Note 1 — Chapter VII

The holders of common stock in a corporation are always entrepreneurs, and they are also capitalists if the stock represents any real capital actually paid in. If the bonds and the preferred stock represent all the real capital that there is, any dividends that may be paid on the common stock are a pure entrepreneur's profit. If, on the other hand, the stock all represents money actually put into the business, the dividends on it contain an element of net profit if they exceed simple interest on the capital and insurance against the risks that are not guarded against by actual insurance policies. If the rate of simple interest is four per cent, and the value of the unavoidable risk is one per cent, then a dividend of six per cent contains a pure entrepreneur's profit of one per cent. In dynamic conditions such a return is often to be expected, and we shall soon study the conditions that afford it.

In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. A small remainder of risk is still entailed upon the capitalist if he leaves his money in this business. The death of the managing partner, the defaulting of payments for goods sold, the chances of unwise or dishonest conduct on the part of clerks or overseers, always impend over a business, but these dangers are at a minimum when the man who is at the head of the force of managers has capital of his own in the business. Risks are at a static level only when they are thus reduced; and for our present purpose it is best to consider that competition has eliminated the establishments where any recklessness has been shown in the management, and that the unavoidable remainder of risk resolves itself, nearly enough for practical purposes, into a deduction from the product which the surviving establishments turn out in a long period of time. A small percentage of their annual gains, set aside for meeting unavoidable losses, will make good these losses as they occur and leave the businesses in a condition in which they can yield as a steady return to owners of stock, to lenders of further capital, and to laborers all of their real product.

[2] In measuring labor we, of course, take account of the quality of the men who perform it, and the work of a skillful man is counted as more units of labor than that of an unskillful one.