80. Commencement of Participation Rights and Forfeiture Clauses

Simply being employed by a company does not automatically confer the right to participate in profit-sharing schemes. It is generally accepted that temporary or transient workers—those who pass through a company like a fleeting meteor—should not be entitled to a share of the profits. Instead, a minimum level of commitment, loyalty, and demonstrated engagement with the enterprise is typically required. This may be determined by factors such as length of service (one year or more), position within the organisational hierarchy, or diligence and dedication vis-à-vis the firm.

Once participation rights are established, profit shares are accumulated to the worker’s credit, with payments made only when specific conditions are met. But what happens if these conditions—such as completing five, ten, or twenty years of service—are not fulfilled? In most cases, the accumulated funds do not revert to the company (as this could create suspicions of bad faith or opportunism). Instead, they are typically redistributed among the remaining participants, particularly when funds are managed by an autonomous trust.

However, forfeiture clauses tied to incomplete service periods are often opposed by labour unions, which view them as a means of binding employees to a company and restricting their freedom to move to new places and jobs in pursuit of better wages. Against a small amount of a deferred share earning the worker would undermine the fundamental right of association with his comrades to earn a normal wage. This concern has led some to advocate for simpler payment structures, such as immediate cash disbursements at the close of each financial period (see paragraph 76).

Forfeiture clauses are more commonly applied in cases where profit-sharing is linked to managerial or entrepreneurial functions, rather than to rank-and-file workers. A notable example is found in the insurance sector, where so-called producers—who generate business by securing insurance contracts—often receive a combination of a modest base salary and a share of the collected premiums. These earnings are frequently placed in a dedicated fund, with access contingent upon continued service with the company. Such employees must often choose between remaining with the firm and benefiting from their accumulated profit shares, or resigning to join a competitor and forfeiting their accrued entitlements. The impact of such clauses is especially psychological. The prospect of forfeiting accumulated earnings acts as a deterrent, discouraging experienced producers from transferring their expertise—and their hard-won clientele—to a rival firm.

81. The Fundamental Prerequisite for the Success of Participatory Management

If profit-sharing extends beyond the mere annual disbursement of a monetary sum to employees and aspires to establish a variably-lasting nexus between the enterprise and its workforce, empirical evidence underscores the necessity not merely for selectivity but for a structured hierarchy within the labour force. The founder of the Leclaire enterprise—the earliest known instance in the industrial domain—differentiated workers into distinct categories: members of the noyau (or core of complete mastery), as well as the sociétaires or associates, auxiliaries, and apprentices.

The noyau comprises an elite segment, typically constituting between ten to fifteen per cent of the total workforce, entrusted with the highly sensitive responsibilities of appointing the enterprise managerial officials, including section heads and the president of the Société de prévoyance et de secours mutuels (the company’s mutual assistance and security association) —an institution which has, over time, evolved into a fully-fledged productive and labour cooperative (specialising in home decoration). Originally set up by the founder, the noyau is perpetuated through a system of co-optation or selective induction. This system, fundamentally aristocratic in nature, mirrors the electoral mechanisms employed in the governance of enduring republican polities—such as those of Venice, Genoa, and the Hanseatic cities—for the appointment of state officials. It is also preserved by historical tradition within the guilds and corporations that constitute the City of London and remains the prevailing method in university faculties and learned academies. In these institutions, no superior mechanism has been devised to ensure a sensible selection of individuals who form, or ought to form, an elite body of equals. Existing members, vested with the prerogative of co-opting new candidates upon the occurrence of vacancies, thereby attest to the merit and suitability of the inductee as their peer. This system represents the sole form of democracy that remains compatible with the endurance of an aristocratic body. Any exogenous electoral intervention—whether by government, parliament, or a wider electorate—would invariably compromise the integrity of the institution, engendering factionalism and disintegration. By contrast, the defining element of institutional continuity resides in the mutual moral esteem among members, who, through the act of co-optation, affirm their confidence in the competence and moral worth of the newly admitted colleague as their equal.

In the industrial sphere, empirical evidence suggests that the election of leadership through the direct vote of all employees within an enterprise is fundamentally incompatible with the long-term viability of the organisation. There is no compelling reason to assume that an electorate comprising 100, 1,000, or even 10,000 employees will necessarily select the most competent individuals to administer and direct the firm. More often than not, those who offer immediate general material benefits—such as wage increases or augmented profit distributions—tend to secure election. However, once in office, such leaders find themselves unable to enforce discipline upon the very electorate since their reappointment depends upon these ones. The inevitable consequence is the enterprise’s decline and ultimate dissolution. Conversely, the traditional method where the "owner " or a "board of directors appointed by the shareholders" meeting is no longer existing in this type of enterprise, there is no alternative mechanism by which managerial leadership may be selected from above. There are no additional options: either the private enterprise, in which capital providers (partners or shareholders) retain the prerogative of appointing executives (such as the chief executive officer, board of directors, and senior management), who in turn, through a hierarchical process, select directors, deputy directors, departmental heads, clerical staff, and workers—a system which, after all, is remarkably efficient; or the participatory, cooperative, or associative enterprise, wherein a select pool of participants, typically designated by the enterprise’s founder, perpetuates itself through co-optation, that is, by elevating to its ranks those who have exhibited demonstrable loyalty and commitment to the firm. An economic enterprise, if it is to endure—if, in effect, “it is not to go bankrupt” —cannot be governed by universal suffrage. Rather, it necessitates either monarchical governance or an aristocratic system administered by body of peers.

