CHAPTER XII.

ON PROFITS.

1. In the preceding chapters we have shewn the entirely unphilosophical nature of the system of Smith, Ricardo, and Mill, and annihilated the distinctions made by the two latter writers in the Laws of Value affecting different classes of commodities; we have now to point out errors of the most important nature of part of their doctrines, arising out of an arithmetical misconception which is so plain that any schoolboy could perceive it, and it is amazing that they themselves should have failed to discern it.

PROFIT is the excess of the Value of any product above the Cost of Production, or the expense of placing the commodity in the place it is offered for sale: and is estimated by the ratio of that excess to the Capital employed. Thus, if the Capital employed be £100 and the Profit £10, that is a Profit of 10 per

cent.

Profit is a general name for the excess gained, whether the matter traded with be money or merchandise of any description. But when the Capital advanced is Money or Credit, the excess is more usually called Interest or Discount: when the return is for merchandise it is usually termed Profit.

When we speak of the Rate of anything it invariably means the time in which it is done. If any one speaks of the Rate at which a horse can gallop, or a ship steam, or an athlete can walk, or run, he always mentions some time in which the distance is accomplished. If it were said that a horse could gallop at the rate of 20 miles, or a ship steam at the rate of 15 knots-or an athlete walk at the rate of 6 miles, or run at the rate of 14 miles,-every one would at once perceive that such a form of expression was defective, and conveyed no precise meaning whatever. The rate of speed in such cases is usually referred to the hour.

So every one, in speaking of Rate of Interest or Discount, invariably refers it to some time, such as a year.

So evidently the RATE of PROFIT must mean the amount of Profit made in a certain time, such as a year.

Now, while every one in speaking of the Rate of Interest or Discount invariably refers it to some period of time, as the year, not a single Economist that we are aware of has perceived that the term Rate of Profit must be referred to the same standard; or that time is as necessary an element in the definition of Rate of Profit as in that of Rate of Interest. They simply define the Rate of Profit to be the ratio of the Profit to the Capital-without any reference to the time in which it is to be made!

No one would suppose that a profit of £10 made on advancing £100 in money is the same Rate of Interest whether it be made in a year, a month, a week, or a day.

But when Economists speak of Rate of Profit there is not one who has perceived that an actual Profit made in a year is a very different Rate of Profit from the same actual Profit made in a month, a week, or a day.

This fact is so extraordinary, and the consequences which flow from it are so important, and the rectification of this definition overthrows so much of the doctrine of Ricardo, and throws such a clear light on many problems of Profits and Interest which have hitherto been obscure, that we must examine at length the current doctrines on the subject.

1

Throughout his chapter on Profits Smith has not the faintest glimmer of the truth that Rate of Profit and Rate of Interest must both be referred to the same standard of Time. Without being very distinct, he says that in a large town capitalists 1 "frequently cannot get the number of workmen they want, and therefore bid against one another in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock," evidently not perceiving that Wages and Rate of Profit may rise together, as we shall shew hereafter." In the remote parts of the country there is frequently not stock sufficient to employ all the people, who therefore bid against one another, in order to get employment, which lowers the wages of labour, and raises the profits of stock."2

Here he evidently does not perceive that wages may be lowered, and the actual Profit high, and yet the Rate of Profit low." In reality high profits tend much more to raise the price of work than high wages."

Now, we shall shew hereafter that prices may be lowered, and yet both Wages and the Rate of Profit raised.

2. This doctrine, however, comes out much more clearly in subsequent writers.

Thus Ricardo affirms that if" Corn and manufactured goods sell at the same price, profits would be high or low in proportion as wages were high or low."

Now this may be true with respect to corn and agricultural produce, because that is produced only once a year; but it is wholly untrue with respect to merchandise in which the returns may be made an indefinite number of times in the year.

"Nothing can affect profits but a rise in wages."-" Profits depend on high or low wages."

"Thus we again arrive at the same conclusion which we have before attempted to establish:-that in all countries, and at all times, profits depend on the quantity of labour requisite to provide necessaries for the labourers, or that land, or with that capital which yields no rent."

