The Freeman 1972 - The Ludwig von Mises Institute

162 THE FREEMAN Marchwas of course based on the assumption- by those trading inthe company's shares - that themanagement would continue tofritter away the liquid resourcesin unprofitable operation and exploration.(By these observationsI am not intending to deny thatthere have been many cases wheretenacity in the face of a poorshowirig over a considerable timehas finally paid off.)It may be safely concluded thatin a given situation neither thefirm at the zero-earning point northe concern suffering persistentlosses is necessarily the vulnerable,marginal entity, the enterprisejust barely hanging on, andthat will be the first to drop outif conditions become less favorable.And it may also be concludedthat even the most badly situatedfirm, the one at the very bottomof the stairway of earning power(or that shows the greatest levelof loss) need not be in the marginalposition in the sense definedabove. (Of course, the term mightbe used to designate the worst-offenterprise - and some seem toemploy it for this purpose.)Profit Maker May Be MarginalIndeed the marginal producer,soundly defined, may be an enterprisethat has an established ea.rningpower. Assume, for example,a producer operating in a highriskfield for some time has beenachieving an earning rate·of 4 percent on the stockholder capitalemployed (computed in terms ofthe current value of resourcesless liabilities). Assume, further,that a 10 per cent annual returnis regarded as the necessary lurefor risk capital in this field, asevidenced by the data of the investmentmarket. With these conditionsthe management may welldecide to curtail production - orstop operations altogether as soonas practicable - and thus step intothe marginal-entity role. Remember,it's the producer just on theverge of dropping out, and whosedecision will have an effect onproduct price, who may be regardedas marginal.In practice, it must be conceded,the identification of themarginal producer in a given industryand time period may bedifficult if not impossible. Thisis especially true when we thinkof such producers as poised onthe brink of withdrawal, but notyet having taken decisive action.The difficulty in the way of specificidentification, however, is nowarrant for adoption of sloppy orunsound concepts and definitions.A good guess would be that seldomdoes reaching the preciseposition of a zero level of earningssignal or trigger a ceaseproductiondecision.