Within the hierarchical structure of the Familistère de Guise, another paradigmatic instance of profit-sharing evolving into participant-led management at the behest of its founder, the organisational framework is notably more intricate:

• The associés, who are required to reside within the familistère—a model workers’ community established by the founder around the factory, comprising private dwellings alongside optional communal services such as collective kitchens, laundries, recreational facilities, and nursery schools, following the Fourierist model to which the founder, Jean-Baptiste André Godin, adhered—for a minimum period of five years. Additionally, they must be at least 25 years of age, hold at least one share in the enterprise’s capital, and have been co-opted by the general assembly of existing members. The assemblée générale of the associates wields ultimate authority, including the election of the administrator-manager, the board of directors, and various specialised supervisory councils governing specific aspects of the familistère;
• The sociétaires, who may be admitted by the board of directors and the administrator-manager, provided they have resided within the familistère for at least three years and have attained the age of 21. Notably, the criterion for eligibility is not merely a specified duration of employment in the factory but, rather, a minimum period of communal living within the workers' settlement. Given that the number of residences is fewer than the number of workers—and that some employees opt to live externally—admittance to the dwelling entails not only professional affiliation but also a commitment to a shared mode of life, thereby evidencing the individual’s alignment with the collective ethos of his fellow inhabitants. It is also significant that, while the associés—the core members of the enterprise—are selected through an aristocratic process of co-optation, whereby existing members induct new equals, and these in turn appoint the leadership; the sociétaires, the second-tier members, are chosen through an autocratic process by the governing authorities (namely, the administrator-manager and the board of directors). This dual-tiered system formed by the inner nucleus (associés) and surrounding group (sociétaires) bears a certain structural resemblance to the College of Cardinals who are appointed by the the reigning pontiff and, in turn, elect the next pope from among their own ranks. The enduring two-millennia longevity of this form of ecclesiastical governance suggests that such a system of selection may indeed be conducive to institutional stability and continuity;
• The Participants, who are admitted jointly by the board of directors and the administrator-manager. To qualify, individuals must have been employed within the enterprise for a minimum of one year, have reached the age of 21, and reside within the familistère.
• The Auxiliaries, a category of temporary personnel who are not eligible for profit-sharing, which remains restricted to the preceding three groups.
• The Intéressés, individuals who were once active members of the enterprise but are no longer engaged in its operations. However, they continue to derive financial benefits from the enterprise by virtue of their retained ownership of capital shares, whether acquired through inheritance or purchase.

The presence of this final category underscores a latent risk that imperils the integrity of cooperative or participatory enterprises: the progressive divergence between the workforce and the ownership of capital. Even if, at the outset, the founder ensured that ownership stakes in the company were distributed among employees—from the highest-ranking administrators to the lowest-paid workers—through direct allocation of shares or subscription mechanisms, what guarantees that these ownership rights or shares shall remain within the workers’ group (executives, clerks, technicians , workers) and not pass through inheritance or market transactions into the hands of individuals with no direct involvement in the productive activities?

In establishing the Familistère de Guise, Godin sought to preclude this outcome and secure the perpetuation of the symbiosis between capital and labour, he had strived for. Share ownership was made contingent upon active service within the enterprise. Just as Godin himself recouped his initial capital investment through the enterprise’s profits, so too is it prescribed that, upon cessation of active participation in the business, managers, associés, and sociétaires—along with their heirs—must divest their shares to their designated successors within the core or subsidiary nuclei. These successors retain the right to redeem the shares, financing their acquisition incrementally by using their profit entitlements and/or independently accumulated savings. The intent of this mechanism is to ensure a continuous rotation of share ownership, thereby preserving majority control of the enterprise within the hands of those actively engaged in its productive functions. Nevertheless, a residual concentration of shares within the intéressés class remains a possibility, and it cannot be denied that this aspect of the system operates with a degree of friction.

82. Accounting Considerations in Profit-Sharing

The distributable profit is derived from the net balance of the profit and loss account over a defined financial period, typically a fiscal year. This balance must correspond precisely to the valuation of net assets as recorded in the enterprise’s closing inventory, ensuring that the net asset position remains unaltered relative to the preceding financial year. For instance:

Profit and loss account.

For Profits; from goods sold = 18; active interests, commissions, etc. = 2; Total profits = 20.

For Losses; overheads = 2; processing costs = 8; Deterioration = 4; passive interests and losses = 1; Total losses = 15; profit balance = 5; Final total = 20.

Balance sheet.

For Active; buildings and lands = 20; Plants and machinery = 20; goods stocks = 10; credits and securities = 10; Total active = 50.

For Passive to third parties; passive c/c = 10; bonds = 10; Total passive to third parties = 20.

For Passive own capital; reserve = 5; net capital = 20; Total passive own capital = 25.

For Passive; profit balance = 5; Final total passive = 50.

If all financial data recorded in the accounts were purely objective facts, the resulting balance would be an indisputable and verifiable figure. Some elements of the accounts indeed fall into this category: for instance, revenue from goods sold, interest income received, overhead expenditure for the production process (wages and salaries, insurance costs), actual expenditures on raw materials, interest expenses, and losses due to insolvencies in the profit-and-loss account; liabilities in cash or due to bond obligations; paid-up capital, and reserves. However, all the other figures are only valuations, i.e. hypothetical assessments made by the administrator regarding the fair value of various assets and liabilities listed in the inventory.

The valuation process is contingent upon the underlying premise guiding the assessment.

If the inventory is prepared under the assumption of liquidation, where the enterprise has ceased operations, asset valuation is made upon specific criteria. In this scenario, assets must be assessed based on the requirements of a liquidation that is the realizable market value rather than their possible utility within ongoing operations; which might need substantial modification before being repurposed. However, land if freed from its existing building, might be worth more as vacant development land than in its current state, while buildings could be appraised at mere demolition value. And equipment and machinery hold only their scrap value. The only assets with an immediately ascertainable market price are the company’s stock of goods.

