“The net result is that profits and losses cancel each other out.”
“You mean that, on net balance, profit doesn’t exist at all?”
“Not, on net balance, as an isolated thing. When we have allowed for the wages of labor, the rental for land, the interest on capital and the wages—or presumptive or imputable wages—of management, then there is no net sum left over for profits. Or at least not in a stationary economy. In an expanding economy, in which capital is constantly increasing, there is a transient profit. But even that is constantly tending to disappear into higher wages or higher prices for productive goods or lower prices for consumers.”
“Your argument, then, as I understand it, is that profits are not made at the expense of wages.” “My argument, Adams, is that in a stationary economy—that is, in an economy that is neither declining nor growing—profits at one place are canceled out by losses at another. Profits, in other words, are not a net price or cost that the community has to pay to the riskbearers. The unsuccessful risk-bearers themselves pay that cost. The people who talk of ‘unreasonable’ profits, as I reminded you a while back, never mention ‘unreasonable’ losses. Any attempt to take away profits from the successful would destroy the vital function that enterprisers play in the private enterprise system.”
“And that function is—?”
“That function, Adams, is to provide the maximum of goods and satisfactions for consumers. That function is to diversify production in accordance with diverse needs and wants, to bring about a balance in the production of thousands of different goods and services. And our private enterprisers perform this function so wonderfully well that I’m even afraid that future generations, who haven’t known the horrors of central governmental planning under socialism, will take the performance of that function for granted. They may think it is something that happens ‘automatically.’ They may even forget that this is a central problem that any economic system has to solve.”
“But does the individual enterpriser, chief, or do even enterprisers in general, deliberately try to solve that problem?”
“No, Adams. Yet each of them helps to solve it incidentally and unconsciously by constantly watching his own income account and his own balance sheet. If there is a profit in making shirts, he makes more of them, so eventually bringing down their price and the profit in making them. If there is a loss in making stockings, he makes fewer of them, or is forced to stop making them altogether, so raising their price and eliminating the loss of more efficient producers in making them. It is precisely because each enterpriser is trying to maximize his profits and minimize his losses that he serves the consumer best and serves the community best. It is the ‘invisible hand’ again.”
“And it is this process also, chief, that solves the problem of economic calculation, over which you and I sweated so much?”
“Precisely. It decides what things are grown or made, how much of each is grown or made, and how each is grown or made. It is the free price system, the relationship of prices to costs, the incidence of profits and losses, that tells the enterpriser which is the most economical way of making a thing—in other words, which is the way that uses up the minimum value of resources in relation to the value of the product. The enterpriser can’t learn this from the engineers and technicians. They can only give him part of the answer. The final answer he gets from his bookkeeper.”
“Which is another way of saying, chief, that he gets the answer from the markets.”
“Which is still another way of saying, Adams, that he gets the ultimate answer from the free choices of consumers.”
“But I’m still bothered, chief, and I’m sure most people are still bothered, by the huge profits made by a few enterprisers. Surely such huge profits aren’t necessary in order to get them to produce the right goods!”
“Your trouble, Adams, and the trouble of these people you speak of, is that you and they still persist in looking only at the winners of the biggest prizes. You assume these to be typical; you forget about the offsetting losses of the losers. Let’s look at a lottery. Let’s say that the man who runs the lottery sells 1,000,000 goldgrams worth of tickets, and hands out 900,000 goldgrams in prizes, keeping 100,000 goldgrams for himself.”
“Very reasonable of him,” said Adams sarcastically.
“I’m not interested in him for the moment,” continued Peter. “I’m talking about the subscribers to the lottery. Collectively they must lose money.”
“Collectively they lose 100,000 goldgrams.”
“Right, Adams. But each individual who subscribes dismisses this collective result from his mind, if it ever occurs to him. He subscribes precisely because he hopes that he, individually, will be a winner. He is not interested in the fate of the other subscribers. Now if the people outside the lottery looked only at the winners of the huge prizes and thought these were typical, and forgot about the huge mass of losers, and if they began to talk as if these winnings were made at their—the outsiders’—expense, they would be talking the same way you are talking about profits under our new free enterprise system.”
“But aren’t these big profits, chief, at the expense of workers?”
“You will usually find, Adams, that the enterprisers who make the biggest profits pay the highest wages. If the profits of the successful enterprisers are at the ‘expense’ of anybody, I should say that they were mainly at the expense of the unsuccessful enterprisers who made the poor guesses and misdirected labor and capital.... And why should you assume that the high profits of the successful enterprisers are any more at the expense of their own workers than at the expense of the owners of their borrowed capital, or of the consumers?”
Adams seemed lost in thought.
“I’m still interested in that lottery you were speaking of,” he said at length. “Considered collectively, the subscribers lost because each nonetheless expected that he would be the exception that would win a prize. May not something like that happen in the case of your enterprisers?”
