Economists recognize a fourth regular share in the distribution of the social income, though they have not been agreed as to precisely what this share consists of, or as to how it is determined. Some writers have used the word "profits"to denote the total return to the entrepreneur from the sale of his product, after the payment of wages for labor employed and a further payment for land and capital hired. It is evident, however, that this return is not a simple one, but contains payments for several elements which call for separate treatment. We shall therefore speak of this return as gross profits, and inquire of what it consists, thus leading the way to an understanding of the net return which may be called pure or net profit.

I. Rewards to Other Factors of Production.1. Interest. In the first place, it is evident that the return which the entrepreneur receives is in part due to the factors of production which he himself owns and uses in the business. The return to his capital invested is really interest, as truly as if it were to be paid to another person who owned the capital instead of to the entrepreneur owner himself. In estimating net profits, therefore, careful bookkeeping will deduct from gross profits interest on capital invested by the entrepreneur.

2.Rent.The same thing, of course, holds true of land owned by the entrepreneur. Rent should be charged off in the same way as to an outside owner.

3. Wages, including Wages of Superintendence.The element of wages and salaries of every sort, including a regularly estimated amount for the entrepreneur himself, should also for scientific purposes be separated from gross profits in the calculation of net profits. Private and public corporations do this regularly, and the practice is frequent in those large non-corporate businesses in which the entrepreneur is employed just as is any other laborer.

II. Charges of Maintenance.1. Depreciation Fund. In the second place, deduction must be made from gross profits of a sum sufficient to provide for the maintenance of the capital, or its replacement, as it is gradually used up, or as it is suddenly destroyed. Modern business book-keeping commonly provides for the replacement of gradual impairment by keeping a separate account for what is called a maintenance or depreciation fund. A man is facing business ruin who takes and consumes as profits from his plant what should be set aside for its replacement.

2. Insurance. --The same may be said of the payment to provide against risk, which may be called insurance. The amount of money which a careful business man sets aside to secure himself against loss is not profit. Insurance in this sense is much broader than insurance against fire, hail, etc., for which a policy may be taken out and a definite premium paid. It must be noticed that when a separate charge is made to cover such risk, the allowance for interest on the capital must leave out the part due to risk which we have seen to be present in gross or market interest; in other words, the interest will in such a case be the pure interest.

III. Extra-personal Gains.1. Monopoly Gains. Even with all these deductions, the analysis is not complete. We must, in the third place, deduct extra-personal gains gains which are not due to the efficiency of the manager. One of these sources of gain lies in the possession of a monopoly advantage. Monopoly gains are a separate item in distribution, and if they are to be called profits, as they frequently are, we must carefully distinguish the particular nature of such profits.

2. Conjunctural Grains. Closely resembling monopoly gains in certain respects is a class of gains known in recent discussions as conjunctural. As the name indicates, these are extra-personal gains resulting from a favorable conjuncture of circumstances which could not have been foreseen. A simple instance of such a gain is seen in the profits made by retail dealers when the sudden death of a great personage creates unusual demand for mourning goods. That this happened in many American cities at the time of the death of President McKinley is shown by statements in the press of those places. Stocks of black goods which the merchant may have censured himself for accumulating may suddenly become the source of a considerable conjunctural gain. Here, however, a very real difficulty presents itself. In instances like that just mentioned, the conjunctural element can be plainly distinguished. But it often happens that such gains are at least in part the reward of foresight and energy, and are therefore to be classed as pure or net profit. The man who makes a fortune by buying up suburban property in an unlikely neighborhood, because he has had sufficient sagacity to foresee growth of population in that direction, may claim with some reason that his gain is not conjunctural. Even more reasonable would his claim be if, after buying the property, he himself directed the movement of population in that direction by securing improved rapid transit facilities and by other familiar expedients. In real life all the stages between clever business foresight and pure conjuncture are to be observed.

IV. Pure or Net Profits.Our analysis, then, gives us as our concept of pure or net profits all that is left after deducting the items mentioned. Of course it will be understood that not every business shows in its gross profits all these different items. Sometimes it may even happen that there need be no further deductions than those for wages and a maintenance fund. But some of the other items are usually present in the estimate of gross profits.

Society must at any time pay for its goods a price sufficient to give even the most inefficient manager whose services are necessary to the production of the supply, an amount covering the items other than net profits. But no pure or net profits will accrue to such a marginal entrepreneur. More efficient managers will, therefore, be able to secure differential profit, the amount of the differential in every case being determined by the extent to which these entrepreneurs individually surpass in efficiency the entrepreneurs of only marginal efficiency. Pure or net profit, therefore, is a purely personal gain a return to superiority of management as such, independently of monopoly advantage, favorable conjuncture, or the mere labor of the manager as a superintendent.

Summary. Let us summarize diagrammatically the considerations just presented:

Gross Profits

' Reward to

other factors of production

Interest on entrepreneur's capital. Rent of entrepreneur's land. Wages for entrepreneur's service.

Charges of maintenance

Depreciation fund charge. Insurance fund charge.

Extra-personal gains

Monopoly gains. Conjunctural gains.

Net profit Personal gains

Differential or pure profits.

Pure Profit and Rent Compared

This explanation of the determination of pure profit as a surplus due to the superiority of a given entrepreneur over the marginal or poorest entrepreneur who can afford to stay in business at the current price of the product, is, as the student will doubtless have noticed, strikingly like the explanation of the determination of rent. Thus, while wages and interest are price determining, entering into the price of the product, rent and profits are price determined; they do not enter into the price of the product. Pure profit has hence been called, not inaptly, personal rent, or the rent of superior managing ability. Again, as with rent, it is interesting to notice the corollary that it is not the able managers, receiving large pure profit, any more than the fertile land, receiving large rent, that make the prices of commodities high. If all land were of the highest grade of fertility, the price of produce would be lessened; and in the same way, if all managers were of the same order of talent as our ablest managers, goods would be produced at a lower marginal expense, and society would reap the benefit in lower prices. But there is this marked difference between the rent of land and pure profits. The more fertile lands can exercise little influence in raising the quality of inferior soils, while superior entrepreneurs are always tending to make the knowledge and skill requisite for success a matter of common property. As business becomes more completely organized, falling more and more into routine; as knowledge becomes more widely diffused throughout the business community; and as governments improve in regularity and firmness and honesty, the marginal expense of production and the resulting prices tend to fall, and profits in consequence tend to lower and lower limits. It is in this sense that profits may be spoken of as " the lure that insures improvement."