09 The Markets

CHAPTER 9

The Markets

In the earlier stages of economic development there was only one kind of market: a place where goods (purchasing power) were exchanged for money or goods (articles of consumption). Such a market also plays a major role in the fundamental economic transaction in the modern world. It is in this goods market that the present-day consumer exchanges money for goods and the producer exchanges goods for money. But the remainder of the exchange cycle portrayed in Figure 1 is carried out in an entirely different market, one in which goods do not participate at all. Here the worker and the supplier of capital exchange labor and the services of capital for money and the producer exchanges money for labor and the services of capital.

Since the entire flow of circulating purchasing power passes through both markets, it is apparent that this second market is fully coordinate with the goods market in the operation of the system. Functionally, however, it occupies a position in the economic mechanism that is the inverse of the position of the goods market. The “real” wage rate, the price of labor in terms of goods, is the reciprocal of the “real” market price level, the price of goods in terms of labor.

It takes no more than these few brief comments to emphasize the importance of the new market that has emerged as a component part of the fourth stage economic system, but it is only comparatively recently that the true relation between the two markets has begun to be understood. Some of the early constructors of price indexes, for instance, recognized that the price of labor must be taken into account in some manner, and they tried to include it in their indexes, but the way in which they went about this indicates that they had no more than a hazy view of the true situation. Carl Snyder, one of the price index pioneers, adopted a 15 percent weighting for labor and 5 percent for rents, leaving 80 percent for items handled through the goods market.50 These figures give us an insight into his evaluation of the relative importance of the two markets, as well as indicating his opinion that the labor price enters into the determination of the general price level in the same manner as the goods price.

In reality, however, there are two price levels, not the single one that Snyder and his fellow index-makers were trying to measure, and the relation between the price level in the goods market and the price level in the production market is one of the vital factors in the operation of the economic machine. Even without the benefit of any detailed consideration it is apparent from the reciprocal relation between the two markets that it is the relative price level that is most significant, not the absolute level in either market. From the consumers’ viewpoint, a rise in prices in one market is equivalent to a fall in the other, and any change, which affects both equally, is no change at all.

In any case such as this where one quantity is, in effect, the reciprocal of the other, it is possible to express all variability in both quantities in terms of either one or the other; that is, we can compute one index and let it do the work of two. The present practice is to set up an index of goods prices—a cost of living index, a construction cost index, or something of the kind—and then to use this index not only as an indication of the goods price level, but also, by relating wages to a constant goods price level, as an indication of the level of real wages, the wage level in terms of goods. The opposite procedure is equally possible; that is, we can compute what we may call real prices, the market prices in terms of labor. But such figures have less practical utility, and are seldom used except in comparisons between different national economies, where a statement as to the number of hours it is necessary to work in each country to earn the price of a particular commodity is more impressive than any comparison expressed in purely monetary terms.

The present-day computations of the price levels are mathematically sound (aside from what seems to be an unavoidable degree of inaccuracy), and are undeniably useful for many purposes. However, the concentration of attention on the goods market has had the effect of obscuring the very significant role that the production market plays in the economy. This is all the more unfortunate because the markets are affected by different influences and do not respond to changing conditions in the same way. The most striking differences are due to the fact that the production market and the production process are located at the head end of the main economic stream, and it is here, and only here, that the streams of economic activity are subject to deliberate control. The volume of production can here be adjusted to whatever level seems appropriate, and once this decision (in practice, the sum of many individual decisions) is made, the volume of goods flowing to the markets is fixed, except for the minor effect of goods storage. As brought out in the discussion of the cooling system analogy in Chapter 8, the production price, in monetary terms, is also subject to arbitrary control, and once this price is established it determines the normal flow of money purchasing power in the entire auxiliary circuit.

The economic location of the markets also has an important bearing on the way in which each market responds to any variation in the flow of money purchasing power. The production market transaction takes place before the act of production, whereas the goods market transaction takes place after production. This means that the response to a change in the flow of money entering the production market can be either a price change or a volume change, as long as the necessary labor is available, since the volume of production has not yet been determined, whereas a similar change in the amount of money entering the goods market can only affect the price, except to the minor extent that storage of goods is feasible.

