of the business, the surplus, if indeed any remain, will constitute the profits, and will go to the manager as the manager's peculiar share in the distribution of the product.

That profits, however, will not be great in businesses where absolutely unrestricted competition exists, is declared by many, and Professor Walras went so far as to say that " the normal rate of profits is zero." He goes on the supposition that the price which the entrepreneur pays in the way of cost of production, including the amounts paid to himself as stated above, must necessarily be equal to the price for which he sells the finished product. In other words, because of the strong competition existing in every form of business, the price of the commodity will be equal to or very little above the cost of production, and consequently profits in the strict meaning will be little or nothing.

When, however, the business is protected by being a monopoly, there is no doubt that its profits may be very great, whether because the price of the product may be artificially set high, as, for example, through the possession of legal rights and franchises, or of rare natural agents, or through capitalistic organization; or because, through new inventions and new machinery and more saving methods, the cost of production may be considerably lessened without any lowering of the price of the product.

Even where there exists no monopoly and where perfect competition obtains, we incline to the view that, while there are a great many business concerns which merely make expenses and only just cover the cost of production, there are many which reap profits more or less large, depending among other things on the ability of the manager of the business. The reason for this will appear presently.

Principle Regulating Profits. The successful conduct of business under free competition is due to two main thingsexceptional abilities or exceptional advantages.

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Of these two factors, the more important is the former, ceptional abilities. The great majority of business houses which have become famous in the commercial world owe their rise to the remarkable abilities of their founders, who have won success

with little or no help from opportunity. And there have been many houses once famous, which, in spite of fortunate opportunities, have lamentably failed upon the retirement of the great captain of industry who started them and carried them on to great prosperity. We may, therefore, for the sake of simplifying the matter, consider that success in business arises from exceptional abilities.

The principle usually advanced to explain the existence and the amount of profits is similar to the principle propounded by Ricardo in explanation of rent.

In the case of rent, we had different grades of land due to the different degrees of fertility of the land, and we had land which lay on the margin of cultivation, was cultivated because it paid interest and expenses, but was called no-rent land, paying no rent to the landlord. The moment a parcel of land arose above the no-rent category, it became rent land and paid an amount of rent proportional to the degree in which it surpassed in fertility and proximity to the market the no-rent land.

In the same way with regard to profits, we can conceive all the various business concerns in the world, in a state, or in a community, of whatever nature they may be and whatever their product, to be in existence for the purpose of supplying the demand for their products. This is a true conception. The business concerns in existence exist for production. The ultimate reason for their being is the demand for their products.

Now, if all these concerns were just numerous enough and able to supply the demand, and if the several managers of them were possessed of the same abilities and the same degree of abilities, then all these concerns competing unrestrictedly among themselves would reduce the returns to so low a figure that there would be no profits at all among them, but all would be carried on for the sake of the expenses, including all the items before enumerated. It would of course be profitable to conduct businesses of this kind, but there would be no "profits," technically so called.

There would be here the no-profits stage of industrial society, which corresponds to the no-rent stage which is found to exist

when all the lands under cultivation are still ungraded and sufficient to supply the whole demand for food.

But, as a matter of fact, no such state of affairs exists. Business concerns may be graded in different classes, and the main factor contributing to this grading will be the abilities possessed by the different managers, or entrepreneurs, who direct the businesses.

We may, for the sake of convenience, divide the entrepreneurs into four classes or grades.

1. There are those rarely gifted persons who seem to have the Midas gift of turning everything they touch into gold; whose commercial dealings have the appearance of magic; who are gifted with remarkable foresight and deal in the future as if it were the present; who are of so resolute and firm a temper that they stand unmoved by apprehension, alarms, and even repeated shocks of disaster; who have such command over men that all with whom they have to do acquire vigor from the contact and work for them as they would not, perhaps could not, work for others." But few belong to this first grade, though we may mention Cornelius Vanderbilt I, A. T. Stewart, Hill, Harriman, Carnegie, J. P. Morgan, as members of it.

