Front Page Titles (by Subject) PART IV: ON THE BUSINESS SYSTEM - Can Capitalism Survive?
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PART IV: ON THE BUSINESS SYSTEM - Benjamin A. Rogge, Can Capitalism Survive? 
Can Capitalism Survive? (Indianapolis: Liberty Fund, 1979).
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ON THE BUSINESS SYSTEM
The two papers in this section deal with selected topics in the general area of “the business system,” which occupies center stage in the drama of capitalist economics.
“Profits” was presented to a group of businessmen and clergy brought together by the National Association of Manufacturers. The meeting site was Bermuda, and the clergymen and professors in the group had an uneasy feeling that they were being “bought” by this choice of site. This uneasiness did not keep most of us from quickly signing our bar tabs against our rooms (as opposed to paying cash). It was here that I was first told by a man of the cloth that even my analysis was un-Christian.
The next paper, on the businessman, was another product of the system then prevailing at Wabash under which students were compelled to attend convocations and faculty members were “urged” to take turns as speakers. Many are the uses of adversity.
“What has happened to profits?” My answer to that question is as follows: Profits have gone down. For those who think this answer inadequate, I can add the following: Profits have also been overestimated, overstated, overtaxed, underrated and misunderstood! Are there any questions?
Of course there are questions. To begin with, what proof do I have that profits have gone down? Profits after taxes in 1941 constituted 9 percent of the national income; in 1961 they constituted 5+ percent of the national income. Profits as a percentage of dollar sales averaged 5 ½ percent in the period 1947-49; now they are averaging 2 ½ to 3 ½. Profits as a percentage of net worth averaged 11 to 13 in the period 1947-49; now they are averaging 6 percent to 7. By any measure one can conceivably use, profits have been shrinking in the last fourteen years.
Are Profits Now Too High or Too Low?
Can we deduce from this information that profits are now too low or that they were once too high and are now just right? This is a complex question and calls for a complex and serious answer.
The first problem is to define what is meant by “too high” and “too low.” Unfortunately, total dollar figures tell us almost nothing; as a matter of fact, neither do percentage figures of the kind I have given above. I am no more justified in using those figures to prove that profits are now too low than a trade union economist would be in using them to prove that profits were once too high.
The percentage share of profits in the national income of a country is largely determined by the relative abundance or scarcity of entrepreneurial capital and talent. In a country where capital is scarce and business leadership talent is in short supply, profits will and must command a larger share of the national income than in a country where both capital and talent are relatively abundant. The failure to recognize this fact is the single most important deterrent to economic growth in the underdeveloped countries of the world today. The governments of those countries, inspired in part by the antiprofits bias of both the socialists and the modern liberals, have tried to keep profit levels low, or have punished or nationalized the high-profit firms. In doing so, they have dried up the wellspring of all economic development: vigorous, aggressive entrepreneurship.
It follows as well that as an economy matures and becomes relatively better blessed with capital and leadership, the percentage share of the national income represented by profits will decline. Thus the figures I presented above do not necessarily prove that profits are now too low.
The Concept of Normal Profits
So let us abandon our inquiry into total figures. Where can we turn? One technique of explanation frequently employed is that of evaluating profit figures for the individual firm. If, for a given firm or industry, profits as a percentage return on sales or investment are found to be significantly higher than for other firms or industries, profits are said then to be “too high”; if much lower than for other firms or industries, they are said to be “too low.”
This technique seems on the surface to be a valid one, and its validity is apparently attested to by the fact that even businessmen use it when they want to prove that their firms or industries are in need of help or are suffering under special handicaps.
One assumption here is that normal profits (as determined by the statistical average of all profits) are the right or “just” profits and that profits above or below normal are thus “too high” or “too low.”
This approach is often used by trade unions to show that a given group of firms has been making abnormally large profits and thus can and should pay higher wages.
It is extremely unfortunate that this point of view on profits has received such wide acceptance in all groups in our society. It implies that businesses should be permitted (perhaps even assisted) to make a “normal” or “fair” profit, but become suspect once they earn more than this statistical norm.
This approach rests on a serious misunderstanding of the function of profits and losses in a free market economy. It is true that, in the long run, and in a competitive market, each firm will be making profits no more and no less than it could make in alternative activities. This is true because if the typical firm in the industry were making higher than normal profits, other firms would enter the industry and profits would be driven down. If the typical firm were making lower than normal profits, some firms would leave the industry and profits for those remaining would rise. Thus in the long run profits do tend to be at the so-called normal or average level.
