§ 6. The so-called unearned increment. Such changes and chances as these have resulted in profits and losses to great numbers of landowners, who as investors have seen their lands rise above or fall below the price for which they bought the land. The name "unearned increment" has frequently been applied especially to this kind of profit of the landowner. It is true that in many ways the ownership of a piece of land may give unexpected gains. Farm land of the poorest kind often is found to contain valuable mineral deposits. Such a lucky find lifted the mortgage from a farm in eastern Pennsylvania, from which, in two or three years, feldspar was taken exceeding in value the agricultural products of the same land in the fifty years before. The discovery of building stone, coal, natural gas, or oil beneath the surface has brought riches to many a poor landowner. A mineral spring, because of the supposed or proved healing properties of its waters, may be as good as a mine. Fitness to produce nettles is not ordinarily a virtue in land, but the discovery that certain fields produce a superior quality of the nettle used for heckling cloth, causes them to rise in price. Marsh land, almost valueless, found to be peculiarly fitted for the cultivation of celery, becomes very valuable. While the in come of the owners of these lands is increased, that of other owners may be diminished, as a result of the fall of prices and the shift of demand.

The increment of land values seems especially unearned when it arises as an incident to the holding of the land for other purposes, as for farming, or for one's own residence. The striking fact in the extreme cases of chance increments of land values is that profits accrue to quite unenterprising landowners. Many dramatic changes of fortune have resulted and in many a case some half-miserly old farmer doing nothing to improve the community and opposing all change, has left a fabulous fortune to his heirs. And yet, comparatively speaking, such cases are about as rare among landowners as are capital prizes in a lottery, and there are many cases of profit in things other than lands, where there is a similar profit due to chance. Stocks of goods are worth more or less, horses, cattle, grain, go up and down in price in the hands of farmers or of produce merchants. All profit involves this element. Land profit is but one notable example of a general fact.

Moreover, while the change of land values is on the whole upwards where population is increasing, many pieces of land fall in price; there are undeserved decrements as well as unearned increments. So far as increases in land value can be foreseen they are included in the present worth of the land, and the new purchaser does not thereafter, viewed as an investor, get any "unearned" increment except from unforeseen or miscalculated changes.

As a matter of the theory of profits there is nothing peculiar in the "unearned" increment of land. A question calling for separate consideration is whether it is expedient to adopt a different policy as to property in land, by special land-taxation, or by appropriating the profit (increment) which now goes to the owners in advancing neighborhoods, or by any other limitations.

§7. Element of speculation in business. A still further specialization of risk-taking is effected by means of insurance and of certain forms of speculation. In its broadest sense speculation means looking into things, examining attentively, studying deeply. In a business sense the speculator is one who studies carefully the conditions and the chances of a

Business Failures in the U.S 1890 - 1914

* The statistics cover only the kinds of enterprises that are reported upon by the large commercial agencies and therefore do not include farming and numerous petty enterprises. The total number of business concerns reported was about one sixtieth of the population. The general yearly average of failures was about 1 in 100 business concerns. If enterprisers are in business on the average 33 years, the chance of any one of them failing sometime in his career is 1 in 3. The increase of failures in or just after a year of financial trouble appears in 1893, 1907-08, and 1914, but the stock-exchange panic of 1903 showed no effects. The rate continued high in the long financial depression of 1893-98, was low in the generally prosperous years 1899-1906, and rose steadily from 1911 to 1914.

change of prices; hence arises the thought that speculation is connected with chance. The enterpriser should be able to estimate these chances better than most men. Every enterpriser is to some extent specializing as a risk-taker. He relieves the other agents of part of the risk, and he insures both laborer and capitalist against future fluctuations of prices. Some of the profits of successful enterprise are speculative gains of this sort. Offsetting them, however, in large measure, are the speculative losses, by which in many cases the investment is swept away altogether. The cautious business man tries to reduce chance as much as possible by insurance, where a regular system prevails, and to confine his thought and worry to the parts of the productive process where his ability counts in the result. A man can better concentrate his thought and effort upon running a flour mill, if some one else will, for a price, take the risks of fire, of loss in shipment, and of a rise in the price of grain needed to fill outstanding orders. Insurance being the economical way to cover risk, the reckless will, in the long run, more likely be eliminated from the ranks of enterprisers.1

§ 8. Specialization of risk-taking in produce markets. In some lines the risk of marketing and carrying large stocks becomes highly specialized, so that ordinary enterprisers shift it to a small group of risk-takers. In buying and selling large quantities of produce there is required the closest and most exclusive attention of a small group of men. The marketing of some staple products requires the most minute acquaintance with world conditions. To foretell the price of wheat one must know the rainfall in India, the condition of the crop in Argentina, must be in touch as nearly as possible with every unit of supply that will come into the world market. Such knowledge is sought by the great produce speculators in the central markets. If all means of communication - telegraph, cables, mails - are open to all, competition among these speculators becomes intense, and the result is great efficiency. Their survival depends on the development of acute insight into market conditions. The margin at which farm produce is sold in the great wholesale markets is a very narrow one. These products are marketed along the lines of the least resistance; that is, of the greatest economy. The function of the commercial specialists is to foresee the markets, and to ship to the best place, at the right time, in the right quantities. If a product shipped to Liverpool will, by the time it arrives there, be worth more in Hamburg, there is a loss. Such difficult decisions can be made best by a small group of men selected by competition. When handling actual products they perform a real economic service.

1 Insurance will be treated in the following volume.