“It is not impossible,” said Peter. “It may be that each enterpriser becomes an enterpriser partly because he is unduly optimistic in nature, and partly because he overestimates his own abilities. If that were so, more people would become enterprisers than conditions would justify; or they would bid higher for the factors of production than the prices and sales of their finished product would eventually justify—and so the enterprisers as a whole, instead of breaking even, might have more losses than profits.... That might reflect itself in a sort of concealed way say in most enterprisers merely getting too small a return, relatively, for their own labor of management. In that case, the consumers and workers, or the community as a whole, instead of having to pay a price for the vital service that enterprisers perform, would get those services, on net balance, for less than nothing.”
“Then it wouldn’t be very accurate, chief, to call your new system a ‘profit’ system?”
“Certainly not in a declining or even in a stationary economy. It is, of course, a profit-seeking system. But then I suppose there is a sense in which all of us are seeking ‘profit’ under any conceivable system. We speak of spending a ‘profitable’ evening when we mean merely that we have enjoyed ourselves. We say that reading a book has been ‘profitable’ when we mean that we have been instructed by it. ‘Profitable’ action of any sort is merely action that achieves, or partly achieves, the end we are seeking, regardless of whether that end is self-regarding or not.... I can’t understand this unpopularity of ‘profit’ except as envy of the successful. Why should there be any more stigma attached to the word ‘profit’ than to the word ‘wage’ or ‘salary’? Why should one form of income be considered less honorable than another? Why should the people who are afraid to take risks begrudge the rewards of those who have taken them successfully?”
Adams was thoughtfully silent again. “You have answered all the objections I can think of for today,” he said at last. “You are right. You have invented a wonderful ec
onomic system—”
“We did nothing more than merely make it possible.”
“You have invented, chief—or made possible—a wonderful economic system. And one of its chief merits, I now agree, is that it rewards people in proportion to their foresight and their production—their ability to provide others with what those others want. And this supplies the maximum incentive, I also concede, to everybody to sharpen his foresight and to increase his production.... But may not the very virtues of the system finally bring about its undoing? How will we be able to protect this system, for instance, against the incessant criticism of the unproductive and the unsuccessful? For no one is ever willing to attribute his failure to himself. He will attribute that failure to the ‘system.’ He will never see his own shortcomings, but will find a thousand shortcomings in the system. And if you answer one of his criticisms—no matter how crushingly—he will bring up another, ad infinitum. Always he will dream of a system in which, in the world of his imagination, he will be at the top, and the presently successful at the bottom.”
“But won’t the successful, Adams—or, as I hope, the disinterested—always be there to answer the criticisms of the unsuccessful?”
“I doubt, chief, that there will be a decent balance. Nearly everybody wants to be a writer; and therefore writers will seldom get the monetary rewards of speculators and enterprisers; and therefore the writers will be envious of these rewards; and the writers will always be more articulate, more plausible, than the successful businessmen.... And then there’s another point. Success is relative. Measured in wealth and income, everybody will be less successful than somebody else, except the one richest man in the world. And therefore even those who have much more than the average wealth and income will be unable to understand why others, surely no more intelligent, industrious or farseeing than themselves, have more wealth and income still. Everyone will be willing to take it for granted that those who have less than himself have less because they have contributed less value to the world. But almost no one will be willing to admit that those who have more wealth and income than himself have it because they have contributed more value to the world. And so your new system will daily be exposed to the danger that—”
“Oh, come now,” said Peter, laughing. “Stop imagining things!”
Chapter 38
ANOTHER year passed. A state of war still existed between Wonworld and Freeworld, but it was still a war without battles and without bloodshed. It consisted of a tremendous barrage of propaganda and of feverish preparations for a resumption of the active war that everyone regarded as inevitable.
Adams contended that this propaganda war was a losing one for Freeworld. The propaganda of Freeworld, he insisted, was heard only by the people of Freeworld. Nobody in Wonworld was allowed to listen to the short-wave broadcasts of Freeworld on penalty of death. And in any case, nobody outside of the Protectorate in Wonworld had a radio set.
“This means that only the people whose business it is to answer us know what our arguments are,” said Adams. “On the other hand, more and more of our people are acquiring radio sets, and you allow them to listen.”
Peter’s chief answer was a tolerant smile. “That’s our system,” he said, “and I intend to stick to it. Means determine ends. We would end up with as bad a society as Wonworld, if we merely aped their methods.”
“If we don’t do something soon,” retorted Adams, “we will end up with a victory for Wonworld. Bolshekov will start bombing us the moment he thinks he has achieved air superiority. He will have all the advantage of surprise and disruption. We have the planes to bomb him now. If we don’t get the jump on him, he will get it on us.”
“I won’t resort to those methods,” said Peter. “I still hope to get peace by convincing Wonworld that our system is better than theirs.”
