How Much Is Enough?

As the second-quarter reports of U.S.

corporations rolled in last week, every thing seemed to be turning up records. The final figures may well show that businessmen have just been through the most profitable three-month period in history. General Motors set the pace, scoring its highest quarterly earnings ($464,000,000, up 13% from last year). Standard Oil of Indiana and Lockheed Aircraft had their best first half ever, and even U.S. Steel racked up its best earnings in three years.

So it ran with few exceptions throughout U.S. industry. In fact, prof its look so good that President Kennedy will find it difficult to use inadequate industrial earnings as a reason for a corporate tax cut by Congress.

No Ready Answer. But the Presi dent's Council of Economic Advisers argues that no matter how high profits are, they are not adequate if they do not induce businessmen to invest in expansion programs. Other economists who agree take their reasoning out of Keynesian scripture. Lord Keynes once wrote: "Short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit."

If profits, representing the return a corporation gets on capital it invests in its business, are too low, a company is not likely to invest in the kind of ex pansion that produces more jobs. A declining return on invested capital (see chart) is one of the reasons some economists give for last year's lapse of the nation's economy into what they like to call "high-level stagnation." The question is: Just what is an adequate profit?

Greed & Gouging. Even before men first started haggling in medieval marketplaces, philosophers and scholars have struggled to define fair profit. ACcording to some interpretations, the Calvinists first began to glorify work and profit, and later the Puritans considered it a moral duty for a person to choose the most profitable occupation he could. Yet there were limits to what was considered a fair return; in 1644, one Robert Keane, a pillar of the church in Boston, was fined -L-200 for making more than sixpence profit on the shilling (12d). Businessmen, who work hard to maximize their profits, nonetheless constantly fear public disapproval of large profits. "The more profitable and successful the business," laments Detroit's Henry Ford II, "the more it is likely to be a target of suspicion and unwelcome attention, the more its critics will cry greed and gouging and exorbitant profits."

There are, in fact, a few guidelines. By common consent, companies in the riskiest business ventures should make the highest return on their investment. Companies that enjoy a natural monopoly, or are protected as well as regulated by the Government, often find their profit margins quite precisely determined for them. New York City's Consolidated Edison, last week, in asking New York State for permission to raise its electricity rates, said that it was not making the 6.3% profit the state said it could. The Federal Power Commission and state agencies that regulate blue-chip utilities figure that a net profit of about 6% on investment is adequate, and the Federal Communications Commission begins to chisel down A.T. & T.'s interstate phone rates if its profits creep above 8%. In the more volatile airline business, however, the fare-setting Civil Aeronautics Board says that the four big airlines are entitled to a 10.25% return on investment; the big four actually earned only 6% last year. In the high-profit soap and cosmetics industry, the return on investment last year hit 16.2%, pharmaceuticals earned 14.4%, motor vehicles and parts 10.7% , chemicals 9.5% , publishing 9% . At the bottom of the heap of manufacturers were the foundering shipbuilders and railroad-equipment suppliers, who came off with a meager 4% profit.

Built-in Damper. Some companies follow a rule of thumb, developed by experience, that aims for a return on investment equivalent to twice the cost of borrowing money. Since interest rates on corporate borrowing average about 5%, this would make an adequate return 10%. FORTUNE'S 500 biggest industrial corporations averaged only an 8.9% return last year, which, by this definition, buttresses arguments that profits are too low. Those who argue for this thumb rule to determine "adequate" profit contend that it also amounts to a ceiling, for if earnings in any field get to be more than twice the cost of borrowing, competitors rush in and soon send corporate profits tumbling.

Some regulatory agencies, like the Federal Power Commission, are moving away from proclaiming a flat figure for profits, now say that their goal is to set a rate of return that is high enough for companies "to stay in a healthy financial position and be able to raise new capital." Frederick R. Kappel, chairman of giant A.T. & T., is one who thinks some of the mud is being scraped off the word profits. "It seems to me that around the country there is coming to be a better understanding of the function of business profit. I haven't any attitude surveys to prove it, but I think there are indicators. It also seems to me that some of the strongest come through from Washington."

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