In this connection it should be noted that the role of goods storage in the operation of the system is almost negligible in comparison with the total volume of production. Services cannot be stored at all, some goods are perishable, others are too bulky, others can only be produced as ordered, and so on. Furthermore, storage is costly. The net variation in business inventories from year to year, aside from the effect of changes in the price level, is seldom more than about one percent of the total national product. In the subsequent discussion the effect of goods storage will be noted at the appropriate points, but for most practical purposes this factor is not significant, and can be disregarded.

Before proceeding farther it may be helpful to elaborate to some extent on the differentiation between the goods market and the production market. We are accustomed to classifying goods into various categories, such as those previously mentioned, durable or transient, consumer goods or producer goods, and so on, and we speak of the goods market, the investment market, etc. For some purposes we even go still farther and distinguish between the potato market and the prune market. But such distinctions are not fundamental. From the broad general viewpoint these markets are all part of the same thing. The money available for the purchase of potatoes can just as well be used to buy prunes, or durable consumer goods, or the capital goods that we classify as investments. But money already in the hands of consumers cannot be used in the production market to buy labor of the services of capital. Before this can happen, the money must get into the hands of producers. Likewise, money in the treasury of the General Motors Corporation is not available for buying Chevrolet cars, or any other consumer goods, until after General Motors has paid it out, directly or indirectly, through the production market in exchange for labor or the services of capital. The distinction between the goods market and the production market is fundamental, and purchasing power available for use in one market stands in an entirely different relation to the economic mechanism than that which is available for use in the other market.

As noted earlier, one of the far-reaching consequences of the addition of the production market to the exchange mechanism has been the transformation of economic activity from an intermittent process to a continuous process. In the earlier stages of economic development the market transactions were mostly intermittent. The small farmer, whose operations are typical of the third stage cycle, carries on his activities over a long period of time. He prepares the soil, plants his crops, cares for them during the growing season, and finally harvests them. After this long period in which no marketing has taken place, he sells his products and then starts production again. Since the marketing transaction is the source of the farmer’s income in his capacity as a worker, there are long intervals during which he is receiving no payment for his labor, and that payment, when received, is usually directly related to the amount of production that has been accomplished.

On the other hand, in the modern fourth stage cycle, where labor is marketed directly in a separate market, there is a steady flow of purchasing power to the worker. Even the person whose salary is nominally on an annual basis receives a pay check once or twice a month. This means that there is a never-ending drain on the producer’s funds, and as a practical matter of self-defense the producers have so organized their operations that they have a continuous flow of income with which to meet this continuous outlay. But they are now faced with a never-ending task—that of maintaining this flow of income at a high enough level to sustain the current rate of expenditures. This is their primary concern in the operation of their respective enterprises.

The producer of the modern type is not particularly interested in the relation between the actual cost of production of a specific item and its selling price. Usually he will not even know that cost if any substantial time has been involved in the production process. His concern is with the current cost, a composite figure, which he reaches by summing up the present cost of each of the separate operations involved in production of the item. If a product can be sold at a price of $1.00 per unit, and the current cost is under this figure, the producer will not shut down his plant simply because the stock on hand actually cost $1.50 each. Likewise, his calculations for the future are not based on a comparison of present production costs against present selling prices, but on his forecasts of future costs against future selling prices.

The usual economic analysis proceeds on the assumption that the producer starts from zero, that he makes a certain advance outlay for labor, capital, and materials, and that he endeavors to sell his finished products for a price which will reimburse him for his actual expenditures and in addition will give him a satisfactory rate of return on the capital that has been invested. This is a reasonably accurate picture of the situation in the third stage economy, where the producer sells the products of his own labor, but the modern fourth stage organization, which sets the pattern for our present-day economic life, is a going concern, a continuous operation that has no zero point. It is true that when an enterprise is first launched a certain amount of expenditure must be made to build an inventory of raw materials and goods in process, and also a working stock of finished goods, before income from sales begins to flow in, but the producer does not expect repayment of this expense from sales as long as the business stays alive. He sets this amount up on his books as working capital, and from his standpoint it is the equivalent of a like amount of the fixed capital that is invested in plant and equipment.

What the modern producer expects the income of his enterprise to do is not to reimburse it for past expenses, but to meet current expenses, including satisfactory earnings on the invested capital. If the operating income for the current month or the current year is sufficient to take care of operating expenses and fixed capital charges, including depreciation, and to leave a reasonable amount for the owners of the equity capital, the operations have been satisfactory, and the business can continue on the existing basis. If current income is more than adequate for these purposes, consideration can be given to reducing prices or increasing wages. If it is less than adequate, attention must be given to means of increasing income or reducing expenses.

