accumulation, how will you set about creating savings'?

Would it not be far better to abandon these nebulous concepts of " just price " and " just profit " and to leave it to the tax collector to reap such harvest out of the total volume of unearned increment as expediency will permit? Then we shall know where we are and cease to befog our minds with expressions that are, at least in my submission, meaningless.

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