Risk, uncertainty and profit
There is little that is fundamentally new in this book' It represents an attempt to state the essential principles of the conventional economic doctrine more accurately and to show their implications more clearly than has previously been done. That is, its object is refinement, not reconstruction; it is a study in "pure theory."
The motive back of its presentation is twofold. In the first place, the writer cherishes, in the face of the pragmatic, philistine tendencies of the present age, especially characteristic of the thought of our own country, the hope that careful, rigorous thinking in the field of social problems does, after all, have some significance for human weal and woe.
In the second place, he has a feeling that the "practicalism" of the times is a passing phase, even to some extent a pose; that there is a strong undercurrent of discontent with loose and superficial thinking and a real desire, out of sheer intellectual self-respect, to reach a clearer understanding of the meaning of terms and dogmas which pass current as representing ideas. For the first of these assumptions, a few words of elaboration or defence may be in place, in anticipation of the essay itself.
The "practical " justification for the study of general economics is a belief in the possibility of improving the quality of human life through changes in the form of organization of want-satisfying activity.
More specifically, most projects of social betterment involve the substitution of some more consciously social or political form of control for private property and individual freedom of contract. The assumption underlying such studies as the present is that changes of this character will offer them greater prospects of producing real improvement if they are carried out in the light of a clear understanding of the nature and tendencies of the system which it is proposed to modify or displace.
The essay, therefore, endeavours to isolate and define the essential characteristics of free enterprise as a system or method of securing and directing cooperative effort in a social group. rAs a necessary condition of success in this endeavour it is [ assumed that the description and explanation of phenomena must be radically separated from all questions defence or criticism of the system under examination. By means of first showing what the system is, it is hoped that advance may be made toward discovering what such a system can, and what it cannot accomplish.
A closely related aim is that of formulating the data of the problem of economic organization, the unchangeable materials with which, and conditions under which, any machinery of organization has to work.
A sharp and clear conception of these fundamentals is viewed as a necessary foundation for answering the question as to what is reasonable to be expected of a method of organization, and hence of whether the system as such is to be blamed for the failure to achieve ideal results, of where if at all it is at fault and the sort of change or substitution which offers sufficient chance for improvement to justify experimentation.
The net result of the inquiry is by no means a defence of / the existing order. On the contrary, it is probably to emphasize the inherent defects of free enterprise. But it must be admitted that careful analysis also emphasizes the fundamental difficulties of the problem and the fatuousness of over-sanguine expectations from mere changes in social machinery.
Only this foundation-laying is within the scope of this study or included within the province of economic theory. The final verdict on questions of social policy depends upon a similar study of other possible systems of organization and a comparison of these with free enterprise in relation to the tasks to be accomplished.
This one "conclusion" may be hazarded, that no one mode of organization is adequate or tolerable for all purposes in all fields. In the ultimate society, no doubt, every conceivable type of organization machinery will find its place, and the problem takes the form of defining the tasks and spheres of social endeavour for which each type is best adapted.
The particular technical contribution to the theory of free enterprise which this essay purports to make is a fuller and more careful examination of the role of the entrepreneur or enterpriser, the recognized "central figure" of the system, and of the forces which fix the remuneration of his special function.
The problem of profit was suggested to the writer as a suitable topic for a doctoral dissertation in the spring of 1914 by Dr Alvin Johnson, then Professor of Economics at Cornell University. The study was chiefly worked out under the direction of Professor Allyn A. Young after Dr Johnson left Cornell. My debt to these two teachers I can only gratefully acknowledge.
Since the acceptance of the essay as a thesis at Cornell in June 1916, and its submission in the Hart, Schaffner & Marx competition in 1917, it has been entirely rewritten under the editorial supervision of Professor J. M. Clark, of the University of Chicago.
I have also profited much by discussions with Professor C. O. Hardy, my colleague at the same institution, and by access to his unpublished "Readings on Risk and Risk-Bearing." Professor Jacob Viner, of the University of Chicago, has kindly read the proof of the entire work. My obligations to various economists through their published work are very inadequately shown by text and footnote references but are too comprehensive and indefinite to express in detail.
pt. 1. Introductory.--pt. 2. Perfect competition.--pt. 3. Imperfect competition through risk and uncertainty
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