Conversely, if the individual responsible for preparing the inventory assumes that the enterprise is a going concern, a markedly different approach to land, building, machinery and equipment is required. Under this premise, there is no need to determine the immediate liquidation value of the factory as these assets are not intended for outright sale. Instead, their value is realised incrementally, as minuscule fractions of their worth are transferred, day by day, into the manufactured goods. Each unit of output effectively incorporates a portion of the depreciation—the gradual wear and tear—of the machinery, tools, structures, and other productive assets that contribute to its creation. Consequently, the valuation of fixed assets must be governed by a different set of principles, extending beyond the mere estimation of their potential market price. The appraisal must anticipate the recoverable value of these assets as they are progressively embedded into the final goods produced and sold. This recoverable value is derived through technical and economic analysis, which estimates the price at which future goods—produced using the existing capital stock—will be sold over the lifespan of the assets in question. The estimated value of the assets will, in turn, vary depending on the timeframe of ongoing operations within the factory. If the assessment is limited to a single year, the projected value of inventory, production costs, net income, and the depreciation attributable to machinery will yield one set of figures. However, if the appraiser extends the projection to five, ten, or fifty years—or even assumes an indefinite lifespan for the enterprise—the calculated valuations will necessarily differ. Thus, as the foundational assumptions shift, so too do the resultant estimates.

The underlying assumptions in financial valuation are not only objective but also inherently subjective. A business’s worth can be assessed for various purposes—whether to satisfy an entrepreneur's personal need to gauge their financial standing, to report managerial performance to owners (such as shareholders in a corporation or partners in a general or limited partnership), or to disclose financial information to third-party creditors or government tax authorities. The accounting principles applied in each scenario can differ significantly.

The tax officials responsible for assessing wealth tax often will not accept, under legislative and regulatory mandates, the valuation methods that businesses, acting in good faith, employ for their own reporting purposes. This leads to negotiations between tax authorities and industrial associations, where compromised valuation principles may be agreed upon—principles that do not necessarily align with those used in shareholder reports or those considered legitimate by accounting professionals and, if contested, by courts of law.

Although the exact expenditure for salaries and wage is know, the same cannot be said about asset depreciation, particularly the wear and tear of plant and machinery. When a company executive consults a technical expert on the lifespan of a machine, they may receive an answer based on material resistance, workload, operational hours per day, and mechanical stress the Dunmer of revolutions made by its wheels, then a machine is projected to last ten years. If it originally had a cost of 100,000 lire, 10,000 lire per year would then be allocated as a depreciation expense to be entered on Profits&Loss. By doing so, the company ensures that, by the end of the 10 year machine’s life cycle, it has accumulated the necessary capital of 100,000 to replace it with a new one having old one a value equal to scraps. And the director, by doing so, will clear his conscience, which obliges him to keep intact the existing capital, which is not his, but belongs to the shareholders. However, a more cautious executive might set aside 12,000 or even 15,000 lire annually, recognizing that machine predicted to last ten years in a mechanical sense may become inefficient or commercially unviable after only seven or eight years due to technological advancements: economic depreciation supplements physical deterioration.

With each asset item, the same debate is renewed. On the whole, a figure of 4 may be as reasonable as a figure of 2 or 6 million. If 4 is written, the profits are, as in the example above, 5 million, if 2, the profits rise to 7, if 6, the profits fall to 3 million.

Within the assets of the balance sheet, stock is valued at 10 million. Should the valuation criterion be the prevailing market price of the stock itself—whether cotton, wool, coal, yarn, laminates, or other commodities—as of 31st December, the balance sheet’s closing date? This would be a reasonable approach if the balance sheet is intended to present a snapshot of the firm’s financial standing at that precise moment. Yet another administrator might adopt a different methodology, valuing the stock at its original purchase price of 12 million. Should not accounting records faithfully reflect historical transactions? Under such a premise, reported profit would rise from 5 million to 7 million. A third administrator, presenting the accounts to partners and shareholders on the subsequent 31st March, might deem it more appropriate to value the stock at the then-current market price, which has since fallen to 9 million, thereby reducing reported profits to 4 million. A fourth, adopting an even more cautious stance, observing a downward trend in prices, may anticipate that by the time the stock is processed into yarn, fabric, or steel rails and subsequently sold, the realised price will be lower still, perhaps no more than 8 million. In such a case, declared profits would diminish further to 3 million.

Likewise, accounts receivable and securities held in the portfolio are currently estimated at 10 million. But why not 8 million or 12 million, contingent on forecasts of future contingencies—such as fluctuations in the selling price of the securities upon liquidation or the potential insolvency of debtors?

The final figure in a financial statement—the declared profit or loss—is subject to fluctuation, contingent upon the valuation criteria employed and the degree of prudence or optimism applied in asset assessment. The result is a spectrum in which the same underlying financial reality can manifest as anything from a 5 million loss to a 10 million profit. Yet, remarkably, all these figures remain equally true in a formal sense. None can be dismissed as outright falsehoods; rather, they are subject to interpretation. Quid est veritas? And even if an absolute financial truth could, by some improbable hypothesis, be established, would it always be prudent to disclose it? If a financial year concludes with a 5 million loss, would it be necessarily in the company’s best interest to proclaim it openly, thereby undermining confidence, discouraging clientele, and unsettling creditors—all in response to what may prove to be a transient downturn? Would not a prudent administrator, acting in the collective interest of shareholders, creditors, the firm, and, by extension, its employees, be justified in over-evaluating assets—land, buildings, machinery, and inventory— for a 10 million value, thereby transforming a 5 million loss into a 5 million profit? If such an adjustment preserves the firm’s stability, does it not serve the greater good? And if, in previous years, the same administrator had deliberately undervalued assets by 10 million—accumulating what are termed hidden reserves—would he not now be within his rights to revise these valuations upward to avoid reporting a loss that, while real in the immediate term, he believes to be temporary? Once again, we ask: where lies the truth?

