Forecasting Business Conditions

By Charles O. Hardy; Garfield V. Cox | Go to book overview

CHAPTER XVII
THE PROFITS OF BUSINESS

A theory of the causation of business cycles which has wide acceptance among economists finds the most important cause of the termination of a period of prosperity in a shrinkage of the profit margin for an increasing proportion of businesses. Prices rise, but costs rise faster, and the consequent disappearance of working margins of profits undermines credit and finally starts the process of liquidation.1 Conversely, a period of depression involves a lowering of wages and rents, a writing off of capital charges, a lowering of raw material prices, and an increase in efficiency of both management and labor, and so brings about a lowering of costs. Consumers' demand not shrinking as much as does the volume of production, it becomes possible to secure more adequate profit margins, and the stage is set for a revival of prosperity.

Corporation Reports. If this analysis is correct, the thought suggests itself that it might be possible by a study of the reports of corporations to detect the changes in total profits and from them to estimate the width of the profit margin and so secure

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1
For a fuller statement, compare Mitchell, W. C., Business Cycles, 1913, pp. 494-511, 570-576; also essay by same author in Edie, L. D., The Stabilization of Business. pp. 27-35. Numerous other works on the business cycle follow the line of analysis laid down by Professor Mitchell.

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