These facts are commonplace. Everyone who has had anything to do with organized business affairs is thoroughly familiar with them. To be sure, there is still a substantial volume of production being carried on by individual farmers, shopkeepers, professional people, and others who operate under third stage conditions, but it is the business enterprise that employs labor that dominates present-day production, and it is this fourth stage mechanism that we must analyze in order to get an accurate picture of the modern economy. Even though the basic principles remain unchanged, we must nevertheless study the details of the processes that are in actual use today; we cannot solve today’s problems by studying the processes that were in vogue in the days of the feudal barons.

In the modern economic world, the leading role is played by the corporation, a device, which has enabled a definite physical separation between producers and consumers. All corporations are producers pure and simple; their only function is to produce and they take no part in consumption. It is true that they use certain goods in the course of their activities, but this is part of the productive process. It is an element in the production of other goods, and does not constitute consumption as the latter term has been defined for the purposes of this analysis. The essential difference from an analytical standpoint is that utilities are not destroyed when goods are used in production, as they are when the goods are consumed. They are transformed into utilities of a different kind. The volume of production that can be attributed to any producer is the net amount after subtracting the value of the goods used or wasted in the production process: the “value added” by production, as the statisticians call it.

Individual producer-consumers, in their capacity as producers, are subject to the same considerations. Producers, corporate or otherwise, are merely intermediaries by means of which the labor and capital furnished by the workers and suppliers of the services of capital are converted into goods for the benefit of those individuals. in their capacity as consumers. All goods produced by the economic machine must go to consumers, either directly of in an indirect manner by contributing to the production of other goods. All of the instrumentalities of production come to the producer from individuals in their capacities as suppliers of labor and capital; all of the proceeds go back to them. The net result to the producer is zero.

This kind of an equilibrium relation, the knowledge that certain quantities always add up to zero, is one of the most powerful tools of mathematical analysis, and in view of the importance of the point just brought out it is desirable to express it as another of the fundamental principles of economic science.

PRINCIPLE V

The income to the producer from goods produced is exactly equal to the expenditures for labor and the services of capital. The net result to the producer is zero.

In order to get a clear picture of the basic relations and the application of Principle V it is necessary to differentiate clearly between the producer (corporate or otherwise) and the supplier of capital. These are two separate and distinct economic entities, even though they may often be combined in a single individual. There are many persons who furnish capital for a productive enterprise and also direct the productive activities, but in so doing they are performing two separate economic functions, just as the farmer is both a producer and a consumer. All that has been said with respect to corporations also applies to these individuals in their capacity as producers. As suppliers of capital, however, they stand in the same relation to the economic system in general as the suppliers of labor.

Here is another significant truth that has been covered up by the confusion and complexities of modern economic life. All income received by producers of any category, over and above the cost of goods purchased from other producers, is paid out to, or credited to the account of, the suppliers of labor and the services of capital. All payments are made in the same kind of money, all go to persons whose intention is to use them sooner or later for buying goods in the markets (this is equally true whether earnings on capital are paid out in dividends or “plowed back” into the business), and there is no way by which we can differentiate between wage dollars and interest or profit dollars once they are in the hands, or the accounts, of the recipients.

There is one school of thought which insists that it is wrong to permit any payment to individuals for the services of capital (except perhaps interest, which for some strange reason does not seem to be quite as reprehensible as rent or profits), but questions of right and wrong, in the moral sense, are beyond the scope of economic science, and of this work. As long as payments of this nature are being made, we cannot get a true picture of economic conditions if we ignore them, or allow sentiment or prejudice to cloud our vision so that we fail to see them in their proper setting. The objective of the present inquiry is to determine the facts, the true relation of these payments to the primary economic processes. From this standpoint the answer is clear. A dollar paid for the services of capital has exactly the same economic status as a dollar paid for labor. So far as the general operation of the economic system is concerned, labor and the services of capital are equivalent items.

One point worthy of special attention is that the owner of capital retains ownership and does not surrender it to the producer. He merely sells the services of this capital just as he sells labor, his personal services. Ultimate ownership of capital always rests with individuals. From the standpoint of the corporation, the entire net worth of the business, including undivided profits, is a liability, an amount, which the corporation owes to its stockholders, and the books of the corporation so indicate. Hence investment is purely a consumer function. The cost of capital improvements always comes out of funds belonging to individuals. It is immaterial, from this standpoint, whether the money is actually paid out to the stockholders and reinvested by them, or whether the producer uses it directly for the increase of capital (plows it back into the business, as commonly expressed) or builds up reserves of marketable assets to help bridge over difficult times. In the investment of surplus corporate funds the officers of the corporation are performing the functions of a trustee, acting on behalf of the actual owners of the funds.

