Chapter LII: Section CXCV: The Reward of Enterprise

The essence of an enterprise or undertaking, in the politico-economical sense of the word, consists in this, that the undertaking party engages in production for the purpose of commerce, at his own risk. In the earlier stages of a nation's economy, the production of consumers is, naturally enough, limited chiefly by their own personal wants. Somewhat later, when the division of labor has been further developed, the workman produces at first, enough to meet occasional determinate "orders;" and still later to meet them regularly and as a business. Later yet, and in stages of civilization yet higher, especially when the freedom of labor constantly grows, as it is wont to, here, and the freedom of capital and trade becomes more extensive, enterprise plays a part which grows more important as time rolls on, and is usually carried on more at one's own risk.[195-1] This transition is a great advance, inasmuch as the advantages of the coöperation of labor and of _use_ may be utilized in a much higher degree by undertakers (_Unternehmer_) than by producers who labor only to satisfy their own household wants, or to meet "orders" already made. The awakening of latent wants, a matter of the utmost importance to a people who would advance in civilization, is something which can enter into the mind only of a man endowed with the spirit of enterprise (an undertaker).[195-2]

While most English political economists have confounded the personal gain of the undertaker with the interest on the capital used by him,[195-3] many German writers have called the "undertaker's earnings" or profit a special, and fourth, branch of the national income, coördinate with rent, wages, and the interest on capital.[195-4] Yet, the net income of every undertaker is either the fruit of his own land used for purposes of production and of his capital, in which case it is subject to the usual laws of development of rent and interest; or, it must be considered as wages paid for his labor.[195-5] These wages he earns, as a rule, by organizing and inspecting the work, calculating the chances of the whole enterprise; frequently by, at the same time, keeping the books and acting as cashier; and, in the case of small undertakings, as a common fellow-workman. (Tradesman, peasant). In every case, however, even when he puts an agent paid by himself in his place, he earns these wages from the fact that his name keeps the whole enterprise together; and for the reason that, in the last instance,[195-6] he has to bear the care and responsibility attending it.[195-7] When a business goes wrong, the salaried director or foreman may permit himself to be called on to engage in another; but the weary, watchful nights belong to the undertaker or man of enterprise, alone; and "how productive such nights frequently are!"[195-8]

This profit of the undertaker is subject essentially to the same natural law as wages in general are; only it differs in this from all other branches of income, that it can never be stipulated for in advance. Rather does it consist of the surplus which the product of the undertaking affords over and above all the rent stipulated for in advance or estimated at the rate usual in the country, the interest on capital, and wages of common labor.[195-9]

[Footnote 195-1: At first, usually imperfect enterprises in
which the shop-instruments, etc., are kept ready for present
orders; and then complete or perfect enterprises. (_v.
Mangoldt_, Volkswirthschaftslehre, 255.)]

[Footnote 195-2: _v. Mangoldt_, Lehre vom Unternehmergewinn,
1855, 49 ff. The same author shows, in his
Volkswirthschaftslehre, that it is better for the general
good that the risk should be borne by the producer than by
the consumer. In the case of the taking of orders, there is
danger only of a technic failure, but in enterprise proper,
there is possible also an economic miscarriage of the work,
even when successful from a technic point of view. But in
the case of the undertaker (man of enterprise),
responsibility is much more of an incentive, production much
more steady, and therefore much better able to exhaust all
means of help. Consumers are much more certain in their
steps, as regards price, etc., since they find what they
want ready made.]

[Footnote 195-3: Thus _John Stuart Mill_, Principles, II,
ch. 15, 4, teaches with a certain amount of emphasis that
the "gross profits of stock" are different not so much in
the different branches in which capital is employed, as
according to the personal capacity of the capitalist himself
or of his agents. There are scarcely two producers who
produce at precisely the same cost, even when their products
are equal in quality, and equally cheap. Nor are there two
who turn over their capital in precisely the same time.
These "gross profits" uniformly fall into three classes:
reward for abstinence, indemnity for risk, remuneration for
the labor and skill required for superintendence. _Mill_
complains that there is in English no expression
corresponding to the French _profit de l'entrepreneur_. [The
translator has taken the liberty to use the expression
"undertaker's profit," for what the French call the _profit
de l'entrepreneur_, and the Germans _Unternehmerlohn_, spite
of its funereal associations, and because Mill himself
employed it, although he recognized that it was not in good
usage.--TR.] (II, ch. 15, 1) _Adam Smith_ had the true
doctrine in germ (Wealth of Nat., I, ch. 6), but those who
came after him did little to develop it. Compare _Ricardo_,
Principles, ch. 6. 21. _Read_, Political Economy, 1829, 262
ff., and _Senior_, Outlines, 130 seq., were the first to
divide profit into two parts: interest-rent (_Zinsrente_)
and industrial gain. Similarly, _Sismondi_, N. P., IV, ch.
6. According to _A. Walker_, Science of Wealth, 1867, 253,
285, "profits are wages received by the employer."]