We can imagine that this doctrine would greatly perplex London traders.

"It has been my endeavour to shew throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of the necessaries on which wages are expended.” 2

"Profits, it cannot be too often repeated, depend on wages.' Malthus says that "Ricardo, in fact, has founded his whole theory of profits, which has been considered as the crowning achievement in the Science, upon the rise and fall in the value of wages."

We shall shew that this "crowning achievement" of the Science is founded upon an arithmetical blunder so gross that any schoolboy would be ashamed of it.

3. These doctrines are developed at greater length by McCulloch

"By profit in political economy is meant that part of the produce, or the value of the produce, obtained by the employment of capital in industrious undertakings, which remains to its em1 Principles of Political Economy, ch. 6. 2 Ibid., ch. 7. Definitions of Political Economy, p. 27. 5 Note 7 to Wealth of Nations.

3 Ibid.

ployers, after replacing the capital, or such portion of it as may have been wasted in the undertakings, and every other expense necessarily incurred in carrying them on.

"The rate of profit is the proportion which the amount of profit derived from an undertaking bears to the capital employed in it. . .

After describing the case of agricultural capital and profits, in which we have already said the doctrine may be true, because these are always referred to the standand of the year, he goes

on :

"Now in this case-and this case is, mutatis mutandis, the case of every man engaged in business-it is obvious that the rate of profit may be raised in three, but only in three, ways—

1. By industry becoming more productive.

2. By a reduction in the rate of wages.

3. By a reduction in the amount of taxation.

And it may be reduced by the opposite circumstances1. By industry becoming less productive.

2. By a rise in the rate of wages.

3. By a rise in the amount of taxation.

Profits cannot be affected in any way not referable to one or other of these heads."-We shall see.

4. Malthus, who was a good mathematician, and from whom better things might have been expected, commits exactly the same He says1

error.

"PROFITS OF STOCK. When stock is employed as capital in the production and distribution of wealth, its profits consist of the difference between the value of the capital advanced and the value of the commodity when sold or used.

"THE RATE OF PROFIT. The percentage proportion which the value of the profits upon any capital bears to the value of such capital."

Again" The profits of capital consist of the difference between the value of a commodity produced and the value of the advances necessary to produce it, and these advances consist of accumulations generally made up of wages, rent, taxes, interest, and profits.

1 Definitions of Political Economy, p. 240.

2 Principles of Political Economy, ch. 5.

"The rate of profits is the proportion which the difference between the value of the commodity produced and the value of the advances necessary to produce it bears to the value of the advances. When the value of the product is great compared with the value of the advances, the excess being considerable, the rate of profits will be high. When the value of the product exceeds but little the value of the advances, the difference being small, the rate of profits will be low.

"The varying rates of profit, therefore, obviously depend upon the causes which alter the proportion between the value of the advances necessary to production and the value of the product obtained."

5. Lastly Mill, who we might naturally have expected could not fail to perceive the gross and palpable blunder of preceding writers, follows in the same strain of error in the following exextracts 1:

"The profits of stock are the surplus which remains to the capitalist after replacing his capital and the ratio which the surplus bears to the capital itself, is the Rate of Profit.

. .

"The rate of profit is the proportion which the profit bears to the capital. . In short, if we compare the price paid for labour and tools with what that labour and those tools will produce, from this ratio we may calculate the rate of profit.

"Profits, then (meaning not gross profits but the rate of profit), depend (not upon the price of labour, tools, and materials-but) upon the ratio between the price of labour, tools, and materials, and the produce of them.

"The whole of the surplus, after replacing wages, is profits. From this it seems to follow that the ratio between the wages of labour and the produce of labour gives the rate of profit. And thus we arrive at Ricardo's principle that profits depend on wages; rising as wages fall, and falling as wages rise.

"This theory we conceive to be the basis of the true theory of profits. It is therefore strictly true that the rate of profits varies inversely as the cost of production of wages. Profits cannot rise unless the cost of production of wages falls exactly as much; nor fall unless it rises.

1 Essays upon some unsettled questions in Political Economy. Essay IV.:

on Profits and Interest,