From Barron’s, January 20, 1958. Robert M. Bleiberg, Editor.

Of all the elements which go to make up the system of pri­vate enterprise, the one which en­joys perhaps the least understand­ing—or approval—is profits. In­deed in the U. S., very citadel of capitalism, an observer these days aptly might say that a profit is al­most without honor. For years, ac­cording to many a dreary survey, the man in the street has enter­tained exaggerated and critical no­tions regarding profit margins. In Washington, which never need worry about meeting a payroll, profits as a rule either tend to be ignored completely or, during a crisis, hastily labeled "excess" for purposes of taxation. To organ­ized labor, of course, corporate earning power is merely the goose which, at annual contract time, can be made to lay a new and larger golden egg.

The amazing persistence of such fallacies in the national thinking has been underscored again of late. Thus, with an obvious eye toward future bargaining sessions, George Meany, president of the AFL-CIO, recently charged that the Department of Commerce, in its official reports, was understating the true magnitude of business earnings. Similiarly, in unveiling his 1958-model demands, Walter Reuther, head of the United Auto Workers, called upon the auto industry to share most of its profits with em­ployees and customers. Finally, in forecasting a balanced budget for the coming fiscal year, the Ad­ministration, in effect, has chosen to ignore the deepening recession and its probable impact on corpo­rate accounts. Whatever their dif­ferences, the foregoing episodes have one thing in common: a striking inability or unwillingness to face the facts of economic life. One is that profits can go down as well as up. In a free society, prof­its also happen to be the moving force behind business activity. In the U. S., in short, labor as well as capital has a major stake in the business of risk and reward.

Shrinking Profits

To those who grasp the connec­tion between investment and em­ployment, the current trend of earning is disquieting. For the figures reveal that profits have been shrinking steadily for more than a year. According to the Department of Commerce, net in­come of all U. S. corporations, after taxes, reached a high of $22.3 billion per year in the fourth quarter of 1956. By the second quarter of 1957, earnings were running at an annual rate of $20.5 billion, a showing which failed to match that of the like 1956 period. The annual reports for 1957 plainly suggest that the slippage continued in the second half as well.

The government data, to be sure, have not gone unchallenged. In particular, Mr. Meany, speaking for the AFL-CIO, has attacked the estimates of the Department of Commerce. In the main, he faults them for failing to take into account the increased deductions which industry, in writing off plant facilities, now is permitted to make. If such sums are added to reported earnings, he argues, the so-called squeeze on profits quickly disappears.

It is perfectly true that under the former methods of deprecia­tion, current profits would com­pare more favorably with those of earlier years. However, that is not the point. Whether by the old yardstick or the new, earnings during the past 12 months (the period in question) unmistakably have dwindled. As to the longer pull, Mr. Meany is equally wrong. For owing to postwar inflation, the cost of replacing an asset has exceeded by a country mile that of building it originally. Until the recent fiscal reforms (to which labor now objects so strenuously), corporations were compelled to report wholly inadequate allow­ances for depreciation. In short, for a decade or more business has overstated, not understated, its profits.

Labor Demands More

Here is a formidable misconcep­tion indeed. However, in this realm George Meany is matched, if not surpassed, by his vice-presi­dent and possible successor, Walter Reuther. In advance of the forth­coming wage negotiations with the auto industry, the U. A. W. head disclosed his intention of seeking a massive profit-sharing plan. Under this scheme — which even the union admits is an "un­usual approach to collective bar­gaining" — motordom would be en­titled to a net return of 4.8 per cent on its invested capital. Any­thing above that amount would be deemed an "excess" profit, of which one-fourth would be paid as a bonus to the workers (with an equal share going as a rebate to the car-buying public).

To the Ruination of All

The proposal may be criticized on many grounds, not least that it would give the union a powerful voice in what is properly the con­cern of stockholders and management. But perhaps its worst — and most revealing — feature is the formula which would grant in­dustrial concerns, subject as they are to whims of the market place, a return lower than 6 per cent or more currently enjoyed by regu­lated public utilities. Such terms would be ruinous, not merely to capital, which must look for rewards commensurate to the risks, but also, in the end, to all those seeking jobs which only the invest­ment of capital can provide. The vital link between the two once was recognized by the Executive Council of the A.F.L., which nearly twenty years ago went on record as saying: "We have learned the lesson that when op­portunities for profits diminish, opportunities for jobs likewise disappear." Today, however, labor apparently has chosen to ignore this simple truth.

Nor is labor alone in such folly. The same may be said of all those who, at the first sign of recession, would have the government launch upon a massive program of pump-priming. Contrary to the views held by some, inflation is the mor­tal enemy of economic progress. For it tends to cover up ineffi­ciency and waste; to reward the speculator rather than the pro­ducer; and, not least, to encourage excessive wage demands. Sooner or later, under the mounting bur­den of costs, profits — as well as trade and employment — inevitably suffer. This is what has happened to the U. S. in recent months. In the circumstances, efforts to revive inflation surely would not be wise. The U. S. will regain its prosper­ity only as it restores the condi­tions under which the risk-taker can thrive.      

NOTE: Turn again to F. A. Harper’s "On Sharing Profits" (THE FREEMAN, January 1958) for further study of the implications of the UAW proposal.