At this point, we must fall silent, for we approach problems that can only be addressed when currencies finish their plunge and settle and monetary stability is restored. A machine with an anticipated lifespan of ten years and an initial cost of 50,000 may, in times of monetary stability, be depreciated by setting aside 5,000 annually. Yet if, by the end of the decade, the cost of replacing that same machine has risen to 3 million, it becomes evident that an annual provision of 5,000 is woefully inadequate. To maintain capital integrity, the provision should have been 300,000 per annum—an amount six times the machine’s original nominal cost. When currencies succumb to the erratic fluctuations of monetary instability—akin to the St Vitus’s dance—all financial calculations descend into the realm of gambling.

The foregoing observations serve to illustrate that profit-sharing—conceived as a mechanism to foster harmony between capital and labour by aligning their interests in maximising distributable profits—may, in practice, prove to be a veritable Pandora’s box with an abundance of poisonous snakes crawling out. If the employer, mindful of the enterprise’s longevity, compiles the financial statements with the prudence befitting one who seeks to ensure its survival for years to come, will the worker not be justified in advocating for criteria grounded in the immediacy of the present, limited to the single year for which he is employed? What meaning does tomorrow hold for him? Will he even remain in the same factory? If the financial year 1944 yields a profit, why should any portion of it be set aside for the benefit of workers in 1945 or 1946, or indeed for even more distant years?

Such concerns provide a compelling rationale for reserving profit-sharing privileges to a core group of long-serving, loyal workers. However, this does not justify denying participating workers the right to understand the criteria by which the financial statements have been prepared. This right is commonly referred to as workers’ control. A participant, even one who bears no responsibility for losses, cannot reasonably be denied access to financial records. Yet, even full shareholders do not enjoy unfettered access to the company’s most sensitive accounts. Were such rights granted indiscriminately, an opportunist—perhaps a solicitor or a trustee acting on behalf of a competitor—could, for the cost of a modest shareholding, gain insight into the company’s most closely guarded commercial secrets, including supplier contracts, customer relationships, pricing strategies, and production costs. Commercial law does not permit such extensive disclosure, as it could imperil the company’s future. Nor could such privileges be extended to participating workers, among whom competitors’ agents might well find easy ingress. Nevertheless, les bons comptes font les bons amis—transparent accounting fosters goodwill. If profit-sharing is to function effectively, it must inevitably be accompanied by some degree of worker oversight. Yet here, once again, emerges an inherent limitation: such a system is best suited to an élite—a select cadre of workers who comprehend the boundaries of the trust they must place in those who manage the enterprise. These individuals must exercise discretion in selecting auditors of unimpeachable integrity, content in the knowledge—without further intrusion—that the financial statements have been prepared with the utmost objectivity and prudence, insofar as such assessments can be rendered in an inherently subjective domain.

Profit-sharing, therefore, is not a panacea for the broader challenges inherent in the condition of the working class as a whole; nor does it serve as a remedy for the perennial conflict between employer and worker. On the contrary, rather than quelling discord, it has the potential to intensify the very frictions that give rise to such conflicts. It represents the culmination of an already-established foundation of mutual respect and trust. Profit-sharing does not create social peace; it fortifies it. It is a stabilising force, effective only as the product of sustained experience and a rigorous process of economic education. When imposed externally, it provokes resentment, inflaming tensions rather than alleviating them; but when it emerges organically from within the enterprise, it serves as a preparatory step in the gradual transformation of wage earners into true partners in the economic endeavour.

83. Economic Problems of Participation

This conclusion gains further weight when examined through the lens of economic analysis. In this context, the company’s profit ceases to be merely a contentious accounting construct—a simple balance of accounts. Instead, it becomes imperative to scrutinise the substantive essence of that figure.

84. Profit Is Not Interest

It is essential to recognize, first and foremost, that the net balance of a company does not encompass the current remuneration of labor, which is wages or salaries, nor the current remuneration of capital, which is interest. Here, the term interest is used in one of the many possible meaning: the market-determined return on capital that an entrepreneur either borrows from others or allocates from his own resources for the operation of the business. Under conditions of perfect competition, this interest also serves as the return on capital already invested. However, since competition is imperfect, the market only dictates the remuneration or interest rate for savings seeking investment, while capital already invested yields an income or quasi-income. A more precise terminology would certainly be preferable to avoid entangling the discussion with the broader complexities of interest—particularly since, in some interpretations, interest is not a true remuneration but merely a mathematical relation between two equal sums separated by a time interval. Nevertheless, for the purpose of this discussion, the definition provided above suffices. A business that cannot generate enough revenue to cover both wages for workers and interest on invested capital is neither sustainable nor viable. Workers’ participation in profits is not a mechanism designed for enterprises on the verge of collapse. A company that fails to yield at least the interest that could be obtained from low-risk investments—such as secure bonds, mortgages, or treasury securities—is ultimately doomed to decline. Interest itself consists of two components: a base return on capital, which we may assume to be 3 percent, and an additional premium to compensate for the inherent risks of industrial investment, which we may estimate at 2 percent. If depositing one’s savings in a bank yields a guaranteed 3 percent, then persuading an investor to allocate capital to an industrial venture—where the risk of loss and failure is greater—requires an additional incentive. This extra 2 percent is not a true income but rather the necessary compensation to offset the probability of capital loss. The saver is left with only the net 3 percent return, while the risk premium, on average, cancels itself out.

85. Profit Does Not Exist Under Conditions of Perfect Competition

After deducting interest—which includes both the net return on capital and the premium for risk—what remains?

Under conditions of perfect competition, the answer is: nothing. At the very moment when any residual profit comes out, if it is true that production factors are infinitely available, that they can enter or exit the market without friction, and that they are perfectly mobile and divisible, then how long can any residual profit last? The moment a surplus appears, new entrepreneurs would be drawn to the industry, or existing firms would expand production, increasing supply and driving prices down until profits are eradicated. Not even the entrepreneur could, under competition, obtain a remuneration higher than the normal wage for the worker entrusted with the management and operation of the enterprise. Neither more nor less than the wage for any other worker. The entrepreneur's profit is a true wage that the market determines at the level sufficient to make the supply of that particular kind of labour, called the direction of the enterprise, equal to the demand.

