§ 4. Enterprise and risk. To the person who exercised this function of active capital-investment various names have been applied: undertaker,3 its French equivalent entrepreneur, adventurer (especially used in former times of one who embarked in foreign trade), and enterpriser. Each of these was meant to express the assumption of the financial risk in undertaking the ownership of the various factors and of their results embodied in the products, in paying off other claimants, and in waiting for an income indeterminable in advance, but contingent on all the various fluctuations of the market.

Enterprise is the act, or function, performed by the enterpriser, and in a different but related sense is the particular business establishment, or undertaking, which is carried on by an enterpriser. Business management and enterprise are functions not embodied completely in any individuals, but diffused more or less among groups of men. The active-capitalist and the passive-capitalist are not in contrast absolutely but relatively; the passive capitalist is not, and can not be, completely freed from financial risk. Enterprise is merely in this particular business the assumption of the legal financial responsibility to the extent of the enterpriser's credit and resources, or in other cases to the extent of the special legal limited liability, as (in most stock companies) to the amount invested, or (often in banking) to double the amount invested.

2 See note on The source and cause of profits in economic writings, at end of chapter.

3 The old English word undertaker, once so used, seems to have been driven out by a rival use; perhaps after "funeral director" displaces it there, it may be reclaimed by economics.

Gradations of Risk in Corporate Investment

Risk is more or less everywhere in human affairs, but among various kinds of investments there is a well-recognized gradation in the uncertainty of returns. The enterpriser in a business takes the more exposed frontier of risk, and the various senior securities have prior claims. For example, if the business of a corporation goes badly the first mortgage bonds, getting a low rate of interest, are the first claim on the income and, in case of insolvency, these bonds would be paid out of any assets of the company; so in turn till we come to the common stock which gets nothing until all the other claims are satisfied but which if the business is prosperous may get dividends at any rate permitted by profits. There is thus an investment risk, an element of enterprise even in the safest investment, e.g., government bonds, but this becomes almost negligible in the case of many well-proven investments. This relativity of risk and of the enterprise function may be shown again in the interrelations of different enterprises. (See Figure 42.)

§ 5. Pure profit the most variable income. It is easily seen why the income to enterprise is the most variable from one establishment, and from one time, to another. It contains within it all the non-contractual elements of income. The laborer has taken a fixed wage, the passive capitalist has reduced his risk and accepted a fixed interest. Both wage workers and passive capitalists have taken the easy way, have "played safe," and have left the enterpriser to bear the brunt

* The rates given are, of course, only illustrative of the proportions in which they might vary in a particular case. In fact the common stock might pay no dividends for years while dividends and interest on all the other classes of securities were regularly paid, of the financial risk. The income of each of these classes tends to conform to a general market-rate, being a medium of the gains and losses when labor and capital are applied with various degrees of risk in various undertakings. Enterprise is the most movable element. It is specialized risk-taking. Enterprise has well been called an economic buffer,

Contractual   Relations   of   Various   Enterprises.

FIG. 42. Contractual Relations of Various Enterprises.

Let enterprise A be tenant farming, for which are needed farm-land and buildings, borrowed money, and the uses of various rented machines. Enterprise B consists of buying land and constructing a house, shop, store-building upon it to let to enterprise A. The enterpriser in this case takes the risk in deciding on the right place, kind of house, materials, etc., and runs a chance of letting it or being without a tenant. Enterprise C is private money lending, or a bank-business, lending to A. The other enterprises receiving contractual payments from enterprise A are not free from all risk. There is a chance that the agreed payment will not be made and, if it is, that loss will result from other causes (e.g., a fire destroying the buildings). Enterprisers B to F, however, in relation to the incomes they receive from and through A, are relatively protected against risk. Enterpriser A in paying a fixed rent, a fixed interest, etc., is, to the extent of his credit, putting up a margin of security against the failure of crops, of profits, etc.

which takes up and distributes the strain resulting from variations in the momentum and rate of movement of industry. The enterpriser feels first the influence of changing conditions. If the prices of his products fall, the first loss comes upon him, for the goods already made must be sold. Further loss is avoided as best it can be by paying less for materials and labor. At such times the wage-earners look upon the employer as their evil genius, and usually blame him for lowering their wages, not the public for refusing to buy the product at the former high prices. "When, however, prices rise, enterprise gains through selling at higher prices the stock on hand that has been produced at low cost. Enterprise is placed between the forces of competition, between owners of resources and ultimate consumers, between laborers and the final purchasers of labor's services. The enterpriser's economic survival is conditioned on vigilance, strength, and self-assertion.

Profits therefore fluctuate more from industry to industry and from man to man than do other incomes. The variations of the market may sweep away not only all "profits," but all the invested capital. As a consequence, profits may be at other times very high, for enterprise will not take the risk of great losses unless there is a chance of large gains. While the income of the salaried man is occasionally advanced, and then for long periods remains unchanged, the profits of enterprise come in waves. In seasons of prosperity profits in many enterprises swell with a dramatic swiftness while rents and wages move tardily upward. Then again for years profits fall to a level hardly exceeding a low interest on the capital invested or leave many businesses for a time with a loss. Reasons for this result will be shown more in detail under cost of production.