This phrase is very useful when we are examining the part which Demand takes in determining wages. For instance, if the demand for houses is rising, the Net Return of the labour of some or all of the various building trades must be increasing. There may be signs of a greater scarcity of labour in one of the building trades, as for instance that of the carpenters, than in others; and if we believe that the earnings of other branches of the building trades (including the Earnings of Management of the master builders) are not likely to rise, we may say that the competition for the aid of carpenters' labour will increase, that the Net Return of their labour will rise in value, that they therefore will get an increased share of the Earnings-and-interest Fund; and that their wages will rise.

Again the phrase Net Return of labour can be usefully applied in explaining the influence of Demand in equalising Task-wages in the same occupation. This influence may be described by saying that under a system of free competition every man's wages, or more generally every man's earnings, tend to equal the Net Return of his industry.]

theory of wages. But really it is only the Law:-"Value tends to equal Expenses of production"-written in a new form.

CHAPTER XII.

EARNINGS OF MANAGEMENT.

§ 1. We have seen that the supply of business power is determined in all essential respects in the same way as the supply of skilled labour; we have now to examine the Laws that govern the Normal Earnings of Management. These Laws appear at first sight to differ much, and they really do differ a little from those which govern the Normal wages of skilled labour; the chief difference arising from the fact that the Earnings of Management can be obtained only by those who have the control of capital. Let us then begin by comparing the Earnings of Management of two men carrying on similar business, the one with his own capital, the other with borrowed.

The man who works with his own capital considers that his Earnings of Management are the whole net profits of his business after deducting the interest that he could obtain by letting out his money on good security. But interest at a much higher rate than this must be paid by a man who borrows capital for his business, at all events unless his own property is sufficient to give good security for it; and interest at this high rate must be deducted from the profits of his business in order to find his Earnings of Management. The rate of interest which he has to pay is high, because in his case a new set of risks is introduced in addition to those unavoidable risks which exist in every business.

Those risks which arise from such causes as the chance of destruction or depreciation in value of the capital employed, or of the goods produced in it, are inseparable from business, and may be called Trade Risks. ` Those further risks which are introduced when the capital of one man is under the control of another, may be called Personal Risks. These are due to the mistakes that the lender may make with regard to the borrower's business ability, and honesty.

A man trading with his own capital has every motive for exerting himself to discover whether he is carrying on his business at a loss. But the man working with borrowed capital

has not such strong motives. If his moral sense is not very active he may, without intending any deliberate fraud, carry on a losing business so long as to cause heavy losses to his creditors. If he has not a strict sense of honour, and finds himself in difficulty, he may plunge into rash speculations: for if they succeed, the gain will be his; and he may not care whether he fails for a large or a small sum.

One way in which the lender can insure himself against these various risks is by charging a high rate of interest for his loans. But a very high rate would be required to cover the risk of loans made for a long period of time; and therefore such loans are generally made for short periods. The shorter these periods are the less is the risk which the lender runs, and the sooner can he recover the use of his capital for himself, if the course of his own trade should make him wish to do so. Thus Bankers and others are willing to lend money for a few months' at a rate of interest sometimes not exceeding three or four per cent. a year, even when the best security that the borrower can offer would not induce them to lend him capital for a long period of time at any moderate rate.

But a man who is much dependent on such short loans labours under great disadvantages. For if any misfortune should injure his credit, or if a disturbance of the money market should cause a temporary scarcity of loanable capital, he may be quickly brought into great straits. He may not be able to obtain a renewal of the loans on moderate terms, or even on any terms, and may thus be cut short in his most hopeful enterprises. One of the chief symptoms of an impending commercial crisis is a rapid succession of forced sales at a loss by those who have been trading with capital borrowed for short periods.

Thus it appears that a trader who works on borrowed capital has in one form or another to pay a high rate of interest. But though high, it is not sufficiently high to prevent him from competing with those who trade with their own capital. On the contrary men trading with borrowed capital seem likely to displace to a great extent those trading with their own.