The workers’ participation in profits is not a mechanism that can reduce capital’s rate of return, nor the entrepreneurial compensation. The only effective means of reducing interest rates are policies that encourage higher savings—such as monetary stability, legal security, enforcement of contracts, and the mitigation of business risks as well as all the instruments that reduce uncertainty in the functioning of the economic mechanism — such as stability of legal systems, absence of arbitrariness and favouritism. Similarly, the only way to reduce entrepreneurial wages is by increasing the supply of competent entrepreneurs through accessible education, scholarships for talented youth, and social mechanisms that allow for economic mobility. Only this can make the ‘entrepreneur’ commodity less rare and lower its price, i.e. its remuneration.

Ultimately, given a certain production of savings and a certain supply of entrepreneurs, the interest and compensation rates of entrepreneurial labour are in a position of equilibrium. But, if competition exists, profit does not exist. There is therefore no possibility of workers' participation in a non-existent profit. Vacuus cantabit contra latronem viator.

86. Profit from Artificial Monopolies

If profit exists, it often arises—as discussed in the introductory lecture—from artificial restrictions such as customs duties, import quotas, exclusive contracts, entry barriers, and patents. These mechanisms create full or partial monopolies in the form of cartels, consortia, trusts, and similar entities. However, the profit generated in this way is detrimental to society as a whole. By artificially restricting competition, the overall supply of goods and services available to consumers is reduced; and this lesser supply is unequally distributed.

Any distribution of monopoly profits—whether among employers or workers—amounts to nothing more than the division of ill-gotten gains. From a societal perspective, workers’ participation in monopoly profits is harmful because it aligns their interests with those of employers in extracting wealth from consumers. The only way to protect the broader public interest is to eliminate these monopoly profits by addressing their root causes—namely, legislative and regulatory privileges that artificially restrict competition. Since these privileges exist due to government intervention, they can be reversed through legislative action. This could involve repealing protectionist measures such as tariffs, reforming patent laws, or lifting barriers that limit the formation of new businesses.

87. Profit from Natural Monopolies

Natural monopolies arise not from legislative intervention but from inherent market conditions—such as those governing railways, tramways, gas, electricity, power distribution, urban land, and large-scale industrial plants with significant indivisibilities. Unlike artificial monopolies, where legislative action can eliminate undue profits, natural monopolies present a more complex challenge. Here, the debate shifts to the most effective methods of public management—whether through nationalization, municipal ownership, autonomous agencies, or delegated enterprises. The goal is twofold: first, to minimize costs—not only through efficiency in producing known goods and services but also by fostering innovation; and second, to set prices as close as possible to a marginal costs towards a minimal cost. However, achieving both objectives simultaneously under public ownership remains an intricate challenge.

The absence of profit in public enterprises, compared to private firms in the same sector, is often cited as proof of inefficiency, but this fact alone is not necessarily meaningful. If a public enterprise produces at a cost of 10 and sells at 10, making no profit, while a private firm produces at 8 and sells at 9, the latter generates a profit of 1 without harming consumers—who, in fact, benefit from the lower price. In such cases, the surplus can be shared with workers without ethical concerns, as it does not result from monopolistic exploitation to the detriment of the consumers.

A more serious debate arises when considering the nature of consortia, agreements, cartels, and trusts among entrepreneurs. The question is whether these arrangements represent true monopolies or rather oligopolies, which are formed with the intent of securing monopolistic profits. Alternatively, are these tools designed to appear monopolistic, with the primary goal of overcoming initial losses incurred when launching new products or experimenting with innovative production methods?

If survival in the competitive market demands that in the following:

For time = I; pricing is = 10; instead of variable pricing = from 11 to 7; situation = A for pricing is, and B for instead of variable pricing.

For time = II; pricing is = 8; instead of variable pricing = from 9 to 5; situation = A for pricing is, and B for instead of variable pricing.

For time = III; pricing is = 6; instead of variable pricing = from 8 to 4; situation = A for pricing is, and B for instead of variable pricing.

Then, the latter would result in a system of competing companies in the sense of true competition.

• If situation B can indeed be considered a historically absurd one, the reason being that the competition would drain the resources of the competing firms in the first period, not leaving them the time or means to implement new product inventions and production systems, it becomes unclear how they—or other firms—would be able to begin further transformations in the supply of products and the structure of production methods in the second period. Even less would this happen in the third period;
• If, in contrast, situation A benefits from agreements between competing companies or strategic maneuvers by the strongest players (secrets, patents, threats of sell-offs partially done, etc.), keeping the price relatively constant around level 10 over time, which allows for a profit higher than normal, then;
• This price must be considered a monopoly price. The question then becomes: should the constant price of 10, in the first period under these agreements, be compared to a price of 11 to 7, an average "lower" price that would have been obtained in a competitive regime during the same period? Or should it instead be compared to the price of 8 in the second period and 6 in the third period—prices whose existence was the direct result of maintaining prices at 10 and 8 in the two preceding periods?

These are not easy questions to answer, and they leave a doubt in the observer’s mind about the true nature of many so-called monopoly profits. Are they genuine monopoly profits that the legislator should work to eliminate, or are they insurance premiums against the risk of industrial innovations? In the latter case, the investigation leads us further to the discussion of the problem outlined in paragraphs 88 and 89.

88. Profit from Unforeseeable Risks.

This section addresses risks that, due to their size and relatively low occurrence, are not typically insured by companies operating even in the rarest branches of insurance: major wars, social revolutions, monetary devaluations, and revaluations of exceptional dimensions—risks that are difficult to insure even within the exclusive circle of Lloyd's of London, where people or groups of people are ready to take on the most unexpected risks.

