§ 1. Review of the profit-concept. § 2. Skill in relation to risk. § 3. Union of chance and choice. § 4. Element of pure chance. § 5. Changes in transportation and in land-values. § 6. The so-called unearned increment. § 7. Element of speculation in business. § 8. Specialization of risk-taking, in produce markets. § 9. Produce speculators as insurers. §10. Ignorant and dishonest speculation. § 11. Fraudulent and illicit profits.

§ 1. Review of the profit-concept. Profit is the legal residual share of the total income yielded by an enterprise, the share (positive or negative, profit or loss) that is left to the owners of the enterprise. Every enterprise, however simple, involves ownership of agents and product, and between the investing and the accounting at the end of any period, there is financial responsibility and profit or loss. This may be minimized by one owner by contract with another, the one thus becoming more passive and safe, tho still having some risk, and the other, taking at a price the active control of wealth and services and selling the results for whatever he can get. The laborer still runs the risk of becoming incapacitated by illness or accident, or of being thrown out of employment. The lender still has some risk of failure of the debtor, etc. But the laborer sells his labor, and the capitalist sells the use of his wealth - horses, lands, equipment, and of his loanable capital, and accepts a definite income and the legal responsibility of the borrower to repay the loan.

§ 2. Skill in relation to risk. In most enterprises and under normal conditions of business the largest factor in determining whether there will be anything left for profits is the skill with which the business is planned and managed, from the first investment to the last little detail by the well-chosen agents of the enterprisers. There are many chances and risks, but few of them are completely objective, of a kind utterly beyond the control of the enterpriser. Even loss by lightning, flood, fire, and other "acts of God" (in legal phrase) are more or less liable according to the judgment and foresight in the construction and location of buildings, care in their oversight, etc. This power to minimize risk, the restless watchfulness and the intuitive anticipation of dangers, and often the discovery of ways to convert them into advantages, is a large part of what is meant by skill of management. The risk of business is not that of the throwing of dice in which (if it is fair) skill plays no part, and gains in the long run offset losses. Business risk is rather that of the rope-walker in crossing Niagara; the task is easily undertaken by the skilful Blondin, it is fatally dangerous to the man of unsteady nerve and limb. The skilled workman, handling, with sure touch, the delicate and costly materials, can not be said to be incurring a great risk of spoiling his work, however great the risk to the novice or the bungler.

Looking at this large phase of the problem, profits are seen to be due not to the existence of risks, but to comparative skill in taking risks which in many cases is the ability to make the risk dwindle or disappear. Some men are more able to perform the function of enterprise than others, and profits are high or low just as fruits are bountiful on fertile soil and scanty on barren soil. In this aspect profits in the long run are the share (non-contractual) of skill and ability in the function of enterprise; and our illustrations above have largely been drawn from industries in which this seems to be the true view.

§ 3. Union of chance and choice. But there is another aspect of the subject. Profits, just because it is the actual residual, is the most complex and varying share. The enterpriser, to the extent of his credit and financial strength, undertakes to assume the risks for all the other factors. Profits is the catch-all for every unforeseen or variable change of price between each act of investment and the ultimate sale of the goods. Chance therefore has its part; but the temptation is to exaggerate its importance. Many cases of profit said to be due to chance are found on closer knowledge to be due to superior judgment. They result from a union of happy chance with deliberate choice. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck; but he has gone to a place where gold-mines are comparatively plentiful. If he stays at home it is more likely that he will stumble over an ash-heap. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of finding a good thing, usually gets the advantage, and men call it luck. The more the causes of success in general are studied, the larger is found the element of choice, the smaller that of luck.

§ 4. Element of pure chance. But after all these qualifications, cases remain in which profits can only be said to be the result of pure chance or luck. It still sometimes appears better to be born lucky than to be born rich. What is luck ? A result that is not calculable, coming to pass in conditions where a rational choice is not possible, is called luck, for lack of another name. There is bad luck as well as good luck. According to the law of chance, in the tossing of a coin for "heads or tails," one side is as likely to come up as the other, and in the long run the number of heads and tails will be equal. Taking all together the pure accidents of certain kinds, in the community, they are so numerous that losses and gains distribute themselves about a general average by what is called the law of averages, or the law of large numbers. The individual's risk then may be eliminated by insurance, as that against fire, flood, lightning, against sickness of the employer, which would cripple the business, or against his death, which would check it. But many factors evade all attempts to reduce them to rule and there is no possibility of insuring against them: war, changes in markets, good and bad harvests, financial crises, etc. One year the enterprise gains, another it loses. One man makes a success because he happened to engage in business at that time, another man fails because he happened to undertake it at another time, with no more real judgment in the one case than in the other.

§ 5. Changes in transportation and in land-values. The union of choice and chance in varying proportions is seen in many instances of the increase in the value of land. The rapid changes in transportation since the beginning of the nineteenth century have wrought great changes in the value of lands for many purposes, and thus have brought great chance profits (and often great losses) to individuals. To take a few examples.

The Erie Canal, completed in 1825, increased the trade of the ports of New York and Buffalo, brought prosperity to many cities on its waters, increased the value of agricultural lands on and near the Great Lakes, but reduced the value of many farms in New York and New England. The completion of the Boston and Albany railroad in 1841 and the later opening of the Hoosac tunnel probably helped the mechanical and depressed the agricultural industries of New England. The spread of the railroads in the United States from 1850 to 1880 went on with unparalleled rapidity, and opened up to settlement great areas of rich lands which rose in value. At the same time the large new supplies of agricultural produce so reduced prices in the great markets, and the incomes from lands in eastern America and in western Europe fell so greatly that many farmers were bankrupted. Timber lands bought from the government at fifty cents an acre made enormous fortunes for the so-called "lumber kings" of the Northwest. The Panama Canal raised the efficiency of ships plying between New York and San Francisco, enabling them to carry freight more quickly and in greater amounts. The railroads must lower some freight rates and even then lose a part of their traffic, and many of the lands on the Pacific coast must rise in value.

Changes in transportation alter the location and character of all kinds of enterprises. After the building of the railroads in Pennsylvania new forges were built where deposits were richer or where materials and products could be more cheaply shipped, and many prosperous small forges on the country roads became valueless. A similar change has relocated the flour milling, the mechanical, and the textile industries of a large part of the country. As population has been growing rapidly in Christendom in the past century or more, farms have become villages, villages have become cities, low-priced residential lots have become expensive business sites.