[Footnote 195-4: _Hufeland_, Grundlegung, I, 290 ff.;
_Schön_, Nat-Oek., 87, 112 ff.; _Riedel_, Nat-Oek., II, 7 ff.;
_von Thünen_, Der isolirte Staat, II, 1 80 ff.; _v.
Mangoldt_, Unternehmergewinn, 34 ff. The latter divides the
undertaker's profit (_profit de l'entrepreneur_) into the
following parts:

A. Indemnity for risk. If this be only an indemnity exactly
corresponding to the risk, it cannot be looked upon at all
as net income, but only as an indemnification for capital.
If individual undertakers, favored by fortune, receive a
much larger indemnification than is necessary to cover their
losses, such indemnification is not income either, but an
extraordinary profit not unlike a lottery-gain, unless it be
called, perhaps, the reward of extraordinary courage
(_Eiselen_), i. e., wages. If, lastly, the indemnity is
uniformly somewhat larger than the risk, in order to
compensate for the continual feeling that one is running a
risk, it must be remembered that all remuneration for
present sacrifice, made directly for the sake of production,
is wont to be embraced under the name of wages.

B. Wages and interest for the labor and capital utilized
only in one's own production, and which cannot be let. _v.
Mangoldt_ himself admits, that, in the long run, only
certain qualified labor belongs to this category.

C. Undertaker's rent (_Unternekmerrente_) depending on the
rarity of undertakers (men of enterprise) compared with the
demand. This, therefore, is not a third component part, but
only one which adds to the other two, _Storch_, Handbuch, I,
180, and _Rau_, Lehrbuch, I, § 237 ff., consider the profit
of the undertaker as an admixture of wages and interest.
Professor _J. Miscszewicz_ has given expression to an
interesting thought in opposition to myself: that credit is
a fourth factor of production (natural forces, labor and
capital being the other three) produced by the three older
factors, as capital by the two oldest. The undertaker's
profit he then considers the product of this fourth factor,
corresponding to rent, interest and wages.]

[Footnote 195-5: Compare _Canard_, Principes, ch. 3; _J. B.
Say_, Traité, II, ch. 7, Cours pratique, V, 1-2, 7-9,
distinguishes three branches of income: rent, interest and
the profits of industry; and he divides the latter again
into the profits of the _savant_, the undertaker and
workmen, (_v. Jacob_, Grundsätze der Nat.-Oek., § 292;
_Lotz_, Handbuch, I, 471; _Schmalz_,
Staatswirthschaftslehre, I, 116; _Nebenius_, Oeff. Credit,
I, Aufl., 466.)]

[Footnote 195-6: I need only call attention to the influence
that the mere name of a general sometimes exerts over the
achievements and sometimes even over the composition of his
army (Wallenstein!); and how important it sometimes is to
keep his death a secret. And so the mere name of a minister
of finance may facilitate loans, etc.]

[Footnote 195-7: It is sufficient to mention the different
positions occupied by the shareholders and preferred
creditors of a joint-stock company.]

[Footnote 195-8: Compare _von Thünen's_ Isolirter Statt, II,
80 ff., and his Life, 1868, 96. _Meister muss sich immer
plagen!_ (_Schiller._) See a long catalogue of books on the
position of the undertaker in the principal different
branches of industry in _Steinlein_, Handbuch der
Volkswirthschaftslehre, I, 445 ff.]

[Footnote 195-9: _Tantièmes_ occupy a middle place between
wages and the undertaker's profit; dividends a middle place
between undertaker's profit and the interest of capital. On
this is based _Rodbertus's_ view, that an increase of joint
stock companies raises _ceteris paribus_ the rate of
interest, and an increase of productive associations the
rate of wages, for the reason that in each instance, there
is some admixture of "undertaker's profit," or reward of
enterprise.]