These gains have perhaps attracted the most public attention in recent times, prompting people to consider the social value of involving workers in sharing them. These profits appear to have the following characteristics:

• When they occur, they are impressive;
• They are concentrated in a limited number of natural and legal persons; aware speculators and fixers interpose themselves between private individuals seeking permits, authorizations, currency checks, import quotas for raw materials, export quotas for national products, permits for new production plants and the public authorities responsible for distributing them. These are enterprises particularly well-positioned to profit from public social and economic upheavals.
• Though such type of risks seem widespread, they are actually concentrated among a few. For instance, after a monetary devaluation, prices rise, and it may seem like everyone is benefiting from increased wages, salaries, and profits. However, in reality, higher earning will go only to those who manage to sell their products and services at a proportionally higher price than the average price of goods and services they usually bought or used to buy—this group includes speculators, intermediaries, and industrial, agricultural, and commercial companies selling products whose price increased more than prices for ordinary.

It is clear that, when considering what economic actions the state should take in relation to these profits, the only logical answer is to do what can be done to eliminate the causes that generate these profits. Therefore, they are of no interest in the context of worker participation in profits. In fact, it would seem detrimental to encourage workers to aspire to participate in profits that are in conflict with the collective good.

Participation would be impractical for the most part, since speculators, intermediaries, and fixers are not inclined to employ workers in significant numbers. Even if participation were to occur in certain large enterprises, it could create a privileged class among the workers, one that would become the object of envy and anxiety for employees in the more numerous enterprises that are unsuited to taking part in this "price revelry.”

89. Profit Arising from Changes in the Organisation and Structure of the Enterprise

The sole enduring source of profit remains—the only one truly aligned with the collective interest. If the entrepreneur:

• Is capable of discerning, amidst the vast array of so-called innovations presented to him, those genuine advancements that introduce novel products capable of transforming latent demand into tangible market interest—such as automobiles, gramophones, refrigerators, and radios—or of implementing refined technical methods for the production and distribution of both new and existing goods;
• Possesses an acute sentiment about consumer preferences, whether local or distant, present or forthcoming;
• Excels in selecting employees and workers with greater discernment than his competitors, and in organising and directing labour with superior efficiency;
• Demonstrates the acumen to recognise the aptitudes of his collaborators, ensuring their progression along career paths best suited to their abilities; he cultivates an ethos of emulation and collaboration, distributing incentives with such fairness that their varying allocations are universally perceived as just; he reinvigorates the workplace with a spirit of contentment in work, with incentives for households with children through nurseries, schools, social initiatives, and workers’ housing—thereby engendering an environment conducive to enhanced productivity;
• Establishes a rapport of goodwill between himself and his clientele, fostering that intangible yet invaluable asset known as commercial goodwill—through welcoming shopfronts, courteous sales staff, home delivery services, and the ready and obliging replacement of defective goods;
• Employs strategic means—through agreements rather than outright competition—that permit, for limited periods, the stabilisation of prices, the accumulation of reserves, and the eventual facilitation of further technical advancements and innovation, hence with cost reductions at a later stage, all pursued without affronting public sensibilities;
• Then, through these and other strategies—revealed to him not by past treatises but by his own creative foresight—the entrepreneur shall secure his profits.

Are such profits eligible for distribution among associates, employees, and workers? The response appears to be affirmative and is conditional, for the creation of a permanent institution to take place, on the sole requirement that the profit-sharing of workers is per se one of the contributing factors in the generation of the very profits to be distributed.

To be such an entrepreneur implies that:

• Participants harbour no apprehensions that their involvement will adversely affect the stability of their regular salary or wage;
• They do not fear that their participation will in any way compromise their professional mobility or moral independence in relation to the enterprise;
• Their involvement serves as a stimulus, inspiring them to take a heightened interest in their assigned tasks and to regard themselves as integral to the enterprise—thereby fostering initiative for constructive proposals and suggestions;
• They maintain confidence in the moral integrity of the entrepreneur, such that when their elected trustees assure them of the veracity of the company’s financial accounts, they require no further inquiries—fully cognisant that the success of the enterprise may hinge upon the preservation of confidentiality vis-à-vis the public, competitors, and even the employees themselves.

These conditions are unlikely to be met by the workforce in its entirety, but rather only by that segment whose tenure within the enterprise, recognition by peers, and responsibilities have elevated them beyond the status of mere temporary labourers, office clerks, or casual workers—namely, a more or less substantial core of collaborators, ranging from the most junior to the most senior ranks alongside the entrepreneur. This reasoning further suggests that profit-sharing cannot be imposed through a rigid legislative mandate—necessarily broad, uniform, and likely to engender friction, discord, and greater social instability. Instead, if it is to endure, it must emerge as the organic outgrowth of a spirit of cooperation and open dialogue, rooted in an environment that fosters voluntary and free experimentation.

Endnotes

[1] This section was originally published as a lithography, in a large in-quarto format, under the name of the professor, spanning 15 + 84 + 2 unnumbered pages. It was curated by the Italian University Campus of the University of Lausanne, though in conjunction with the Geneva campus and with the support of the Fonds Européen de Secours aux Étudiants, through the Office of Lecture Notes in Lausanne in 1944. The first chapter of this section was also separately published, in the same format and by the same University Campus of Lausanne, under the title of the index with the subtitle Lezione introduttiva al corso di politica economica tenuta all’Università di Losanna il 24 marzo 1944 [Introductory lecture to the course on economic policy, delivered at the University of Lausanne on 24 March 1944]; 15 pages, Lausanne, 1944.

