which a vast inherited business has been quickly destroyed by men who could have managed a small business well.

In some industries large capitals have completely driven their smaller rivals from the field, and afterwards their competition among themselves has reduced the rate of profits very low. In rolling mills for instance there is little detail which cannot be reduced to routine, and a capital of £1,000,000 invested in them can be controlled by one able man. A rate of profits of 20 per cent., which is not a very high average rate for some parts of the iron trade, would give the owner of such works Earnings of Management amounting to more than £150,000 a year. And since iron-masters can with so little additional effort get the Earnings of Management on an increased capital, wealthy men remain in the trade longer than in most others; and the competition of the great iron-masters with one another is said to have reduced the average rate of profits in their trade below the ordinary level.

§6. We are now in a position to sum up our inquiry as to the way in which Normal Earnings of Management are determined.

Firstly, with regard to the demand for business power. It is true that this demand is not measured by any definite market price list of Earnings of Management, such as that which states that carpenters' wages in a certain town are ninepence or tenpence an hour; and it is true that the fluctuations of Earnings of Management are greater than those of wages, because the fluctuations of trade prosperity exert a more direct and a greater influence on the incomes of employers than on those of the employed. But yet the demand for the aid of business power in production is fundamentally of the same kind as the demand for the aid of skilled labour. For instance if a manufacturer can improve the method of carrying on his business so that the work of four hundred men produces as much as that of five hundred men did previously, then he will gain an addition to his Earnings of Management equal to the wages of a hundred men. Thus the Earnings of Management of a manufacturer represent the value of the addition which his work makes to the total produce of capital and industry: they correspond to the effective demand that there is for the aid of his labour in production, just as the wages of a hired labourer correspond to the effective demand for his labour. The Law of Demand tells us that the value in exchange of anything is the measure of its Final value in use; that is, of its value in use to those who are only just induced to purchase it; and that this Final value in use diminishes as the supply of the thing increases. So it is with regard to skilled labour of any kind; every increase in the supply of it tends to diminish the Final value in use of the work it does, and therefore to lower its wages. And so it is with

regard to any order of business power; every increase in the supply of it tends to diminish the Final value in use of the work it does, and therefore to lower its Earnings of Management.

Secondly, with regard to the supply of business power. Returning to the case of the manufacturer who obtained high Earnings by an improvement in his methods of manufacture, we see that his success will induce others to follow in his steps, and that their competition will force down his Earnings. The extent to which they will be forced down depends upon the number of those who are able to do the work; and this will depend on the Earnings to be got by it on the one hand and on its difficulty on the other. Thus the rarity of the natural abilities and the expensiveness of the special training required for the work play the same part in determining Normal Earnings of Management that they do in determining the Normal wages of skilled labour. In either case a rise in the income to be earned sets in operation forces tending to increase the supply of those capable of earning it; and in either case the extent to which the supply will be increased by a given rise of income, depends upon the social and economic condition of those from whom the supply is drawn.

The conditions which determine the Normal demand for, and the Normal supply of each kind of business power being known, its Normal Earnings of Management are determined as those which will equate supply and demand in the long run. Thus the Law of Normal Earnings of Management is similar to that of the Normal wages of skilled labour, and similar also to the Law of Normal value for commodities1; and is :

The Normal supply of each kind of business power is that to which the field of employment will just afford the Earnings of Management which are required to call forth this supply: and the rate of the Earnings of Management so determined is the Normal rate for this order of business power.

The conditions which thus determine this Normal rate vary from place to place and from age to age; but since business power is easily transferred from place to place, variations of the Normal Earnings of Management between different places are less important than those which occur from age to age.

§ 7. But in spite of the fundamental similarity between the Law of Normal Earnings of Management and that of Normal wages of skilled labour, there are several important differences between the two cases. Firstly, the Earnings of Management which a business man gets, depend upon the capital with which he has started, in the same way as, but to a greater extent than, the income of a professional man depends on the start in life which the social position of his parents gives him. And a

1 Comp. Book II., ch. V., § 3.

business man working with his own capital includes among his Earnings the equivalent of that Insurance against Personal Risks which must be allowed for, in some form or other, by those who work with borrowed capital.