2. In the second grade there is a much larger class of business men, of a high order of talent though without genius, men of natural mastery, sagacious, prompt, and resolute.

3. In the third grade are the men who do fairly well in business, who possess in fair degree the qualities which go to make the successful entrepreneur, in whom, however, some mental or moral defect tends to impair these qualities, men who stand often on the brink of danger and failure, yet avoid it by care and diligence.

4. In the lowest grade are the more or less incompetent business men. This class is well described by a writer: "Lower down in the industrial order are the multitude of men who are found in the control of business enterprises for no good reason; men of checkered fortunes, sometimes doing well, but more often ill; some of them perhaps filling a place that would not

otherwise be filled, but more commonly in business because they have forced themselves into it under a mistaken idea of their own abilities, perhaps encouraged by the partiality of friends who have been willing to place in their hands the agencies of production, or intrust them with commercial or banking capital. The industrial careers of these men are not peculiarly happy, though the degree in which they suffer from the constant imminence of loss, perhaps of bankruptcy, is very much a matter of temperament. Some take it extremely hard, and when they fall make no effort to rise again; others are irrepressible as Harlequin, jumping up, alert as ever, after being apparently hanged, drawn, and quartered by the common executioner." (Walker, Political Economy, p. 238.)

These are the four grades of managers of business, diversified by reason of the abilities possessed by them. Now, the demand of product is great enough to keep all these classes in actual operation supplying the demand. Otherwise, the business concerns would not continue to do business. But the returns from the several grades will be very different in amount. The lowest grade will receive returns, which, taken in the average, will at least pay the expenses incurred in running the business - wages to employees, including the manager's wages or salary, interest on capital, rent for land. We say, taken in the average, because, although in one year there may be a loss, in the next there will be gain sufficient to counteract the loss.

Again, we said that the returns in this lowest grade will at least pay the expenses, for we cannot suppose that a business would be run during any continued period at a loss.

This grade of business managers may be called the no-profits grade. If any profits at all exist, they will be so small that in our calculation they may be neglected. It will pay the managers to run the businesses, because after all they receive for themselves the salary they could claim were they to hire themselves out to other employers to oversee their business for them.

In the third grade, where managers of greater ability direct the concerns, varying rates of profits will be received, and large for

tunes may in time be accumulated. In this grade we have the beginning of profits.

In the second and first grades, the profits will be proportionately larger with the greater and higher abilities possessed by the managers.

Under the first-grade managers, especially, the profits will be enormous and rapid and vast fortunes will be made.

In many forms of business carried on to-day, the capital is supplied by persons who buy the shares of the concern. The shareholders appoint a manager or superintendent to conduct the business, and they control the actions of the manager through a board of directors. The manager in this case is not the manager, or entrepreneur, in the technical sense. He ranks as a skilled laborer and receives a fixed salary for the work he performs. His salary or wage is commensurate with his ability displayed in the management of the business. He receives no share in the profits as understood in the technical sense. The profits are distributed among the contributors of the capital, the shareholders, in the form of dividends. In businesses conducted after this manner, it is difficult to distinguish between interest and profits. When the dividends paid the shareholders amount to 50 or 60 per cent of the capital contributed, it would be wrong to classify such returns as interest. The part of the returns that could be rightly classed as interest would be a portion equal to the average rate of interest paid in the country by money invested. The rest is profits and goes to the capitalists, who are really the managers and direct the business through the superintendent they have appointed. Relation between Profits and Wages. It is claimed by many that, if a close study be made of the relations that exist between profits and wages, it will be found that profits have nothing to do with fixing the amount of wages paid the laborer, that the exceptionally high profits are not the cause of low wages, and, finally, that it cannot be said that profits are taken out of the wages of labor. We shall endeavor to understand these statements thoroughly, since they have very broad consequences.