[2] Italian students are fortunate in having access—should they manage to locate a copy in a library of their host country—to what is arguably the finest guide available today, not only within Italian scientific literature but also in comparison with foreign works: Introduzione alla politica economica [Introduction to economic policy] by Professor Costantino Bresciani-Turroni (second edition, Turin, 1943). This work should be approached with the same intellectual rigour required for any scientific text—namely, with humility of spirit, akin to that necessary for learning the principles of calculus or rational mechanics. In this particular case, it is imperative to free the mind from any biases imposed by inferior, propagandistic literature—regardless of its origin—which serves only to obscure the clarity of thought that young scholars must cultivate in disciplines integral to their technical curriculum. Another noteworthy work, which may be available in an Italian or French translation and is highly recommended, is that of the Dutch economist Pierson, Grondbeginselen der staathuishoudkunde [Principles of Economics](Turin, Italian translation circa 1900). It is advisable to omit the appendices added by the Italian translator—not due to any deficiency in their quality, for they are indeed excellent, but rather because it is unnecessary, at an initial stage, to engage with discussions of Italian economic issues as they stood at the dawn of the twentieth century.

[3] The simplifications inherent in the analytical tools employed by economists are justified insofar as these tools are definable—that is, in so far as it is possible to ascribe to them reasonably well-delineated characteristics. Competition and monopoly, as defined in this text, along with related concepts such as oligopoly, can be described using qualifying adjectives such as many, not too dissimilar, one, unilateral, or bilateral, among others. Conversely, there exist other frequently invoked constructs—terms that often surface in discussions and debates—such as capitalism, private property, collective property, proletariat, and bourgeoisie. These, however, are entirely devoid of scientific utility; they have never led to any substantive conclusions and should, therefore, be relegated to the realm of amateur discourse. Their fundamental deficiency lies in the impossibility of defining them in an unequivocal and tolerably precise manner. A valuable intellectual exercise would be to attempt to formulate rigorous definitions for these widely used but conceptually ambiguous terms.

[4] Theoretically, however, such an individual could serve as a Minister of Production in a collectivist state. PARETO, and later, in a more extensive manner, Colonel ENRICO BARONE—professor of political economy at the Faculty of Economics in Rome—demonstrated that a Minister of Production, should he truly seek to maximise output and economic utility (elimity) for the community, would be compelled to adhere strictly to the principles established by economic theory for the case of competition. Reading the first For further reading, one may consult PARETO’s Cours d’économie politique, delivered at the University of Lausanne (translated into Italian, Turin, 1943), and BARONE’s seminal essay Il ministro della produzione [The minister of production], initially published in the Giornale degli economisti and subsequently included in Saggi. This work has been translated into English and French within VON HAYEK’s volume Economic Collectivist Planning (London and Paris). The challenges a Minister of Production would face in solving the problem of optimal allocation—one which a competitive economy resolves automatically—are not merely theoretical but eminently practical and, in reality, insurmountable. For a detailed outline of this topic, one should refer to the demonstration provided by BRESCIANI in the aforementioned volume.

[5] It is hardly surprising that a great philosopher such as Hegel, struck by the spectacle of an economic world governed by competition—where seemingly miraculous results of maximum production and equilibrium between the contributions of individual factors of production are achieved—should exclaim: "All this multitude of seemingly unconnected and unguided actions is held together by a necessity that intervenes automatically. The discovery of this necessity is the object of political economy, a science that does honour to human thought, for it discerns the laws governing a vast multitude of cases. It is an engaging spectacle to observe how everything interconnects and exerts reciprocal influence; how distinct spheres of activity reach into, shape, and amplify one another. This interweaving, initially imperceptible, for all appears to be left to the whims of individuals, is, in fact, profoundly natural, resembling the planetary system, which to the naked eye presents only irregular movements, yet whose laws can nonetheless be discerned.” Such expressions of admiration for the elegance of economic science, articulated by a philosopher of such stature at a time when the discipline was still in its infancy, may serve as a source of solace against the criticisms frequently levelled at it by lay observers.

[6] If any among the students possess a command of the English language, I cannot too strongly recommend the reading—indeed, the meticulous study—of WICKSTEED’s The Common Sense of Political Economy, recently reprinted in London with an introduction by Professor Robbins. A somewhat imperfect substitute—imperfect not in its intellectual merit, but merely owing to the date (1884) of its publication—is that literary gem titled Principii di economia politica [Principles of Political Economy] by MAFFEO PANTALEONI. For those wishing to delve further into historical foundations, one might also mention Principi [Principles] by FRANCESCO FERRARA, unearthed after many years from manuscripts and lithographic handouts (published by Zanichelli, Bologna). This work offers valuable insight into the state of economic science at a time when the ideal of freedom inspired men, even in the realm of scientific inquiry.

[7] Legislation remains indifferent to what the English refer to as the submerged tenth—that fraction of society comprising the incapable, the constitutionally weak, the deficient, the criminal, the vagrant, and the indolent. In such cases, minimum standards are of no relevance, nor lasting social advancement. Instead, it is the work of charity, education, philanthropy, reform institutions, and sanatoriums to gradually diminish this fraction—to reduce the tenth to a twentieth, and eventually to a fiftieth part of society. Recent studies suggest that in many countries, this proportion has already fallen below one-tenth. It is noteworthy that Lord Beveridge, having authored two seminal works on state intervention—Report on Social Insurance and Allied Services (November 1942) and Full Employment in a Free Society (November 1944; Italian translation, Turin 1948)—considered it necessary, in the following years, to publish a third volume, Voluntary Action (1948). This work highlights the role of voluntary efforts in various charitable and philanthropic initiatives, many of which are dedicated to addressing the plight of the submerged tenth. [Annotation added by the editor of this edition, December 1948.]

[8] Both works have been translated into Italian and are included in the fourth and fifth series of the Biblioteca dell’Economista, with an appendix also featured in the Nuova Collana di Economisti.

[9] To provide a rough approximation, one might say that the 40 shillings mentioned as a pension or subsidy—the foundational sum in the Beveridge Plan—would have been roughly equivalent to 24 Italian lire before 1914, amounting to approximately 100 lire per month. However, it is impossible to determine with certainty how many present-day lire those pre-1914 100 lire would correspond to. With the necessary—indeed, considerable—caution, one might venture to estimate that they correspond, for the most part, to 200 Swiss francs as valued in 1944. This sum would appear sufficient to maintain, in Switzerland, a couple in modest yet dignified conditions.

