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putting out preferred stock equivalent to the actual capital invested in the business and an equal or even larger amount of common stock as a bonus. In these and other ways the nominal capital of an enterprise may be made from the first, two, three or even five or ten times the amount actually invested in it. Such an arrangement permits directors to distribute very large profits as dividends on the nominal capital without exceeding the ordinary rate of interest.

It often happens, even when large monopoly earnings are anticipated, that the nominal capitalization is not made large enough to conceal them. In such cases, and in the more usual cases in which actual and nominal capitalization start together, the practice of "watering" stock to conceal excessive earnings is frequently resorted to. This consists simply in issuing new stock for which no equivalent investment is required. It may be accomplished by means of a stock dividend, each shareholder being given an amount of new stock proportional to his original holding; or by the issue of new stock for subscription at a nominal price, subscriptions being open only to shareholders, directors or other favored investors. By these means the nominal capitalization may be expanded to keep pace with earnings and to permit the distribution of the latter without any apparent increase in the dividend rate.

The above ways of concealing monopoly profits have been resorted to so generally by monopolistic corporations in the United States that the casual reader of the reports of some of the most successful of these enterprises would never suspect that their earnings were larger than those of competitive businesses. To show that they are so in fact requires a full knowledge of the operations of such corporations from the time they were first organized. In most cases such knowledge is confined to those most interested to keep it secret and in consequence it is rarely possible for an impartial investigator to determine what part of the earnings of a monopolistic enterprise represents a fair in

terest on the capital actually invested in it and what part monopoly profit.

79. Current Misapprehensions in Regard to Monopolies.—There is a widespread impression in the United States that monopolies are always and unalterably opposed to the public interest. This is based partly on experience of the bad phases of monopoly and partly on the teachings of jurists and economists. American courts uniformly declare monopoly, except that created by the government itself in the exercise of its constitutional powers, illegal. Economists are equally prone to characterize monopoly as abnormal and to extol an industrial system of free, all-sided competition as that best calculated to promote the general interest. There is, of course, good reason for this distrust of monopoly, but if the analysis we have given of the different kinds of monopolies and of the restraints under which they exercise their powers is accurate, it ought not to be extended to all without qualification. For some industries monopoly is not only as normal and inevitable as is competition for other industries, but it is the form of organization that best serves the public interest. Natural monopolies of organization, for example, are monopolies because as such they can produce more economically than could competing firms. For them the monopoly form of organization is the desirable form, which should be encouraged rather than discouraged by those who have the public interest at heart.

Another misapprehension that is current is that monopoly always means large monopoly profits. That this is not the case is evident when it is remembered how many patented articles, in connection with which the government itself undertakes to protect the producer in his monopoly, are regularly produced at a loss. Many other conditions in addition to control over the supply of the good produced are necessary to make production profitable. When all the conditions are favorable, large monopoly profits, of

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But the power

course, may be and often are secured. that consumers possess of substituting other goods for those monopolized and the danger that competition will be excited are ever present forces which confine monopoly profits in most businesses within narrow limits.

80. The Influence of Monopoly Profits on Other Shares in Distribution. In this treatise monopoly profits are discussed independently of the other shares in distribution, not because they are considered abnormal or even unusual, but because it is easier to trace their influence when they are studied in isolation. In actual industrial society competitive and monopolistic enterprises are carried on side by side and act and react upon one another. The influence of monopoly profits on the other shares in distribution should be briefly indicated before we turn to a discussion of the competitive shares of income-rent, wages and interest— treated in the following chapters. To secure monopoly profits monopolists must fix the prices of their goods above their expenses of production. In the example given in an earlier section the largest monopoly profit was secured when a price between nine and ten cents was fixed for the patented soap. The expenses of production for the 2,500,000 cakes that could be sold at ten cents averaged only five cents, so that the effect of the monopoly was to make the price nearly double what it would have been had competition had free play. To maintain the price at ten cents the monopolist must, of course, limit production to the 2,500,000 cakes which the public will take at that figure. If competition forced him to lower the price to six cents he could produce and sell, according to the conditions of the illustration, 6,000,000 cakes. At the price corresponding exactly to the expenses of production, four and one-quarter cents, he could sell more than double this product. The effect of monopoly is, accordingly, to reduce the amount of the monopolized good that is produced and sold below what it would be under conditions of free, all

sided competition. Only through such reduction or curtailment of the supply can the coveted monopoly profit be secured. But reducing the output of the monopolized good involves the employment by the monopolistic enterprise of less land, labor and capital than would be needed in the same branch of production if competition had free play. The effect of monopoly is thus to increase the supplies of the factors of production which must find employment in competitive industries. What influence this mal-distribution of the factors of production is likely to have on the shares of income, rent, wages and interest, can only be explained after we have considered how these shares are determined. Such influence is of course supplementary to the tax on all consumers who buy monopolized products, resulting from the enhancement of their prices.

The phases of the monopoly problem that have assumed greatest importance in the United States concern legal and natural monopolies, trusts and labor monopolies, and these are treated at some length in later chapters (XVIII., XX., XXI. and XXII.). The reader will find in them many concrete details and illustrations which, out of consideration for space, have been omitted from the preceding sections.

REFERENCES FOR COLLATERAL READING

* Marshall, Principles of Economics, Book V., Chap. XIII.; * Ely, Monopolies and Trusts, Chaps. I.-IV.; * Bullock, Introduction to the Study of Economics, Chap. XI.; * Fetter, Principles of Economics, Chap. XXXIII.

CHAPTER X

DISTRIBUTION: RENT

81. Definition of Rent.-In contrast with competitive and monopoly profits, the shares in distribution now to be discussed-rent, wages and interest-are regular and persistent. Their payment is not due to the absence of competition or its failure to work out its full effects, but is the direct consequence of the activity of competitive forces. In fact the keener and more general competition is, the more certain and definite these shares become. For this reason, in explaining them, we may disregard the factors making for change and monopoly, which play the major rôle in determining profits, and confine attention to the division of the money income when prices are normal and just equal the expenses of production to representative firms. The same influences which determine rent, wages and interest under these conditions, determine them also in actual industrial society where market diverge from normal prices and entrepreneurs realize profits or losses in consequence.

Rent may be defined as the share of income that goes to owners of land, sources of water power and other gifts of nature which assist production, as compensation for the use of these factors. Needless to say, it is only paid for the use of factors which are limited in supply in comparison with the demand for them and therefore in the category of economic goods. When land is leased, rent is actually paid to the owner. When it is used by the owner, it is an element in the gross returns from his business, economically distinct from the other elements.