Many economists are inclined to regard corporate reserves as quite distinct from consumers’ assets, apparently because the individual stockholder, in most cases, has little voice in the determination of policies with respect to the accumulation and utilization of such reserves. This present analysis, however, is concerned with the facts, not with mental reactions, and from a purely factual standpoint there is no difference between capital deliberately invested in a business and capital involuntarily invested when a corporation builds reserves of one kind or another. The effect of an action is determined by the nature of the action that is taken, not by the nature of the influences that caused it to be taken.

It is true that corporate reserves are more readily available for meeting operating requirements, as distinguished from needs for additional capital, than funds which have already been paid out to the stockholders as dividends, and to that extent these reserves have the status of producer money reservoirs. However, the stockholders own the funds in these reservoirs just as they do all other assets of the corporation, so these funds have the same economic status as any other capital assets.

After the current expenses of an enterprise, the amounts owed to other producers for materials and services, the cost of labor, the cost of capital employed on a time basis, taxes, and various miscellaneous items have been paid, and reserves have been set aside to cover depreciation and other deferred liabilities, any amount remaining out of current income is added to the earned surplus of the corporation, one of those corporate assets which, as has been pointed out, are owned by the individual stockholders of the corporation. This addition to the earned surplus, the net profit for the current period, is the compensation for the services of capital supplied by the stockholders, irrespective of whether or not it is currently paid out in the form of dividends.

Here is one of the many places where the injection of sociological viewpoints and prejudices into economic thought has had a serious effect in confusing the issues. The economic theorists exhibit a curious reluctance to classify profits in accordance with their true economic function as a “wage” of capital, a payment for useful services rendered by capital goods, and a strange assortment of doctrines has been advanced, ranging all the way from the absurd contention that profits (at least the so-called “pure” profit, any excess above the normal interest rate) are an unearned and unjustified charge against the general economy to weird theories which are based on the assumption that profits are abstracted from the circulating money stream and are not available for consumer buying.

The truth is that profits are the price of junior capital (risk capital) in exactly the same way in which interest is the price of senior capital (debt capital). Those who accept interest and condemn profits and the “profit motive” are allowing their sociological prejudices to lead them into a flagrant inconsistency. Neither capital nor any other form of wealth is essential to life, but wealth does enable us to live a more pleasant and comfortable life, and all forms of wealth therefore have economic value. Thus the cost of using capital cannot be escaped any more than the cost of labor can be avoided. This is just as true under socialism, or any other collective economic system, as it is in the United States today. Turning to a collective economy eliminates the name “profits” but nothing more. Those who favor collectivism because they are opposed to profits are closing their eyes to the economic facts, as the cost of the services of capital still has to be met under some other name. We cannot evade that inconvenient ban on “something for nothing” that stands in the way of so many ingenious schemes.

Under many circumstances there is no actual payment for the capital or other wealth that is utilized, and in such cases the existence of the cost factor is often overlooked. The man who has paid $100,000 for his house may be inclined to feel that he can now enjoy its use without cost, since no further payments have to be made, but this individual is simply deceiving himself. If his $100,000 were not tied up in the house he could invest it in something that would give him an income of at least $6.000 per year, and forfeiting this income is just as real a cost as the amount that he would have to pay in rent if he did not own his home. A state-owned industry that has built a million dollar plant is in exactly the same position. The million dollars invested in the plant would have earned $60,000 or so annually if the money had been put to use elsewhere. The cost of having this much capital fixed in the new plant is therefore about $60,000 per year, regardless of the fact that the collectivist system of bookkeeping requires no actual payment or recording of the amount. As long as the productive capacity of the human race is finite, the services of wealth have an economic value, and there will be an equivalent cost attached to the use of wealth as capital.