[10] A frequently cited example concerns an elderly man, rendered nearly immobile by the afflictions of old age, a figure of pity to others and of dejection to himself. Yet, quite suddenly, he began to walk again—on feast days, he would retrace the long road leading to the village church, and every month he would visit the post office. What had occurred was that, following the death of one of his sons in the Great War, he had been granted a small pension. Modest though it was, it sufficed to restore his sense of dignity, to earn him the respect and care of his relatives and neighbours, and to enable him to live many more years in good health, no longer useless to himself or to those around him. Nor was this an isolated case; those who observe closely will find the same phenomenon repeated, particularly among elderly widows, who are no longer abandoned or scorned by their daughters-in-law. On this subject, one might consult a poignant article published during the period of Italy’s occupation by the enemy—Corriere della Sera, 22 April 1944—entitled La nuova padrona by Giovanni Comisso [The New Mistress], which recounts the fate reserved for peasant women who found themselves widowed.

[11] For those students who have the opportunity, the following works are recommended for further reading:

• G. Saint-Léon Martin, Histoire des corporations d'arts et métiers.
• Armando Sapori, Saggi di storia economica medioevale [Essays on medieval economic history] (focusing on the period of the corporations' flourishing).
• Federico del Pane, Raccolta di documenti sul tempo della decadenza ed abolizione delle corporazioni in Italia [Collection of documents on the decline and abolition of corporations in italy] (ISPI, Milan).
• Sidney and Beatrice Webb, History of English Trade Unionism and Industrial Democracy (both included in the fourth and fifth series of the Economist’s Library, with an appendix to History found in the New Economists' Collection).
• Roberto Michels, Storia del movimento operaio e del movimento socialista in Italia [History of the workers’ movement and the socialist movement in Italy].
• Rule, Azimonti, Riguzzi, Opere varie sulla storia del movimento operaio in Italia, [Various works on the history of the workers’ movement in Italy], published by Laterza (Bari) and by Problemi del Lavoro (Milan).
• Luigi Einaudi, Le lotte del lavoro [The struggles of labour] (published by Gobetti, Turin).

We extend our apologies if, owing to the inability to verify these books through direct consultation, the titles have been indicated only approximately.

[12] To elucidate the statement made in the text, it is important to note that any socio-economic order can be examined from two distinct perspectives:

• Its formal expression in legislative texts, such as the Italian Labour Charter of 1926 and the accompanying laws governing the Italian unionist system, the final constitution of the Russian Soviet Socialist Republics, or the phalanstère projects conceived by Fourier. Such documents may hold significance for the magistrate, who seeks to systematically reconstruct the various systems as formulated by the legislator (be they Italian Fascists or Russian Communists), or as envisioned by a reformer (such as Fourier). Their survey may likewise interest scholars of public law who are keen to understand how a particular reformer (e.g. Fourier) sought to reconstruct the world, or how particular governing groups (Fascists or Communists) committed to writing either the formula (Moscow) or the myth (Pareto) that they deemed viable for guiding the governed towards objectives that, in practice, were often wholly different from those professed.
• Its actual historical reality. Such legislative documents, while ostensibly descriptive, frequently bear little relation to the lived reality they purport to represent. They often serve instead as a calculated portrayal, designed more to justify a system to the public than to accurately reflect its workings. As demonstrated in the preceding (third) chapter, the formula of Italian unionist movement proclaimed voluntariness with representation, whereas the reality, by contrast, was one of obligation without representation. It is this reality—rather than its formal articulation—that constitutes the true object of scientific study.

In the same way that science does not concern itself with the study of Italian corporate trade union law or the written Russian constitution—both of which remained unapplied and are abstract constructs rather than living realities—it instead focuses on the English or American constitutions, or the Italian Statute of 1848. These latter documents and traditions endure, or at least persisted, precisely because they evolved in practice over time. Similarly, the numerous proposals by internal commissions aimed at fostering a sense of enterprise management among workers cannot be the subject of scientific study, except in those rare instances where they have been implemented to some degree. By contrast, practical applications of profit-sharing, worker shareholding, and production cooperatives provide grounds for examination, as they represent tangible occurrences, either historical or ongoing. The experience accrued from such cases enables an analysis of how individuals have actually behaved when attempting to put theoretical models into practice, the reactions such attempts have elicited, and the outcomes achieved. Through rational inquiry, one may examine these facts, reactions, and effects much in the same way one would study a physical phenomenon or a chemical reaction. The economist, as ever, is then able to advise the policymaker: if the desired outcome is A, one must act in a certain way; if the goal is B, a different course of action is required. This guidance is derived not from speculative ideals or theoretical constructs outlined in documents that have never materialised in reality, but rather from the empirical study of human behaviour when confronted with real-world choices.

[13] This subject forms part of an extensive body of literature, of which only a few of the most significant works shall be mentioned here:

First and foremost, the Société pour l’étude pratique de la participation aux bénéfices was established in France in 1879, which, since the same year, has published a quarterly journal entitled Bulletin de la participation aux bénéfices. This publication provides periodic summaries of the outcomes of experiments conducted under this system in France, as well as in other industrial nations across the world.

Among the noteworthy books on the subject are:

• Victor Bohmert, La participation aux bénéfices. Étude pratique sur ce mode de rémunération du travail, translated by Albert Trombert, Chaix et Guillaumin, Paris, 1888. Also translated into Italian in an edition by Dumolard.
• Albert Trombert, La participation aux bénéfices. Exposé des différentes méthodes adoptées, pouvant servir de guide pratique pour l’application du régime, Chaix, Paris, 1924.
• David F. Schloss, Methods of Remuneration for Work. Translated from English into Italian in the Biblioteca dell’economista, fourth series.

These works, along with other relevant documents, provide access to a broader body of literature, particularly French, English, and American, comprising surveys and statistical studies on the subject.