However, at a given moment of time in a changing, dynamic economy, few firms or industries will be in this long-run equilibrium position. Most will be in the process of making adjustments to the changing circumstances. Thus, in some industries, profits will be well above normal, and in others, profits will be well below normal.
It is this fact which leads the firms involved to make the adjustments called for in the service of consumers. The abnormally high profits in some industries are the signal that consumers are calling for more firms to enter those industries. The below-normal profits or outright losses in other industries are the signal that consumers are calling for some firms to get out.
The importance of this signal system can be illustrated by the life history of the ball-point pen. When Reynolds produced the first ball-point pen, he sold it for around $12.95. It is doubtful if, even then, production and distribution costs were as much as one fourth of the selling price. By any measure known to man, Reynolds was receiving abnormally high profits. However, the signal went out loud and clear; soon every pen company had its ball-point pens, and new firms entered the field almost daily. Within a short period of time, the price of the pens had dropped below $5.00. Now I am writing this paper with a pen that I bought with nine others for a total cost of $1.19 for the ten.
Suppose the government, shocked by Reynolds’ profits, had insisted on recapturing all of his profits above a return of (say) 6 percent on capital and made this a universal rule for the industry. Or suppose that Reynolds’ workers had insisted on their wages being increased until his profits were brought down to “normal.” In either case, the price of ball-point pens might well still be $12.95. But because the abnormally high profits were permitted to serve as a signal to other producers, the results were as I have described them above.
The above-normal profits then are not “too high” in any value sense, nor are the below-normal profits “too low.” They are simply signals and very, very important signals as well. In fact, the efficiency of the economy is completely dependent upon their not being silenced or modified.
Nor is this signal system costly to the consumer it serves. Abnormally high profits in some areas tend to be balanced by below-normal profits in other areas, and the net cost to the consumer is minimal.
If the consumer insists on recapturing the excess profits, surely he is compelled by logic and conscience to indemnify those who are getting below-normal profits, and the net gain would be of no immediate significance. The price of doing so, though, would be the destruction of the combined signal and incentive system of the free market—and hence his hope for a free and prosperous society.
In the same way, the worker who would demand that wages be tied to profits, that the employer share the excess profits with him, should be compelled by logic and conscience then to take wage cuts whenever his firm is making below-average profits. Few workers would have much enthusiasm for the arrangement thus presented.
In sum, then, we gain little insight into what has happened to profits by asking if some firms are making profits above or below the average. Such deviations from the average are a normal and indispensable part of the functioning of the competitive market economy.
The Concept of Market Structure
We seem now to have thrown out all meaningful ways of evaluating profits, of determining what has happened to profits. Perhaps we should give up in despair and turn our attention to some other problem.
Fortunately, there still remain certain indirect approaches to the problem that do have meaning. Let me go back to a phrase I have used several times, “the competitive market.” It is literally true that profits never can be said to be too high or too low in a competitive market. In such a market, forces are always at work to bring profits back to the normal level, and the net cost to the consumer is minimal.
But what if the markets in which the firms deal are not competitive? What then of profits?
If a given firm has a monopoly of its market, it may be said to make above-normal profits and to make them indefinitely. The signal is going out, but the other firms are prevented by the monopoly power of this one firm from answering the signal. Under these circumstances it is quite meaningful and realistic to say that profits are “too high.”
Again, if the firm is selling in a competitive market, but buying its resources (for example, its labor services) from units that are not competing, it may suffer from a cost squeeze on profits that will cause those profits to be persistently below normal. In the short run, the owners of the firm will suffer, and, in the long run, the consumer will suffer as firms will get out of the industry in response to a basically false or distorted below-normal profit signal. Here again it is quite meaningful and realistic to say that profits are “too low.”
Our search then must take us to the markets of this country, to ask whether product and resource markets are less or more competitive than they once were or than they could or should be.
Let us begin with the selling side, with product markets. It is commonly assumed that the American business firm was once small in size and competitive, but that it is now large in size and monopolistic.
This is a complex subject which cannot be explored fully in limited space. However, here are my views in brief form.
(1) I believe that it can be demonstrated that product markets in America are more competitive today than they have ever been. My reasoning is that, though firms have grown in size, markets have grown even more rapidly. The absolute size of the actual firm is unimportant. What is important is its size relative to the industry or market in which it operates.