The use of money as a measure of value does not affect the situation one way or another. Those economists such as Schumpeter, who contends that “in a communistic or non-exchange society in general there would be no interest as an independent value phenomenon” (“The agent for which interest is paid simply would not exist in a communistic economy,”51 he says) are being confused by the money aspect of interest payments to the point where they are mistaking the bookkeeping for the essence of the phenomenon itself. Schumpeter’s assertion that “interest attaches to money and not to goods”52 is totally wrong. Interest, rent, and profits are payments for the services of wealth, and whether they are paid in money, or in goods, or in the loss of services that would have been enjoyed if the wealth were otherwise utilized, is merely a detail. As Frank Knight pointed out, “A moment’s reflection on the Crusoe situation should make it clear that a purely monetary theory of interest is simply nonsense.”53 Neither the communists nor the Crusoes can have the services of wealth free of charge.

Here, again, those who have centered their attention on the social forms rather than on the economic functions have been misled by what they see. If we look at activities involving the use of capital from a purely economic standpoint, and avoid differentiating between actions that are economically equivalent, we get a totally different picture. Let us consider a typical example of a capital investment. An engineering firm designs an improved type of oil refinery, and offers a “package” deal whereby it handles the entire construction and delivers the complete unit at a fixed price. Each prospective purchaser then faces only the problem of how to raise the necessary capital, and each proceeds in its own way to do so. Company A issues bonds for the purpose and thus borrows the money from the individual purchasers of the bonds. Company B elects to use a method of financing that is currently popular. It arranges with an insurance company to build and own the plant, and it then leases the plant on a long-term basis. Company C finds that it has sufficient reserves to enable paying for the plant out of its own treasury. Across the international border in socialistic state D the government taxes its citizens to raise the necessary capital.

Now let us look at these transactions from a purely economic standpoint. First, we find that is all cases the capital comes from individual suppliers. In case A it comes from the individuals who are now bondholders. In case B it comes from funds belonging to the individual policyholders of the insurance company (assuming that it is a mutual company). In case C it comes from the individual stockholders of the company, who own all of the assets of the company, including the cash reserves. In case D it comes from the individual taxpayers. In all cases the cost to the individual suppliers of capital is the same; they must forego whatever gains or satisfactions they would otherwise have obtained from the use of the money elsewhere.

Next we note that in all cases the individual suppliers retain ownership of the capital. The bondholders in case A merely lend their money. The insurance company policyholders in case B own the plant after it is built, and so do the stockholders in case C. In the state of D, the ownership is theoretically vested in the citizens of the state, but since we can, in general, equate citizens with taxpayers, particularly in a collectivist economy, where a large part of the taxation is concealed and broadly based, the taxpayers own the plant for which they have supplied the capital.

Finally, we can see that in all cases the individual suppliers of capital expect to be compensated by the production agency for the use of their capital. In case A the bondholders receive interest. In case B the policyholders (owners) of the insurance company receive rent. In case C the stockholders of the company receive profits. In case D the citizen taxpayers also receive the residue after other production expenses have been met—what we call profits in the individual enterprise economy—but they do not recognize them under that name, because the payment is indirect and not clearly identified as to it origin. The profits in this case are either returned to the general funds of the state, in which case the individual citizens benefit by being assessed less taxes than would otherwise be necessary, or they are used for other capital requirements, or they are distributed to the citizens in the form of lower prices.

It is then evident that we can describe the general economic process involved in all four cases in exactly the same words:

The production agency obtains labor and the services of capital from individual suppliers, utilizes them to produce goods, and with the proceeds thereof compensates the suppliers of labor and the services of capital for the services utilized.

From the economic standpoint, the general process is the same in all of these cases; whatever differences may exist are in the details. The important conclusion to be drawn from this identity, so far as the point now at issue is concerned, is that the payments made by the production agency—the producer—to the individual suppliers of capital have identically the same function in all cases. They are nothing other than compensation for the services of capital, regardless of whether we call them interest, rent, or profits, or bury them under some vague classification of socialistic benefits. The economic purpose of the payment is the same in all cases; the only difference is in the basis on which the payment is made. Interest is related to the amount of capital that is supplied, rent is related to the specific capital goods that are furnished, and profits are related to the output of the production process.

Essentially the same situation exists with respect to the labor payments. All such payments are made for the same economic purpose—as compensation for services—but there are differences in the basis on which payment is made. Some payments are made on a time basis—daily or hourly wages, monthly or annual salaries, etc.—while others are made on an output basis; that is, at a certain rate per output unit. In industrial production this is called a “piecework” rate. Elsewhere such terms as “royalty,” “fee.” or “commission” are used. Work such as that performed by authors or inventors is mainly handled on the value output basis, since the commercial value of the product has little or no relation to the amount of time spent in producing it. There are even cases where the price to be paid is established on a contingent basis, so that no payment at all is made unless certain specified results are achieved.

