66 enterprise to organize the business and start it going: the "promoter" discovers the "proposition," assembles the elements, and plans its organization on the larger lines. This branch of the entrepreneur function is illustrated by such men as Judge Moore and John W. Gates. They turn the enterprises over to the entrepreneurs who direct them as going concerns. These are the men who, like Carnegie and Harriman, are generally associated with the name "captain of industry." As stockholders and directors they plan the general commercial policy of the plant or plants under their control, receiving not salaries but "profits" for their services. The preceding sentence suggests another way in which the function now under discussion has been divided. In the simpler forms of business organization the owners are generally the ones who organize and direct the operations; but in the big business corporations of to-day it is quite impossible for all the stockholders so to participate. They therefore delegate authority to elected boards of directors, who in turn elect officers. Clearly, as bearing the risk of loss and as being the final source of authority for making the ultimate decisions, the body of stockholders hold the entrepreneur function, and that function is therefore divided among many individuals. But on most ordinary occasions the board of directors or perhaps an executive committee of the board-passes upon important matters. Frequently, one personality dominates the board and is de facto the directive entrepreneur. In any case, all this suggests that the two aspects, risk and direction, almost necessarily become nearly dissociated; for under existing laws the directors may own merely nominal holdings of stock. Thus, in the business corporation, the entrepreneur's function is diffused, and is far more complex in its working than in the single-entrepreneur business unit or in the partnership. Nevertheless, in the same sense that "the people" govern in the United States, the voting stockholders of a corporation direct its general policy. This delegation of authority and subdivision of ownership which characterize the corporation, while not fundamentally changing its nature, exert no small effect upon the nature of the entrepreneur. The risk itself is modified by the fact that the stockholder's liability is limited: he bears only a fixed maximum risk, and generally he cannot lose more than he has invested. On the other hand, his chance of gain is commonly unlimited. The very fact, too, that the risk and the directive authority are divided among so many men makes a difference: both are less concentrated, and are less closely correlated than in simpler forms of business organization. Thus, we conclude that with the complex business units of to-day there may be promoter entrepreneurs and director entrepreneurs; and within each of these classes, but especially the latter, the directive and the risk elements of the entrepreneur function may be largely dissociated. This latter fact may open the door to irresponsible direction and clash of interests. So it is that in politics a dictator or "boss," whose interests are not those of the people, may do great harm. Profits. This is not the place to enter into the niceties of the problem of determining profits; but, as profits are the reward of the entrepreneur, or enterpriser, a brief statement is called for. It follows from the explanation of the entrepreneur's work which has just been presented that profits are the reward for certain valuable services in organizing and directing business units, and in taking the risks involved. The demand for entrepreneurial service then, like the demand for the services of the other factors, depends ultimately upon the prices which consumers are willing to pay for the products which business units are turning out, as modified by the relative abundance of the remaining cost factors. If demand prices are high, and labor and capital are abundant, profits will be great. The supply of entrepreneurial ability, in turn, depends upon the number and ability of men who are available for the conduct of business enterprise. If such men are scarce in relation to the demand, profits will be high. On the supply side, too, one must consider the costs of the entrepreneurs; and if the risks of business are enhanced by uncertainty, by difficulty of organizing the other factors, and so forth, profits must be relatively high in order to maintain the force of entrepreneurial ability which is demanded. To sum up, the rate of profits tends to be such that, in view of the quantity of entrepreneurial ability available at any given time, the share of the gross income which entrepreneurs get just compensates them for their costs, - just equilibrates demand and supply. This way of explaining profits is not in conflict with that which is often taken by the business man. When the business man figures his profits simply as what remains of the gross income of the business after all expenses are paid, he is virtually taking his gross income for granted. To say that this income is due to the coöperation of all the productive factors jointly is correct, if the element of organization and direction which the business man himself contributes is included. But unless this element, with its attendant risks, is allowed for, no adequate explanation of the gross income is forthcoming. The same reasoning also applies to expenses. To dismiss profits as a residuum of scraps of net income which in some haphazard fashion are left over from various sources is no explanation. One