A CEILING ON PROFITS ?
By HONOR CROOME For wages and profits are not on an equal and comparable footing as slices of the national cake. Wages are a cost of production ; profits a margin between total costs and selling prices. Wages are a datum ; profits a result. Workers can demand such-and-such a wage, and get it—so long as they are employed at all—regardless of whether their employers are making or losing money ; business- men cannot demand such-and-such a profit, but can only so direct their activity, with costs on the one hand and ruling prices on the other, as to spread the margin between these as wide as possible. It may be enormously wide ; it may be absent or negative. In any case it is a residual, not a contractual, quantity. One exception can be noted ; when any firm is working on a." cost-plus " contract of any kind, the " plus " does constitute an agreed, a virtually con- tractual, return for the business-man's time and trouble. There is a genuine parallel with wages and a genuine case for treating the businesi-man's margin just as wages are treated. But the " cost- plus " contract is still, mercifully, not the representative form of profit-making activity. For most business-men profit is reckoned, not by cost-plus, but, as it were, price-minus.
Price is given—determined by the public's willingness to pay. Even today, with the free-market mechanism despised and ham- strung, too high a price in relation to quantity means unsold stocks ; too low a price in relation to quantity means queues and waiting- lists. Even today the ability of business to fix its own prices is largely illusory. Their potential upward limit (whatever the im- mediate masking effect of rationing and price-control) is set, as always, by public taste and the money in the public's hands ; their downward limit is almost equally severely drawn, regardless of costs, by the present freezing-up of competition and mobility. In " the bad old days," efficient, low-cost firms, to which the ruling price represented a wide profit margin, could win customers by under- cutting that price, win needed raw materials by overbidding their less efficient competitors, and so expand production, with narrower margins but large aggregate profits from larger turnover, to their own benefit and that of the public. Today, cartel restrictions on the one hand and Government regulations on the other combine to make such expansion impossible. Even assuming that no restrictive trade-association rules forbid a lowering of prices when the profit margin permits it, the efficient producer cannot take the rewards of
efficiency in the form of larger sales. He is tied to a (probably pre-war) quota of raw materials. He cannot extend his works with- out a (probably unobtainable) stack of licences. He is, in fact, virtually forbidden to use his efficiency in the public service and enjoined to keep his profit margins wide.
Competition, the natural cure for exorbitant profit margins, being thus ruled out, an artificial axe is proposed to take its place ; and the F.B.I. is even now, presumably, engaged on the uncongenial task of designing this weapon. It is likely to be a truly Heath Robin- sonian instrument. Even if, when duly designed and put into action, it proves capable of discriminating between the occasional large profits of the risky undertaking and the steady returns of the " blue chip "—and it had better do so, if enterprise and risk-taking are not to be penalised still further—even if it is wieldy enough to catch the would-be evader and his enthusiastically collusive customer, its use is going to lead to some remarkably queer situations. What will happen in those industries—and there are many of them—where there is an enormous spread in costs, matched by an inverse but equally enormous spread in profits, between the most and the least efficient firms? Will the most efficient be required to sell its wares at a fraction of the price charged by the least efficient? • One en- visages a new and thriving grey market—the resale of goods obtained by the suddenly privileged customers of the more efficient.
On the other hand, as readers of a recent Financial Times article will remember, cheaper goods may be actually unwelcome so long as there is a ready market for the more expensive and no possibility of increasing turn-over ; the retailer's mark-up is bigger on the higher price. One's brain reels at the thought of that new efflor- escence of controls, enforcement machinery, snooping, priorities and under-the-counter jiggery-pokery to be expected from this bold attempt to get round the elementary economic proposition that there cannot be more than one price for the same goods in the same market.
The easier alternative, for any firm whose accounts show profits verging perilously on the impermissible, is to level up its costs. It can ensure the goodwill of its workers (and frustrate the anti- inflation drive) by wage-increases and bonuses ; it can buy thicker carpets for• its directors' rooms and sanction expense accounts even more lavish than those encouraged by present taxation. " She's a sort of a secretary," says Peter Arno's magnate of his sensational blonde, " she only costs me eight cents in the dollar." She would be an even better bargain as a gratuitous protection against legal penalty. Altogether no more certain way could be found of penalising efficiency, perpetuating that high-cost tradition which has sat like an Old Man of the Sea on Britain's shoulders ever since the First World War, and ensuring the maximum of trouble and the minimum of resilience at the first breath of a trade recession, than the limitation of profit margins by specific enactment.
This is not to say, by any means, that profits should not con- tribute their share to the much overdue squeeze-out of water from the national income structure. Most emphatically they should. They are already contributing, and heavily, by way of taxation ; no one except the incurably vengeful extreme Left, to whom profit merely as profit has a brimstone smell, would suggest that further taxation is the proper way. Specific limitation of profits is demonstrably either an invitation to inflate costs or an arbitrary bonus-distribution to a privileged group of customers. What then is left ? Something considerably more drastic, and calling for considerably more courage, than either of these methods. Its general outline should be per- ceptible from what has been said above. Price levels depend on general demand ; general demand depends on purchasing-power. If the Government wants to force down prices, it has all the machinery at hand ; the Budget with which to grapple and sterilise a surplus, the open-market mechanism of the bank with which to deflate bank deposits, authority over the fiduciary issue and even the despised and rejected Bank Rate. No one else can wield these weapons ; the Government, and the Government alone, can tackle the obstinate price-equation from the demand side. And the first victim of any general downward movement of demand will, automatically and inevitably, be the residual element, the price-minus element—profit From the side of supply there is indeed room for voluntary action by the F.B.I. and its constituent bodies. This action should take the shape not merely of willing revision of old contracts, but of a frontal' attack on those time-dishonoured practices of restriction, feather-bedding and general tenderness towards inefficiency which at present block the way towards lower prices. With a downward movement sensibly under way, the unions could be asked not merely, as now, to agree not to press for wage-increases, but to accept reduc- • tions, in keeping with the falling cost of living, where these will do most good to the national distribution of labour. Neither of these courses of action will be particularly easy to initiate or to carry through ; the beauty of feather-bedding is a subject on which business combines and trade unions are marvellously at one, and the sug- gestion that any wage could in any conceivable circumstances be cut has a positively blasphemous ring nowadays. But their intrinsic difficulty, given an appropriate background of public finance, fades to insignificance beside their impossibility given a continued refusal by the Government to play its essential part. The Budget will show whether the Government is in earnest. So will the forthcoming legislation concerning combines and cartels. Taken together, Bud- getary policy and monopoly reform could remove all grounds for specific profit-limitation. Unfortunately, all the evidence goes to show that the Government's terrorised antipathy for the word " deflation" is much stronger than any mild aversion it may feel to the fostering of economic montrosities.
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