Just why the economists have been unable to see that profits are the piecework or royalty rate of payment for the services of capital is a mystery of the first order. They all recognize that labor is paid either on a time basis or on an output basis, and they recognize that interest and rent are payments for the services of capital on a time basis. The existence of payments for the services of capital on an output basis would seem to follow almost automatically, and it should not take any great perspicacity to see that profits are payments of this kind.

Furthermore, it is generally conceded that the average percentage return on invested capital is approximately the same whether it is received in the form of interest, rent, or profits. Schumpeter, for instance, refers to “the phenomenon observed by theory from time immemorial, that all returns in the economic system, seen from a certain aspect, tend to equality.”54 It seems almost incredible that such an obvious clue to the true nature of profits should have been ignored, but the economists’ own admissions show that they have looked the situation straight in the eye and have still been unable to see profits in their true perspective. Fraser, for one, simply does not see the analogy between piecework rates and profits. “In practice,” he says, “the distinctions between time rates and piece rates are only important in the case of incomes from labour. Property incomes are regularly calculated in relation to time, not to services rendered.”55

Once again, the sociological fixation to which the economist is subject prevents him from seeing the economic facts. He cannot see profits in their economic setting because, under the conditions now prevailing, a substantial part of the total paid out as profits accrues to the benefit of a social class with which he is not in sympathy. As a result of this social viewpoint, or more accurately, these social viewpoints, since the sociological picture of the constant economic reality necessarily changes every time social practices and institutions are modified, the socio-economist is unable to recognize the economic fact that profits are simply one of the alternative methods of paying for the services of capital, a method in which, with all due respect to Fraser’s statement to the contrary, the amount of payment is “calculated in relation to services rendered.”

Where there is no emotional factor involved, the present-day economist is able to get a clear picture of the payment situation, and he is able to recognize that piecework rates for labor are payments for services rendered, and that they differ from daily or monthly rates only in the basis of calculation. No one even so much as suggests that the difference between the piecework rate and the time rate has any theoretical significance, and no one contests the assertion that any excess of the piece rate above the hourly rate is just as much a payment for labor as the hourly rate itself. When he turns to a consideration of the analogous payments for the services of capital, however, the same economist sees the situation through the haze generated by his sociological prejudices. Since he has a strong emotional antipathy to large profits, he does his best to set up a theoretical classification in which any excess of profit above the current interest rate, “pure profit,” as he calls it, becomes some kind of an unjustified charge against the economy, rather than a legitimate payment for services performed.

“The economic system in its most perfect condition should operate without profit.” says Schumpeter, “profit is a symbol of imperfection.”56 This statement refers, of course, to the economists’ “pure profit,” and what Schumpeter is saying, in effect, is that under the optimum conditions there can be no reward for assuming the risks involved in operating a business enterprise. But the very essence of the prevailing economic system, the factor that is mainly responsible for its unparalleled record of achievement, is that it rewards the efficient and penalizes the inefficient. Inequality of earnings is not a “symbol of imperfection,” it provides the incentive that assures productive efficiency. The whole concept of “pure profit” should be dropped from economics. In application to genuine economic issues it leads to nothing but such unrealistic conclusions as the one of Schumpeter’s just cited. The only real purpose that it serves is to create an opening for the introduction of sociological viewpoints into economic reasoning.

It is recognized by many of the economic theorists that the unrealistic theories of profits, which the profession has developed, are not satisfactory, even though they continue to cling to them. Fraser tells us that “the theory of profit is by common consent the most recalcitrant element in the whole structure of value and distribution analysis.”57 His use of the word “recalcitrant” in this connection is highly significant. Of course, he really means that the established facts are recalcitrant; they stubbornly refuse to fit the theory. A continuing conflict of this kind exists wherever theory constructors try to force the facts to conform with some preconceived ideas of their own, and the “recalcitrance” of the economists’ theory of profits is simply a result of their insistence in having a theory which portrays profits in an unfavorable light. This antagonism is not based on economic grounds; it is sociological. And, as Lloyd Reynolds comments, the form in which the attack on profits often takes “arouses a suspicion that the critic has not thought through his position.”58