The reason of this is not far to seek. A man who has a capital of £50,000 can easily obtain a secure income of £2500 by lending it out. And very likely he may not care to undergo the labours and anxieties of a business life unless he can get Earnings of Management of £2500, or even £5,000 a year, exclusive of course of Insurance against Trade Risks. But a man of equal ability who owns little capital, and who therefore cannot live in comfort without working, will be content with lower Earnings of Management. He may be willing to employ £50,000 of bor

1 This is done chiefly by "discounting bills."

rowed capital, in addition to his own, even though after allowing for the interest that he actually pays and the indirect risks that he runs through working with borrowed capital, he does not clear more than £1000 a year by the work. He can therefore afford to sell at a price too low to give that rate of profits which the man of independent means requires. Thus those who depend on their business for a livelihood, undersell and drive out of trade those who are not so dependent1.

§ 2. Again a man may obtain Earnings of Management by carrying on a business with capital, the owners of which take a part at least of the risks of the business. The simplest way of doing this is the old plan of partnership. In former times a man of little capital had small chance of getting high Earnings of Management unless he could obtain the confidence of some wealthy man or private firm, who admitted him as a partner.

Again, if a man thinks that he can profitably employ more capital than his own in his business, he often converts it into a joint-stock company. That is he admits others to shares in his business: they take a share of the risk and a corresponding share of the net proceeds that remain after paying him Earnings of Management according to some plan agreed upon between them 2. A joint-stock company of this kind which is managed by its chief shareholder or shareholders, may act almost as freely and promptly as a private firm can. It has some special disadvantages; but under favourable circumstances, it may hold its own even in trades which require ready enterprise and quick action.

The business of a large joint-stock company is however often carried on by Directors, who give it only a little of their time, and General Managers, who give their whole time. The General Managers are seldom men of much capital, and are contented to work for moderate salaries.. The business of such a company will almost always be managed with less energy and economy than a similar private business in able hands. As Mill says, it may be possible to secure in hired managers that fidelity which shrinks from a deliberate neglect of duty, but not that zeal which is continually laying schemes by which greater profit may be obtained, or expense saved, and which is ever anxious about small gains and small savings. If however the

1 This is making English commerce increasingly democratic, and does much harm in preventing "the long duration of great families of merchant princes....But the propensity to variation in the social as in the animal kingdom is the principle of progress.' See Bagehot's Lombard Street, Introductory chapter.

2 This is similar in some respects to the old plan of introducing "sleeping partners" into a private firm. The sleeping partners supply Capital and take a share of the risk, but have no part in the Manage

ment.

company is large, and it can afford to pay fairly good salaries to its officers, its affairs are likely to be in many ways better managed than those of a private business in the hands of men of second rate ability. The directors are usually men who can bring a wide and varied business experience to bear in laying down the broad principles on which the affairs of the company are conducted, and in judging the ability and industry of the chief officials under them. So that the management of a large joint-stock company, though generally far from perfect, is seldom very bad except where there is wilful wrong doing,

The publicity of joint-stock companies helps more than it hinders them in trades in which it is necessary to obtain public confidence, as for instance in banking and insurance. They have a monopoly of railways and other undertakings which require enormous capitals, and they are fast pushing their way in all businesses in which large capitals can be managed chiefly by routine and in which there is little need for bold and speculative enterprise. For they can thrive with a much lower rate of profits than will remunerate a wealthy capitalist for undergoing the worry and fatigue of business. The growth of Joint Stock Companies offers great opportunities to those who have business power, to obtain the control over capital.

§ 3. We may next inquire how the Earnings of Management of a business are related to the capital employed in it. Is the Normal rate of profits for all capitals employed in trades of the same difficulty the same whether the capitals be large or small?

If two businesses in different trades are equally difficult and disagreeable, and require equal capitals, there will of course be a constant tendency to equality of their Earnings of Management. There may indeed be great differences between the Earnings of Management of two men with the same capital in the two trades; but so there may in one and the same trade. These differences arise from inequalities in ability or good fortune, just as do those between the earnings of successful and unsuccessful medical men or barristers. Again it is true that an able business man who starts in life with a great deal of capital and a good business connexion is likely to obtain higher Earnings of Management than an equally able man who starts without these advantages. But there are similar, though smaller, inequalities between the earnings of professional men of equal abilities who start with unequal social advantages.

What is meant then is that competition tends to equalise the Earnings of Management of men of average ability and good fortune in two occupations in which equal capitals are employed, 1 which are equally difficult and disagreeable. The profits in

ase are to be found by adding the Earnings of Manage