Improvements in transportation and communication and the development of substitutes for almost any and every kind of product have so widened markets that neither A&P nor U.S. Steel has as much real market power as did the small town grocery store and the local iron foundry a century ago!
(2) I believe that such instances of monopoly as do arise tend to be rather quickly erased by the dynamic changes in the economy.
(3) I believe that almost all instances of persistent monopoly power that do exist can be attributed to positive protection of that power by government. The protection takes such forms as price supports in agriculture, tariffs, fair trade laws, special franchises and licenses, subsidies, etc.
(4) I believe that the unhampered market naturally tends to be a competitive market. Monopoly is not only unnatural, but can be maintained only with the positive support of government.
If what I have written above is true, then we can add that profits are not generally “too high” in the American economy, except in those cases where the government is giving direct or indirect support to monopoly power. NOTE: Profits can be “too high” even if they are in fact losses! Thus if the government is subsidizing or otherwise aiding a declining industry, losses will be less than in a free market. Thus, returns to the firms involved are “too high” in that they do not accurately reflect the true signal being sent out by consumers. Excess resources will be held in the industry long after the consumer has ordered them out! A case in point would be agriculture.
We turn now to the buying side of the markets in which firms operate: to the resource markets. Are these markets less or more competitive than they used to be, or than they can or should be?
This too is a complex question and again I can do no more than summarize my argument.
(1) I believe that the resource markets also tend to be competitive in the absence of government intervention. Improved transportation and communication have expanded alternatives confronting both the buyer and the seller of most resources, including labor.
(2) However, governments have been particularly active in labor markets in the last thirty years and have done much to force the employer to hire his labor in noncompetitive markets. Governments have done this through direct setting of wages, hours, and working conditions and by encouraging, protecting, and giving special privileges to trade unions.
(3) I believe that the effect of this has been to make of the trade union a government-sponsored instrument for distorting the workings of the market. It has resulted in a never-ending cost squeeze on profits in large segments of the American economy.
If what I have said above is true, then it follows that what has happened to profits is that they tend to be “too low” in those segments of the American economy most influenced by trade unionism and by wage legislation. NOTE: Profits can be “too low” even though the firm is making above-normal profits! Thus, in an expanding industry, wage increases can hold profits below the levels they would otherwise have reached. Thus the high-profit signal is somewhat muffled and resources may not be entering the industry at the rate consumers are ordering them to!
The Impact of Taxes
This tendency is reinforced by the taxing process. Both the fact and the form of profits taxes tend to reduce the effectiveness of the signal system. The effect is one-sided in that profitable industries have their returns taxed by the government, but unprofitable industries do not receive subsidies—nor should they. Permission to do some spreading of losses does not help firms in industries that are expanding and generally profitable, year after year. Moreover, the unrealistic handling of depreciation in an environment of inflation leads to persistent overstating and hence overtaxing of business earnings.
I have argued that most of the usual ways of evaluating profits are meaningless. I have suggested that profits can best be examined indirectly, by weighing them in the context of the markets in which firms buy and sell. I have expressed my belief that the greatest distortion in those markets in America today is in the labor areas, and that, as a consequence of this distortion and of other factors, profits tend to be “too low” in large segments of American industry.
I would add that this fact goes a long way to explain the persistence of unemployment in an apparently prosperous nation. The general business climate created by government interventions, particularly in the labor markets, is not one that creates buoyancy and optimism in the business world. Thus, the economy tends to sag, and adjustments are not quickly made. More directly, unemployment tends to be concentrated in those industries and those areas most influenced by aggressive union action in the last thirty years.
If these “low low” profits persist, the economy is in danger of being moved even further from the free-market ideal. The apparent failure or refusal of private enterprise to “do the job” will lead Americans to demand more and more government intervention (witness the demand for deficit spending to “get the country going”).
The solution lies not in raising profits by granting special favors to business (as is so often suggested) but rather in reducing or eliminating the special handicaps business has faced in its labor markets and in other ways during recent decades.
If this is not done, we are in danger of losing our free economy; and when economic freedom is lost, all other freedoms must follow, sooner or later.
I should like to begin with a paragraph from an article in a recent issue of the Wall Street Journal. The headlines read as follows: “Scorning business. More college students shun corporate jobs, choose other fields. Teaching, Peace Corps lure Harvard grads: company hiring quotas go unfilled. Martinis, ulcers and profits.”
