The Business of America
Clark, Lindley H. Jr.
The Business of'America Lessons in Free Enterprise (III) What follows is the third of four columns by the economic news editor of the Wall Street Journal on the practice of business in...
...But in Washington politics appears to be much more potent than personal feelings...
...Other entrepreneurs see them and are encouraged to provide competition...
...John Kenneth Galbraith, the articulate Harvard economist, claims that it has been a lot like putting the Pope in charge of a birth control program...
...Earnings returned to U.S...
...But public opinion polls now say that inflation is far and away the public's biggest worry, and 1974 is an election year...
...they are inflated by some factors that offer businessmen little long-range comfort...
...The Business of'America Lessons in Free Enterprise (III) What follows is the third of four columns by the economic news editor of the Wall Street Journal on the practice of business in America...
...Under the pressure of competition the businessmen try to improve their product or service or develop new ones...
...Next year, under the impact of a business slowdown, corporate profits will be no better than this year and quite possibly will decline...
...Most economists now think that inflation will persist at a rate of 4.5 percent to 5 percent or so at least for the next five years...
...Labor unions are willing to go along with controls on wages only as long as the government also enforces controls on profits...
...producers have a chance to enlarge their market shares but many don't have the capacity to do it...
...Despite the horrendous inflation of this year, corporate profits still are a much smaller slice of the gross national product than they were in the early 1960s, when inflation--by recent standards-was little more than negligible...
...SO the controls stay on and continue to squeeze profits...
...If an entrepreneur provides a new service or product that the public wants, the public rewards him with profits---assuming, of course, that he manages his business reasonably efficiently...
...But it can't continue indefinitely...
...The idea that business hunger for profits causes inflation, however, helps to explain the government control approach this time around...
...The need stems partly from the impact of two dollar devaluations...
...If a firm is to remain in a given industry, it must earn profits sufficient to provide what its owners consider to be an adequate rate of return on their capital...
...Though profits don't cause inflation, they do perform an economic role...
...parent companies by foreign subsidiaries suddenly have been worth more...
...markets that they have cultivated during the past decade...
...Competition is indeed far from perfect, and the government ought to stiffen it with intelligent antitrust enforcement, removal of import barriers, and other steps...
...Many foreign producers have been priced out of U.S...
...Unless supply can be brought into better balance with demand, the inflationary pressures will persist...
...Another straw is that the people running the controls program really don't believe in it...
...Also boosting profits were the February dollar devaluation and the subsequent market decline of the dollar...
...A few economists, clutching at straws, think that businessmen may be ingenious enough to thwart the controls with some under-the-table evasion...
...But even in the imperfect market businessmen in recent years have found that there is a limit to how far they can raise their prices...
...If this process continued indefinitely, profits would be eliminated...
...Resources are drawn into his business and used productively, since they are filling a public want or need...
...For one thing, profits have been heavily influenced by the surge of inflation...
...l,qat year's earnings, however, amounted to less than 5 percent of the gross national product...
...Such profits, of course, are transitory-unless you want to assume that inflation and the decline of the dollar will continue to accelerate...
...Unless consumers become entirely disenchanted with the whole program, the chances are that some form of controls will remain...
...The shortages and the upward price pressures of recent weeks have helped to show the need for greater output...
...For more years than anyone cares to remember, labor unions have been telling the public that fat corporate profits are a major, if not the major, cause of inflation...
...If they can't, a generally declining level of profits leads some firms to abandon the field, shifting resources to areas that look more promising...
...The increases will be smaller in the last half of this year, and for the year as a whole the profits still will be only around 5 percent of the GNP...
...The argument makes sense only if you assume that businessmen can and do collusively raise their prices to whatever level they choose--and then go on selling as much as they want to sell at the new, highly profitable price levels...
...What they feel they are entitled to is a decent reward for accepting the risks of the business they own...
...If they don't earn what they feel they are entitled to, they take their money elsewhere...
...But the difference, which the unions prefer to ignore, is that profit rates, unlike wage rates, often go down as well as up...
...Profits can't be kept secret, either...
...Unless the government finances an inflation by printing up fresh supplies of money, businessmen are likely to find that prices can go down as well as up...
...Corporate profits, after taxes, came to $53 billion last year, a 15.5 percent increase from 1971 and well above the previous record of $50 billion in 1966...
...4 The Alternative January 1974...
...And if you assume that, you assume the not-very-slow collapse of the economy, something that isn't too good for profits either...
...until this year, the steel industry has provided a prime example...
...So their rates of return are so lousy that few of those people possessed of capital are willing to invest it in such companies...
...After-tax profits in the first quarter were 28 percent above what they were a year earlier, and in the second quarter the year-to-year gain was 34 percent...
...This year, of course, has been even better...
...Congress early next year will consider whether to renew the authority for the program, and it's sure that labor will insist that profits and wages be linked together--if any controls continue...
...Some economists think that the controls program will be eased enough and in time, and government officials have in fact been stressing their desire to facilitate increased production...
...So the Cost of Living Council is going to have to let prices rise in some industries if it wants to have any hope of holding prices down in the long run...
...The total lack of correlation between profits and inflation shows up in the historical record...
...But no one will win any friends in the labor movement by suggesting that wage increases next year be no larger than profits gains...
...the 1966 profits were close to 7 percent of the GNP...
...The controls program that began in August 1971 and the regulations that followed it have limited the producers' ability to raise prices now...
...businessmen have found that their inventories suddenly were worth more...
...Such are the risks that business owners must take...
...And there are risks...
...Under the pressures of foreign competition in the 1960s, these producers were unable to raise their prices much...
...This year's profits levels are not only low as a portion of the gross national product...
...But very much of that sort of approach probably would only lead to an enlargement of the enforcement apparatus, which already seems to be growing fairly rapidly...
...They are in effect the engine that keeps the economy moving in one direction or another, or up or down...
...Profits encourage the entrepreneur to expand his business, hoping that the public will buy more and more of what he has to sell...
...The competition, as it grows, keeps the level of prices and profits down...
...Some of the results have been ridiculous: often, the legal list prices stood at levels much higher than those at which businessmen wore really selling goods...
...Price increases have been permitted only when the government, in its wisdom, decided that the boosts would not unduly fatten profits...
...At the moment many industries are planning major spending programs to enlarge their production capacity...
...A controls program always makes economics sound a little silly...
Vol. 7 • January 1974 • No. 4
