Broadest use of the term profit.

1. The term profit is popularly used as any gain or advantage secured by any means in business. The terms used in economics, being taken from popular language, vary in meaning according to the context. It is necessary to clear thinking to reject some words entirely and when using others to define them more strictly. The broad usage of the term profits just noted includes every kind of return to industry: such as interest on capital, and wages or services of the man owning the industry. Precise thinking requires its use in a much narrower sense.

Used of gross gains on sales.

2. A common meaning of profits in retail business is the gross gain on a given sale. Buying an article for one dollar and selling it for two dollars, is said by the merchant to be selling at one hundred per cent, profit, jocularly called, "The Dutchman's one per cent." The cost price is considered to be that paid to the manufacturer or wholesaler. In different lines of goods there is added regularly to this cost twenty, thirty, or fifty per cent., as the case may be, as the merchant's profit on the sale. This is of course a gross profit, and not net, or true profit. It leaves out of account rent, interest on capital, clerk hire, freight, and many other minor items that enter into the cost of running a store. It often happens that the Dutchman's way of reckoning is nearer the truth, and that the gross profit of one hundred per cent, proves at the end of the year to be only a net profit of one per cent. This evidently is a loose meaning, impossible in the discussion of theoretical questions. This meaning is sometimes developed, making profits the sum of all the gross profits on separate sales within a year, or the difference between the wholesale and retail prices of goods sold within the year.

Another meaning given to the term is gross profit (as above) compared with the capital invested. The "profit" in this case varies partly with the rate of the turnover. To illustrate: if the amount invested in a printing-office is $100,000, and the annual business done is $300,000, the capital is said to be turned over three times; if the gross profits on sales averaged twenty per cent., they would be sixty per cent, on the investment; but, if the capital had been turned over four times, the gross profit would have been eighty per cent, on the investment.

3. Another meaning of profits is the annual net gain of the business, as compared with the average investment of capital. This is a long step toward greater definiteness. If at the end of a year it were found that after paying all outside expenses there were $10,000 to set aside, this would be accounted a profit of ten per cent, on $100,000 invested. But confusion still reigns because of wide variation in the methods of estimating costs before fixing net profits. In one case the enterpriser rents lands and buildings, in another he owns them; in one case he has borrowed money and counts interest as a cost, in another he is free from debt; in one case he counts as a part of cost an estimated fair salary for himself and his partners, in another (usually in a small business) no such allowance is made Such a variation in business usage is most perplexing. In all these cases one must have the exact conditions in mind before it is possible to make any comparisons and draw any conclusions as to the relative profits of different industries.

Of net gains as a percentage of invested capital.

4. In the narrower and exacter sense profits are the net gain of the enterpriser after counting the rent of material agents and contract wages of employees at the prevailing rates. Into the practical problem of cost and profit many factors enter, and the theoretical problem is to determine just how much ought to be attributed to each. In a large business usually the practical bookkeeping problem is not unlike that of economic analysis. A stock company counts as cost, as a part of fixed charges, interest on capital borrowed either from banks or bondholders. Its managers are paid salaries, counted as a part of cost. The net balance, after deducting these and all other expenses, is counted profits and paid in dividends to stock-holders. The economic student is not attempting to get a theory of profits that is in contrast with practice. Bather, he is trying to analyze profits generally, just as they are analyzed in the few cases where the books are properly kept. In economic theory, therefore, profits are the part of the gain of any business that is logi-cally attributable to fortunate investment and good man-agement; profits are the income attributable to the enterpriser's services.

Profits in economic theory.

Profits a species of wages.

5. Typical economic profits are thus a species of wages but are marked by peculiar features. In some of the older treatises on political economy, profits are treated merely as a combination of "wages of management," and of interest on capital invested. A man hired at a fixed sum to manage a business is receiving simply contract wages. Economic profits are not contract wages, not being paid by agreement, but being yielded impersonally by the industry. Profits are, however, economic wages or the earnings of services. As business has developed, it has been seen that the enterpriser's work has its peculiar character and deserves special atten-tion. The old English word "enterpriser," used of the "adventurer" who embarked in foreign trade, may fittingly apply to the organizer and director of business today. Foreign trade then, more often than now, was most uncertain, and there were many chances that the ship would be lost, or the venture prove a losing one. In the simplest business today there is this element of enterprise, or undertaking, combined with ordinary capital and labor. As industry develops, this special service stands out more clearly. In the corner-grocer and in the manager of the little newsstand, the elements of enterprise and labor are not apart. In the large wholesale house, the enterpriser is seen to be not merely an abstractly thinkable function, but a separate and concrete person. The typical enterpriser is the man who gives his time and. energies to the launching and guiding of business.