Secondly, business men are chosen by a process of natural selection from among many millions of competitors. For many employers of labour, in some parts of England more than half, have risen from the ranks of hired labour. Every artisan who has exceptional natural abilities has a chance of raising himself to a post of command, and is in fact a candidate for the prizes that may be earned by success in business; and the average of these Earnings of Management is high, partly because the class of employers contains, in addition to the able men that have been born within its ranks, a large share of the best natural abilities that have arisen among the lower ranks of industry. While Profits on capital invested in education is a specially important element in the incomes of professional men, Rent of rare natural abilities is a specially important element in the incomes of business men.

The total amount of the Earnings of Management got by business men in a country may be found by subtracting interest on the whole amount of their own capital from their total net incomes after allowing for all expenses and losses: and, even after allowance has been made for Insurance against Personal Risks, this amount certainly gives a very high rate of wage for the skill and ability of business men. But this rate is not so high as at first sight appears; for great deductions must be made on account of those who have lost their capital in trade. The earnings of the labour that these men have wasted, together with all the capital that they have lost, must be deducted from the Earnings of Management got by successful men before the average Earnings of Management can be found. Those who fail are quickly lost from sight and memory; but their number is very great. It is said that in America three-fourths of those who engage in trade become insolvent in the course of the first five years1.

And

§ 8. The supply of skilled labour is increasing faster than that of unskilled labour, and the supply of business power is increasing faster than that of the lower kinds of skilled labour. Thus the competition of business power for the aid of the lower orders of labour in production is increasing. as a consequence the Earnings of Management that can be got by doing work of a given order of difficulty-the TaskEarnings of Management--are diminishing. The continual increase in the complexity of business, and the continual increase in the amount of capital that can be employed in business

1 Bowen, American Political Economy, ch. x.

greater Earnings of Management than were ever heard of in earlier generations. But the total amount of the Earnings of Management is not so high in proportion to the amount of capital employed as it used to be. And the ratio which the Earnings of Management of a business bear on the average to the capital employed in it is diminishing; and will probably continue to diminish. For the growth of education will increase rapidly the supply of business power that is competing for the aid of hired labour in production; and this competition will prevent the Earnings of Management from growing as fast as capital is likely to grow.

Since the Normal rate of Interest is likely to fall, and the ratio which Normal Earnings of Management bear to capital is likely to fall, and since profits are composed of interest and Earnings of Management, therefore the Normal rate of profits is likely to fall. It will not fall rapidly for a time, and then remain stationary at a minimum. But subject to some oscillations, its fall will probably be continuous, though increasingly slow, so long as the world is inhabited by men of the same nature with ourselves.

M.

ΙΟ

CHAPTER XIII.

RELATION OF NORMAL TO MARKET VALUE.

§ 1. WE have seen that "every producer of a commodity calculates the price which he will be able to obtain for it, and the Expenses of producing it, and determines by this means to what extent it is his own interest to increase or diminish his production. If there is free competition, his interest leads him to act in the same way as he would if his only object were to regulate the amount produced so that it could just be sold off at a price equal to its Expenses of production." Thus the Normal value of a thing—that toward which the Market value continually tends-is equal to its Expenses of production. These Expenses of production may ultimately be resolved into wages and profits, or rather into earnings and interest.

We have seen how each Expense of production measures that effort or abstinence which is the corresponding element of Cost of production. We have seen that the interest which can be got by abstaining from the immediate consumption of £100 worth of wealth and saving it to be used as capital, is a practically fixed and uniform amount at any given time and in any given country. This Normal rate of interest depends on the one hand on the field that there is in that time and country for the employment of capital, and on the other hand on the supply of capital; this supply depends on many causes, one of which is the rate of interest that has hitherto prevailed in the country.

The Normal wages of unskilled labour in any time and country depend on the scope for its employment on the one hand and on its supply on the other. The scope for its employment depends partly on the natural resources of the country, partly on the amounts of capital, of skilled labour and of business power that are seeking its aid in production. The supply of labour depends, as regards both quantity and quality, on many causes, the chief of which is the rate of wages. It is true that things which are luxuries in one stage of civilization are regarded as necessaries in another, and that all such changes