Adams threw up his hands in despair. They had been over this argument too many times.
But he conceded that Peter had been brilliantly right about the advantages of his new free system. Both of them continued to watch its development with undiminished fascination.
It was not merely that it out produced the communism of Won-world to the point where there was no comparison. This increase in production was itself merely a symptom and consequence of something more deep-seated.
The whole spirit of the people had been transformed.
Peter noticed this daily even in the attitude of small storekeepers toward their customers. There was none of the indifference and surly boredom that had marked the office-holding storekeeper under the socialism of Wonworld. These people waited on customers not merely with courtesy but with eagerness. It was not only that every sale meant a personal profit to them. Every sale was also a confirmation of their foresight in making or stocking certain goods, in correctly anticipating the wishes of consumers, or in anticipating these wishes better than their competitors did.
Under socialism there had been only one center of initiative, at the top of the hierarchical pyramid. Everybody else had merely carried out orders; he had made what he was told to make or stocked what he was told to stock. When he had filled an order, he had done it as a favor to the customer. It had been always the customer, not the seller, who said “Thank you.” The customer was always supposed to be grateful because the commissars of Wonworld had graciously consented to order the making of the rationed goods. Neither the good nor the bad guesses of the commissars were considered to be the concern of the local storekeeper himself.
But under this new free market system every sale was a sort of personal triumph for the storekeeper. The decision what to make or to stock, and the task of persuading the customer that this article was as good as or better than what one’s competitors had to offer (a task in the long run impossible unless the article actually was as good or better), had all the adventure and excitement of playing a fascinating game. And though success, as in a good card game, might be sometimes due to luck—to the fall of the cards—in the long run it was the result of shrewd anticipation and skill in playing one’s hand.
True, the hired salesmen in a store did not, as a rule, show quite the alertness and eagerness of the proprietor. But as they were usually under the watchful eye of the proprietor, and as their promotion and salary depended on their success in selling, most of them were incomparably more alert and accommodating than most socialist jobholders had ever been.
This competition in serving the consumer ran through the whole society. It did not show itself merely at the point of sale. Long before that point, manufacturers, enterprisers and inventors vied with each other in thinking up new products that consumers might want, or ways of making old products better or selling them more cheaply. There was a spate of new inventions such as Peter had never dreamed possible. Some of these, it is true, were mere gadgets, often ridiculed by Bolshekov’s propaganda ministry and even by writers in Freeworld; but if they were really useless, if they filled no real and permanent want of consumers, they were soon unsuccessful. Time and the consumers kept weeding out what was merely meretricious and selecting what was best.
There was also competition in advertising; and the sometimes extravagant contentions of rival sellers were also the butt of Bolshekov’s propaganda and of writers in Freeworld. But the Free-world government kept this to a minimum by tightening the laws against fraud and the misrepresentation of goods.
Even without these laws, Peter pointed out to Adams, the mischief of fraudulent advertising would not begin to compare with that under socialism. For under socialism no one was permitted to ridicule or even question the claims of the state. The claims of the state went unchallenged precisely because there were no rival claims. But when manufacturer A announced that his soap was the best, and manufacturer B asserted that his soap was the best, and manufacturer C swore that his soap was the best, it was clear to the consumers that all three couldn’t be right. This competitive advertising bred a healthy skepticism in the consumers and even a remarkable skill in weighing rival claims. It was
found that in the long run, in fact, people judged a product by the product itself. For the great majority of products, the most skillful advertising soon proved to be impotent if the product itself was not good.
Under socialism, on the other hand, consumers had no choice between competitive products. The product itself was nearly always bad, because the state had a monopoly of making it and a monopoly of advertising it. No competitor could arise to displace it with a better product. No one could throw doubt on the state’s advertising claims by rival advertising of another product. There was no one to restrain the state itself when it misrepresented its products, as the leaders of Wonworld always did.
But in the private competitive system that Peter had introduced, the bad or indifferent product was constantly being supplanted by the good, the good by the better, and the better by the best. No one could afford to rest on his past laurels; for though his product by its merits might dominate the market today, it might be threatened by a better product tomorrow. Even the corporations whose products already led the field maintained research laboratories to keep ahead of possible new competition.
The advertisers contended that they increased the pace of industrial progress by bringing new and better products to the attention of consumers sooner than consumers would otherwise learn of them. They argued that their advertising was essentially an “educational campaign.” And Peter, though he knew that the motives of the individual advertisers were not disinterested, and though he personally disliked the blatancy of most of their methods, conceded that the basic contention of the advertisers was ultimately right. Their advertising of production goods helped to reduce production costs; their advertising of consumption goods helped to increase demand and so reduce unit costs of production. Buyers were educated by the necessity of judging among rival claims and by actually comparing and trying out competing products. It was the comparative quality and price of the product itself that ultimately decided which product was bought and survived.