If we suppose business men to calculate reasonably, it follows that the average profits in any industry over a long period of years, reckoning in the losses of the concerns which disappear altogether, are likely to be higher, the more risky is the industry.  Such a result will not, of course, occur in every case.  Even when the calculations are reasonable, they may be entirely falsified by the event.  Moreover, business men may not calculate reasonably on the information which they have.  But, unless we suppose their judgment to be subject to a prevailing bias in one direction, i.e. to be unduly optimistic as a general rule, we should expect, and in any case they must expect, profits above the ordinary in a risky industry.

This conclusion is sufficiently important.  Far too many people, though they admit it when it is expressly stated and dismiss it even as a tiresome commonplace, are apt to neglect it when the occasion for applying it arises.  For example, the great importance to any industry of good management is generally recognized, and the consequent desirability of paying adequate salaries to the managerial staff.  The importance of securing a supply of capital is very widely recognized, and the practical necessity of paying a fair rate of interest is thus, however grudgingly, conceded.  But the “residuary profits,” as they are called, which accrue at present to the owners of a business, are denounced in some quarters in a sweeping fashion, which seems to ignore altogether the all-pervading element of risk.  People speak as though you might appropriately limit profits in every industry to some uniform percentage on the capital employed, without making it clear whether you would even be allowed to make up in good years for the losses incurred in bad.  The effect of introducing any such crude device into our present industrial system could only be to paralyze enterprises of an unusually risky kind, which, so far from being pushed to an excess at present, are more probably curtailed unduly from the standpoint of what is socially desirable.  Like the fixing of a low maximum price for a commodity it would cause the supply to wither up and disappear.

Sec.4. Risk under Large-scale Organization.  While this is true of the present economic system, the question is worth considering whether it represents a fundamental necessity, whether, for instance, under our world socialist commonwealth the factor of risk-bearing need play so important a part as it does in the actual business world.  This question cannot be answered with a conclusive simplicity; opposing considerations present themselves, between which it is not easy to strike a balance.  On the one hand, in accordance with the law of averages gains and losses tend to cancel out over a large series of transactions, when reasonable calculations have been made.  Thus Insurance Companies, while they take heavy risks off the shoulders of policy-holders, incur relatively