by the costs of construction of new houses, and should
correspond closely to them in the long run. The same relation between
rent, price and rate of interest will hold good; but the rents will be
affected by changes in the rate of interest, owing to the reactions of
such changes on the supply of houses.]

CHAPTER VII

RISK-BEARING AND ENTERPRISE

Sec.1. _Profits and Earnings of Management_. The profits of a business,
as they are ordinarily reckoned, whether for the purposes of income
tax or of a balance sheet, comprise several elements which are
fundamentally distinct. The relative importance of these various
elements varies greatly from one type of business to another. The
profits of a private business include, for instance, the remuneration
of the work of management, which in the case of a Joint Stock Company
is mostly paid for by salaries or directors' fees. It is to their
profit that farmers, small shopkeepers, and the partners of a private
firm look not merely for a return upon their capital, but for the
reward of their own labors. "Earnings of Management," as they are
usually termed (though in truth they often cover other and humbler
forms of labor) are thus frequently one of the ingredients of profits.

Sec.2. _The Payment for Risk-bearing_. There is another element of great
importance about which our ordinary ideas are apt to be so vague that
it will be well to devote a chapter to its examination. This is the
element of payment for risk, or rather the reward of risk-bearing.
Risk is inherent in all business, as it is inherent in all life. The
vagaries of nature and the vagaries of man are alike responsible. The
farmer may find his harvest ruined by a drought or by a deluge; the
coal or the gold, for the extraction of which you have perhaps set up
an extensive mining plant, may come to an end which is unexpectedly
abrupt. You may put your money into roller-skating rinks and find that
cinemas have become the rage with the fickle public; sometimes "the
market" may decline for causes which remain obscure but with
consequences which are disagreeably plain. But while risk is always
present in some degree, the degree varies enormously from one industry
to another. Now, it is obvious enough that in an exceptionally risky
industry, where there is a considerable possibility that the capital
invested will yield no return at all, the profits of those concerns
which succeed are likely to exceed the rate of inter