In the article proper, Roger Ricklefs writes:
The word on the campus is that business is for the birds. At college after college an increasing percentage of graduates is shunning business careers in favor of such fields as teaching, scientific research, law and public service. Amherst College says that 48 percent of its alumni are businessmen, but fewer than 20 percent of recent graduates have been entering business. Only 14 percent of last spring’s Harvard graduates plan business careers, down from 39 percent five years ago. Arthur Lyon Dahl, a June graduate of Stanford University, says of his classmates: “I know of almost no one who even considered a business career.”
One of the toughest obstacles confronting company recruiters on many campuses is a general atmosphere of scorn for business.
This last sentence has suggested my question for this morning. Can any right-thinking young man deliberately choose a career in the business world?
Is being a businessman a respectable way to go through life? You will note, I am not asking if any particular person should be a businessman. There are many for whom other careers are clearly indicated. I am asking only if it is one of the acceptable alternatives confronting a young person today.
I raise this question because I have a feeling that, on most college campuses today, a student could easily gain the impression that if he chooses a career in business, he will have embarrassed the college, his teachers and his yet unborn children.
I wish now to examine some of the more common campus views of the businessman to see to what extent they are valid descriptions of life in the gray flannel suit.
The first is the view that whatever else it is, a career in business is not a life spent in serving the human race, in doing something for others. If this were accepted by all, there would of course be no businessmen in this world, because it is almost literally impossible for the average man to spend his life doing something which he thinks is of no value to others. Even the drug pusher or the prostitute is led to insist that his or her role is an extremely important one in serving the emotional needs of society.
I take as granted then your desire to do something useful to serve society. Can you do it as a businessman? That many still answer “no” to this question is a tribute to the enduring quality of an old myth—the myth that in an exchange, what one party gains, the other must lose. In a voluntary exchange, both parties must expect to gain or no exchange will take place. A businessman is a specialist in voluntary exchange, and his success is largely determined by how well he succeeds in serving others.
Don’t I really mean, by how well he succeeds in deceiving others into thinking he is serving them? Isn’t a kind of sophisticated dishonesty a requirement for success in business? I make no claims for the superior moral fiber of the businessman, but I will say this: A basically dishonest man can survive longer in the church or the classroom than he can in the grain exchange or the furniture business. The penalty system in the business world operates with some real precision and certainty, largely unencumbered by a mystique of occupational sanctification.
There are dishonest men in the business world, of course, but if you go into the business world, you will be under no greater pressure to stretch the truth than if you get a job as an editor of a college catalogue or as a speechwriter for candidates for political office or a member of Nader’s Raiders.
But doesn’t the businessman, if he wants to get ahead, have to cater to the whims and caprices of his customers, no matter how depraved their tastes might be? Yes, of course; that is, he must serve other people as those other people wish to be served and not as he thinks they ought to want to be served. This may be what rules out the businessman as a public servant. The public servant is perhaps a man who serves others as they ought to be served, rather than as they want to be served or perhaps more accurately, as they are willing to pay to be served.
Now don’t misunderstand me; I have great respect for the man who says, “This is what I think it right to paint, or compose, or produce; if you like it, fine. If you don’t, fine. If you want to pay me for it, fine; if you don’t, fine.” This is a position of integrity and honesty; it is also a position rarely encountered in the business world. But let’s be honest with each other. It is not really the position of one who serves others, but rather of one who serves some personal set of imperatives. Moreover, it may enable you to make a living or it may not. If you have the guts for this kind of stance, go to it. Just don’t complain later that no one recognizes your talent with monthly paychecks.
If you are interested in making a living, then you are usually well advised to take some account of what others are willing to pay to get. Admittedly there is a way out; rather than serving B as B is willing to pay to be served, A can sometimes be paid with C’s money to do for B for free what he, A, knows to be best for B. This, by the way, is more in keeping with the modern concept of public service than is the direct exchange with B on a quid pro quo basis.
Whatever the case, you can, in fact, must serve others if you wish to be a businessman. I would go so far as to argue that the young man who goes to a country like Brazil as an employee of (say) Sears Roebuck will end up doing more real good for the people of the country than will the young man who goes there as a member of the Peace Corps. This is not an argument against the Peace Corps, which is largely meant to be symbolic anyway. But it is an argument for giving some thought to Sears Roebuck, even though you would be paid more by Sears than the Peace Corps.