gets the same result if one looks at profits in either of these two ways, but the second way of solving the problem throws little light upon the questions why are profits what they are? why must they be paid? Importance of Business Relations. Having thus outlined the nature and functions of entrepreneurial ability, this introductory analysis may well be concluded by returning to the subject of business organization in general. The significance of the purely "business" part of industry has seldom been discussed, for its separate significance is the result of a relatively recent development, a development in the nature of a division of labor. Time was when the business enterpriser owned his plant and personally directed its operations. He knew the details of the business from A to Z. Industry was comparatively stable, for the markets were not so wide nor was either progress in process or change in taste so rapid as now. Not only this, but credit played a smaller part in business transactions, and the jointstock corporation with its dependence upon mobile investment funds was not as common. The result was a closer relation between business management and technical management. Financial relations were simpler. There was relatively little opportunity for manipulation. How different the business world of to-day with its "trusts" and Wall Streets, promotions and "melon cuttings"! Nowadays, we have a vast force of " business men in a new and narrower sense. As already indicated, these men seek gain in buying and selling. They need know little or nothing of the technical processes of extractive industry, transportation, or manufacture. With large use of credit, with capital raised by "floating" transferable stocks and bonds, and with technical management in the hands of salaried managers, they run their businesses with their eyes on the stock markets and the financial columns. Markets are wider and less stable, financial relations more complex, and manipulation common. Technical management and business management are frequently separated, and the former is more dominated by the latter. Businesses are interrelated in a complex network of "pecuniary relations,' to borrow Professor Veblen's suggestive terminology. These relations have become the sensitive means for transmitting 'panics" and "booms." A new field for highly speculative and chance gains has been formed, within which by manipulative strategy business men may make and unmake the industrial balance. A relatively high degree of mobility characterizes the situation, and by shifting investments great changes. may be wrought in the technical operations. One instance may be cited to illustrate how these forces work. Many will remember how the "Sugar Trust," the American Sugar Refining Company, dealt with its rival, the Arbuckles. The latter company which had been engaged chiefly in the spice and coffee business began to compete with the trust in the refining of sugar. Immediately the trust retaliated by purchasing a plant which handled spices, and began vigorously cutting into that part of the Arbuckles' business. It forced an "understanding." Thus, through mobile investment funds and stock exchanges, technical manufacturing units are made subservient: the whole machinery for importing, manufacturing, and dis tributing coffee and spices was ready, and the trust through pecuniary power directed it at will. For further suggestions, let the reader turn to the recent hearings of the Pujo committee of Congress which investigated the so-called "money trust." Here he may learn how groups of financiers through control of financial houses can sometimes control the marketing of securities and the direction of investment. While there are obvious limits set by material environment and technical conditions, it is interesting to reflect how, by shifting investments, the fundamental material side of production may be deeply affected by this buying and selling side. In line with the foregoing conclusions is the fact that the forms of business organization which now predominate are working a profound change in the significance of property rights. The significance of private property has often been explained. We know that the pride of ownership spurs most men to put forth their best efforts in production. Direct ownership often begets an interest in the business or property, and diffuses technical and business knowledge. It means stability, economic and social: as the saying is, "make proprietors and you make good citizens." Now all this refers to direct ownership, to personal familiarity with the property. What, then, must be the effect of a system which makes ownership indirect, and takes away personal contact with property? And is this not the effect of reducing business property to ownership by "stockholders "? The holders of the shares of a joint-stock company need know little of their property and can take little personal interest in their products. They are too far removed from the property. And what shall we say of a "holding company " in which shares of stock represent ownership of other shares in subsidiary corporations; those shares, in turn, represent ownership in sub-subsidiary companies; till finally, by a devious route, we reach the tangible technical property? The result must be a vastly different relation between owner and property, and the institution of private property itself must change in significance as the scope of ownership by shares grows. The more readily transferable the interests in property (stock certificates), and the more per 7 |