Sec.7. General Analysis of Profits.  Let us conclude this chapter by clearing the ground for the next.  Earnings of management, payments for risk-taking and for the special knowledge and advantages associated with it, are ingredients of the gross profits of a business.  The chief element that remains is that of interest on capital.  Frequently, indeed, it is not the only one.  As we saw in the last chapter, a farmer may not be required by his landlord to pay the full economic rent for his farm; and he may therefore make profits above the normal level, above the ordinary return for his own services, his own capital expenditure, and the risks to which he is necessarily exposed.  In such a case the farmer is really the recipient, as we have already suggested, of part of the economic rent of the land; and an element of rent accordingly enters into his gross profits.  But profits may include a surplus element which may arise in a great variety of other ways.  A business may possess some decided advantage which is not open to competitors; and it may reap high profits accordingly.  You can, for instance, if you choose, regard the high money profits, which, as was suggested in Chapter IV, are likely to accrue in future to the owners of pre-war factories, as a surplus profit of this kind.  But while, as this illustration indicates, the phenomenon of surplus profits becomes of very great importance when we seek to study the distribution of wealth, it need not detain us here.  For the surplus element arises only in so far as the costs of a business are lower than the marginal costs; and it is the marginal costs, which, with good reason, we are now endeavoring to analyze.  The marginal costs must include a normal profit, i.e. a profit which will cover earnings of management, the reward of risk and enterprise, interest on capital, but nothing further.  It remains, then, only to consider this last element of interest.

CHAPTER VIII

CAPITAL

Sec.1. A Reference to Marx.  Interest is the price paid simply for the use of capital.  But what is capital, and in what does its use consist?  What claim has it to be regarded as an independent factor of production?  Our very familiarity with the term, our habit of employing it with the rich looseness of every-day life is an obstacle to the clearness of thought, which is again essential.  We recognize, most of us, clearly enough that capital, although we reckon it in terms of money, consists, like income, of real things; factories, machinery, materials and the like.  It is quite obvious that these things are of use, are, indeed, indispensable for production; what more natural than that capital should command a price?  It almost seems as though we might pass, without further ado, to a detailed discussion of the forces which determine the amount of this price.