Now that we’ve mentioned the embarrassing topic of compensation, perhaps we should pursue it for a moment. Isn’t the businessman, by definition, a person who is primarily concerned with making the almighty dollar?
Well, motives differ, even among businessmen, but I am not going to deny that most businessmen are trying to make money. This may or may not be an admirable objective in life. I would say this: the serving of this idol probably produces, not only less of heroism and glory, but also less of cruelty, fanaticism, and bloodshed than does the serving of such idols as patriotism or the one true church or the New Jerusalem. As I remember it, neither Socrates nor Christ nor Servetus nor Joan of Arc was put to death by a frustrated business rival. As Samuel Johnson put it, “A man is never more innocently involved than in the making of money.”
But even in this the businessman differs from the typical nonbusinessman only in degree. Most lawyers and doctors I have known have been able to restrain their impulses to offer their services free to one and all.
What of the college teacher? I can honestly say that I know of almost no men or women who have entered college teaching with a view to getting rich. Yet, once in the profession, we have been known to bargain for the limited prizes available in our profession with an aggressiveness that would bring a blush to the cheeks of the operator of an oriental bazaar.
A life that measures itself in terms of income alone is not likely to be a noble one, but there is no requirement that all who enter the business world must display more than a normal, prudent regard for their own and their family’s financial well-being.
Now to another question: Even if all that I’ve said is true, isn’t it also true that the business world offers no real intellectual challenges and that the businessman becomes, over time, a culturally deprived person?
Those who argue that there are no intellectual challenges in the business world simply do not know of what they are speaking. Nor are the challenges limited to those working in the pure research section of R & D. Conrad, in Lord Jim, says of the man who serves as water-clerk for a supply firm that “he must have ability in the Abstract and demonstrate it practically.” This is true of all roles of any significance in the business world, and the intellectual challenge in such roles is hard and clear. These roles call for imagination and for analytical skills of no mean order.
Now it is perfectly true that the business world rarely calls for intellectuality of the bookish variety. If you want to spend your full working day dealing with ideas, both your own and others, then the business world is not for you. You should join those of us who are professional intellectuals.
All that I am saying is that the business world requires the use of the intellect; it is not a kind of lotus land for the mind. Nor do you need lose all interest in the bookish variety of intellectuality. Wallace Stevens combined his career as an insurance executive with his other role as a poet. Crawford Greenewalt, once Chairman of the Board of the Du Pont Company, has written a definitive work on the hummingbird. The men who buy the works of art, who attend the concerts, who fill the theaters are in the main drudges from the world of business—and this in spite of the fact that in the usual Broadway play, the businessman is portrayed as either a knave or a fool. Many businessmen have no intellectual interests of this kind, but it is possible to be a businessman without also being a Philistine.
One final objection: Do not the pressures for conformity in the business world effectively silence whatever human or intellectual impulses a man may have taken with him into that world? I am referring here of course to the concept of the organization man. I can’t deny that the business organization does exert both formal and informal pressures on the individual to conform to certain patterns, although I think the extent of conformity demanded has been seriously exaggerated. But the most important point is this: Any organization you join, whether business, educational, governmental, or philanthropic, subjects you to this problem. The organization man is found wherever organization is found. If you really want to be subjected to no pressures of this kind, then you’d better decide here and now to go it on your own, whatever you do—whether it’s teaching history or producing glassware.
Let me illustrate: I would wager that there was more informal pressure on the typical college faculty member during the election of 1964 to conform to the prevailing campus anti-Goldwaterism than there was pressure on any businessman to conform to the prevailing conservatism of his class. Or to put it another way: Some of the most slavish conformists I know are those who are conforming to some in-group type of nonconformity.
If you wish to work with other people, your integrity is measured not by whether you recognize their needs and interests, not by whether you accept compromise solutions, but by your choice of those things where compromise is possible and necessary and of those things where you must never compromise. If you can’t accept even this, then find yourself a Walden Pond and go with my blessing.
So much for my case for the poor, misunderstood businessman. I am not arguing that the businessman is a hero or a saint, or that all businessmen are great guys who compose sonnets in Italian on the side, or that all of you should run from here to the placement office to sign up for the next interview. I am saying only that in deciding on a career, as in everything else, you should decide on the basis of reasonably accurate information. I suppose I could summarize it this way: The problem on the typical college campus is not that so many people know so little about the businessman; the problem is that so many know so much about the businessman that isn’t so.