"Consider, if you please, two typical units of production, a factory and a farm. Let the factory be large, an employer with many employees; let the farm be small, a one-family affair. These two cases will be typical—insofar as price and purchasing power are concerned—of the entire economic organism. First, the factory: It makes, let us say, shoes. These shoes are placed on the market at a definite price. This price consists of two parts; the cost to the owner of the factory of making the shoes, plus a profit. The cost consists of a number of items, of which the principle are wages to employees, cost of raw materials, depreciation on capital goods, rent of land, interest on invested capital, and taxes. The additional portion of the price is the profit. This is the return to the owner or entrepreneur for his time, personal labor, ingenuity, and so forth, and is the source from which he must support himself and his family. To assume that profit is unnecessary is to assume that employers don't eat. It was popular in your day to attack the 'profit system'. We shall see that profits to an entrepreneur are not the cause of unemployment and financial distress. Of course there will arise the question of some entrepreneurs receiving a disproportionate amount of production as their profits, but that is a question of morals to be regulated according to the current customs. It does not in itself cause unemployment, as we shall see. As a matter of fact most persons who undertake the enterprise of new production, or entrepreneurs, did not make an excessive profit; most of them made no profit and went bankrupt. That is a simple matter of record. In your day eighteen out of nineteen businessmen failed in the long run. The groups who attacked the 'profit system' were beating a dead dog.
"Nevertheless, since entrepreneurs must eat, profits are a legitimate part of the cost of production. Henceforth we shall include them as cost charges and consider that the necessary value of an article of production is its total cost, or cost to the entrepreneur plus his necessary profit."
Perry interrupted. "Do you mean to say that the profit system in my day was okay? It seems to me that the profit system was always being attacked as the villain in the piece."
"The profit system was not the villain in the piece. The villain was ignorance of the workings of the economic mechanism, in which the entrepreneurs or industrial leaders were the greatest offenders. At the very least the laborers knew that something was wrong and demanded a change, but the industrial entrepreneurs denied that any change was needed, and stubbornly resisted change with the ignorant willfulness of a Marie Antoinette. Furthermore they possessed the economic and political power to resist change. In that way they were the villains and were responsible for all the tragedy of your era. But let's not condemn them too heartily, as they were ignorant and stupid rather than innately vicious.
"But now let's prove the statements I have made. Let's put this factory into operation and see how a cycle of production and consumption works. I mentioned a shoe factory. That will give us too limited a case to understand the whole industrial system. You understand the mathematical principle of the general case, the one in which all possible factors appear. Consequently any individual problem can be solved if you can solve the general case. Of course you do, very well then, let this factory be the general case of any production unit in the country which employs labor and uses capital. Its raw materials will be the materials it processes even though those materials have previously been processed after leaving mother earth. Thus steel plate or tanned leather may be termed raw material for automobiles factories and luggage factories. The term factory includes buildings and chattels of every sort used in production but which are not themselves the goods produced by the factory. Land includes the sites of buildings, rights of way, and so forth. Do you follow me?"
Perry nodded. "Sure. It's like any algebraic general case, like the general quadratic equation for instance; ax squared plus bx plus c equals zero gives a general solution of x equals negative b plus or minus the quantity the square root of b squared minus four ac all divided by 2 a. Substituting the conditions of a particular case gives the answer for that particular case." *
[*ax2+ bx + c=0 x=-b±(√b2-4ac)/2a The full solution of this general problem of the second degree can be found in any textbook of primary algebra. The Author]
"Exactly. Let's set up the general case of a production-consumption cycle under the rules of your period and work out a few problems. Then perhaps we shall see the principles involved and be able to state a general solution which will answer all our questions about economics."
Perry scratched his head. "Look. That's all very well in simple algebra like quadratic equations, but in economics we deal with an indefinite number of unknowns and too many factors. How can we possibly do this?"
"We'll cross that bridge when we come to it. All special cases in the actual world are complex, it is true, even in quadratic equations. But the general case may turn out to have pleasing simplicity. Let's try to formulate it, and see. Have you pen and paper? Let's write down our elements. What are they?"
Perry thought. "A factory."
"Yes."
"The entrepreneur or industrialist."
"Go ahead."
"Raw materials, and labor, and land."
"Continue."
"Consumers."
"That is right, but who are they?"
"Everybody. All of the public."
Davis nodded. "True, but this is the general case. What does that imply?" Perry looked puzzled. "I'll tell you, then. The consumers are the people you mention plus their dependents, and no others. Even retired people enter the picture as capitalists or dependents, as well as consumers."
"Yes, I think I see that."
"Each individual has a dual role, appearing both on the production side and on the consumption side. Even a child appears as a producer through his father and appears as a consumer of goods purchased by his parents. We can disregard dependents from here on as they are represented economically by the head of the family."
"How does a widow living on insurance appear in the set up?"
"As a consumer of earlier production of the deceased head of a family. We'll take that case up later when we are ready to deal with it. Let's get on with our set up. What else do we need?"
"A bank or banks."
"Yes, and bankers, stockholders, bank clerks, and so forth. Will you let me lump them together as a bank and a banker, remembering of course the collective nature of the terms?"
"Okay, I guess."
"Very well, then. Do we need anything else?"
"Not that I can think of."
"Was the United States an anarchy ?"
"No, of course not."
"Then we have the government, and all of the subdivisions of government, public servants, taxes, and laws, and the government as a consumer."
"This grows complicated."
"Not too complicated. Let's represent government, and all subdivisions, as 'US', which you can think of as 'United States' or as 'us', for in the United States the government is everybody taken collectively. Public servants work for 'US'. Now do we have all elements?"
"How about farmers and professional men? They are certainly consumers."
"Yes, that's true. The case of the farmer is simple. Economically speaking, he produces in the same fashion as the factory owner, using the same elements; labor, raw material, land, enterprise, and so forth. If he employs no labor but himself and his family, 'profit' should appear as a large item in cost, and labor wages as zero. It becomes simply a special case under the general case. The professional man appears as a different type of laborer when he is hired by a production unit, for example corporation lawyers. Professional men serving the consuming public directly appear in the production-consumption chain in a one-to-one relationship of transfer without destruction of purchasing power. When you pay a medical man ten dollars for advice, your potential power to purchase and consume doughnuts or automobiles is reduced ten dollars and that of the doctor is increased by ten dollars. There is another element we have not named however. Can you guess it?"