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often repeated, or particularly startling, so weaken the inclination to engage in some particular sort of undertaking that the existing establishments in this line are able to remain for a considerable period more or less free from the pressure of competition and so are able to yield a gain which secures more than proportional indemnification for the risk run. At this point, national character is of the greatest significance. If self-confidence and persistence are dominant characteristics, then competition will be very eager. A tendency to over-confidence,-which just as readily passes over into discouragement, and fickleness, work in the opposite direction.

Further, the indeterminateness of the probability of success comes into consideration. Up to this point we have assumed that it is certain how much a given undertaking would be in a position to return under favorable conditions, and also that the proportion of successful to unsuccessful enterprises would be known. But this is scarcely ever true in the fullest sense, and often not even approximately so. If, for example, it concerns the furnishing of a new product or the employment of new industrial forces the productivity of which has not yet been tested, the entrepreneur can not set out from a determinate probability as respects the returns from his undertaking. This hovers, rather, in more or less complete uncertainty; the probability is itself only probable. Under these circumstances, a reasonable business man must assume the existence of only the least probability, and can go into the undertaking only on condition that the possible proceeds correspond to this least probability. In consequence, until the probability of success becomes definite, the return usually exceeds the proportions indicated by the real risk. Fortunate entrepreneurs gain more than unfortunate ones lose. But, on the other hand, a conspicuously favorable outcome of this kind is easily overestimated and becomes the cause of a later congestion of the particular industry concerned. . .

Finally, when one takes into consideration the deeper aspects of the rule laid down,* he finds that rule subject to a third limitation, to which von Thünen has already called

*See p. 43.

attention. The rule relates, not to the objective amount, but to the subjective estimate of the expense of production and its remuneration. If, in a given case, the possibility of losing the cost incurred is just as great as the possibility of a successful outcome, then we rightly demand that, in the latter case, the total return should be twice as great as the possible loss, but twice as great, not in its objective significance, which may be something quite different. For not seldom it occurs that the pain of a loss incurred shows a ratio to the satisfaction resulting from a gain made, quite different from that between the quantities of value which express that gain and loss. For example, the loss of a cow, which is worth 40 dollars, involves greater hardships for one who depends on it for his livelihood than the satisfaction which the gaining of 40 dollars would give him. From any surplus which one may possess he may venture something on an undertaking, even if the possible return does not perfectly correspond to the probability of success. If a man who has a large income takes a chance in a lottery, we could not call him a poor business man even though the entire amount obtained by winners does not equal the total money paid in. On the other hand, the man who, in such a case, stakes his whole property will act in an unbusinesslike way, even if there is a greater possibility that he will get back a far more considerable sum. For, if he loses, the misfortune will give him pain greater than the satisfaction he would derive from even a greater piece of good luck.

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Herein lies the actual explanation of the fact that the returns to be expected continually stand above, rather than below, the amount indicated by the ratio of cost to risk, or, what is the same thing, why the total return from al! undertakings of the same kind can continually exceed the outlay incurred, as well as fall short of it. Further, this same principle furnishes the elements which must be of influence in bringing about the one result or the other. The return must be greater, the more painful one feels any loss whatsoever, the less one has susceptibility to the joy of winning and vice versa. On the first ground, the return

must be greater where large, than where small, sums are staked, greater with a poor nation than with a rich one: on the second ground, the return must be greater with a stationary people than with one occupied in the swift development of its resources, whose efforts are exclusively devoted to increasing its possessions,-greater with less, than more, daring enterprises, for the appetite for winning is wont to grow more swiftly, than the amount of winnings. Accordingly, the risk premium, i. e., that part of the entrepreneur's profit which one may look on as compensation for the risk incurred, is according to the circumstances a different one: i. e., it changes not only in proportion to the degree of risk present, but also independently of this, so that the same kind of enterprises can at different times command a different risk premium, and conversely two contemporaneous undertakings with different risks can have in prospect equal risk premiums.

[Then follow comments on differences in the disposition to take risks at different stages of development, and among different peoples.]

To summarize briefly what has been said, we must not conceive the risk premium as meaning that the entrepreneur must in the long run experience a gain and a loss of equal amount. But, because assuming this risk is bound up with a sense of insecurity and care, he may reasonably set up a claim for a certain surplus. We have tried to make clear that, in so far as one can expect to meet deficiences which may occur with surpluses, there is nothing to be said of real risk and consequently nothing to be said of a risk premium. These come in only when it must be supposed that one is liable to suffer a loss without being able to idemnify himself. In that case, of course, there must be a prospect of higher gain. How high this possible gain must go and how far it can vary from the amount of the costs fruitlessly expended, whether above or below, depends partly on the nature of the business, partly on the character of the people, and partly on the grade of culture and well-being which it has reached and the rapidity with which it has reached that grade. But, of the gain really made, the entire excess above costs personally expended is entrepreneur's profit. .



Every person who has given the slightest attention to economic matters is easily convinced that a high degree of productive efficiency is impossible without a high degree of specialization, whether this respects labor or land or capital. Further, no one would deny that if specialization is indispensable, then the conditions upon which specialization depends are also indispensable. But, when we set about giving this second proposition concrete application, when we put forward one particular condition as a requisite of high efficiency, because it is a requisite of specialization, then we find many disposed to hesitate, or even to turn back. The particular condition to which I allude is freedom of trade, freedom of industrial intercourse. Exchange is obviously the necessary correlate of specialization, division of labor. So, a great degree of freedom in exchange is the necessary correlate of a great degree of specialization. For we cannot afford to devote one man or one machine to doing one very little thing, unless we need to have that little thing done times enough to keep the one man or machine busy. In turn, we can not need to have the little thing done thus many times, unless we are producing on a very large scale. But, again, we can not be producing on a very large scale, unless we are producing for a large market. Finally, our market can not be very large, unless there is a large degree of freedom in trade. The following passage from Adam Smith is still one of the best general presentations of this matter.

*As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such part of the produce of other men's labour as he has occasion for.

There are some sorts of industry, even of the lowest kind, which can be carried on nowhere but in a great town. A porter, for example can find employment and subsistence in no other place. A village is by much too narrow a sphere for him; even an ordinary market town is scarce large enough to afford him constant occupation. In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker, and brewer for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade. The scattered families that live at eight or ten miles distance from the nearest of them, must learn to perform themselves a great number of little pieces of work, for which in more populous countries they would call in the assistance of those workmen. Country workmen are almost everywhere obliged to apply themselves to all the different branches of industry that have so much affinity to one another as to be employed about the same sort of materials. A country carpenter deals in every sort of work that is made of wood; a country smith in every sort of work that is made of iron. The former is not only a carpenter, but a joiner, a cabinet maker, and even a carver in wood, as well as a wheelwright, a ploughwright, a cart and wagon maker. The employments of the latter are still more various. It is impossible there should be such a trade as even that of a nailer in the remote and inland parts of the Highlands of

* Adam Smith, Book I, Chapter III.

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