Industry and trade; a study of industrial technique and business organization; and of their influences on the conditions of various classes and nations

Front matter

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Preface

THE present volume is a study of industry and trade; with special reference to the technical evolution of industry, and its influences on the conditions of man's life and work. It is designed to be followed by a companion volume, which is to be occupied with influences on those conditions exerted by the resources available for employment; by money and credit; by international trade; and by social endeavour.

Its motto is; — The many in the one, the one in the many. Many tendencies have gone to the making of each industry and each economic institution: therefore a thorough realistic study of any part of the economic field, calls for some reference to the interaction of many diverse tendencies, and gives occasion for some care in analysis. And, conversely, almost every important tendency is so far modified by the conditions under which it operates, that an exhaustive study of it may need to range over many fields of work. This motto supplements the motto of my Principles which is: — Natura non fadt saltum: i.e. economic evolution is gradual and continuous on each of its numberless routes.

My aim has been to present as accurate a picture as I can of a part of the field of economics, and not to advocate any particular conclusions. A politician is compelled to seek his allies among those who desire the same ends as his; and therefore political influences on economic studies are not always wholesomie. But a student's natural allies are those, whose aims and methods of work are akin to his own. It is of no concern to him whether a particular argument makes for or against his own ultimate conclusion: in either case he is equally grateful for any solid new suggestion that is contained in it; and equally repelled by any that seems to be based on inadequate data, or to reason vi PREFACE

inconsequently on those data. My own experience has been, for instance, that, the more I knew of the work of Sir W. J. Ashley and the late Professor SchmoUer, the warmer became my regard for them; in spite of the opposition between the main drifts of their work and of my own. Similarly, looking back on the years, in which I was much occupied in arguing that the net advantages of bimetallism are less than those of monometallism, I found that the person from whom I had learnt most on the matter, and whom I should have most welcomed as a colleague in that connection, was a leading bimetaUist, Sir David Barbour.

The volume has no claim whatever to be a contribution to economic history: but an endeavour has been made to turn a few hints derived from the past to account in explaining the present: these wiU be foimd chiefly in Chapters iii to vin of the first Book, and in Appendices B to G. The table of Contents, which brings together the Section headings, indicates the general drift of the volume; and may incidentally suggest to a reader what parts of it he may with advantage shun. Analytical subtleties have been avoided as far as possible. But broad reasonings, essential for the argument, have been set out briefly; even when they have been more fully studied in my Princifles.

For many years after the pubKcation in 1890 of the first volimie of my proposed complete Principles of Economics, I continued to work at its second volume: part of the type for that was set up in 1904 and is now used at last — I am told that this long waiting of type for its ultimate appearance is unique. Shortly afterwards I decided to bring out separately a more or less independent volume, devoted to Industry and Trade. Later on two volumes appeared to be necessary for the purpose: and at last it seemed best to round off the present volume in such manner that it would be an independent unit.

I may perhaps be forgiven for adding that my progress has been delayed, not only by weak health and constitutional unfitness for rapid work; but also by heavy professional duties tiU 1908; by preparing evidence and memoranda for various Eoyal Commissions on currency and other matters: and by

PREFACE vii

service on the Eoyal Commission on Labour, 1891 — 5; during whict I received from working men and other witnesses, and from members of the Commission, the most valuable education of my life.

Nearly half a century has passed since I set myseK to obtain some insight into industrial problems by obtaining leave to visit one or more representative works in each chief industry. I tried to get such a knowledge of mechanical technique (chemical technique was beyond my range) as would enable me to understand the resources and the mode of operation of all elementary plant in general use: I sought also to study the relations between technique and the conditions of employment for men and for women.

In pursuit of the latter aim I made it a practice to ask what pay was being earned by each class of operatives, whom I passed. Afterwards I asked to be allowed to guess in every case. If my guess was right within a shilling or two a week, I passed on. If not, I asked for explanation; and I almost always found that the reason lay in a cause, sometimes technical, sometimes relating to special conditions of the workers in question, which I did not know. The result was a conviction that inequaUties of pay were less arbitrary than was often asserted, and were more directly under the influence of broad "natural" causes.

But I beheved that the causes of these causes were not whoUy beyond human control; and that they might probably be so modified as to bring about a nearer approach to equality of conditions, and a better use of the products of human effort for the benefit of humanity. I developed a tendency to socialism; which was fortified later on by Mill's essays in the Fortnightly "Review in 1879. Thus for more than a decade, I remained under the conviction that the suggestions, which are associated with the word "socialism," were the most important subject of study, if not iu the world, yet at all events for me. But the writings of socialists generally repelled me, almost as much as they attracted me; because they seemed far out of touch with reahties: and, partly for that reason, I decided to say Uttle on the matter, tiU I had thought much longer.

Now, when old age indicates that my time for thought and

Vlll PBEFACE

speech is nearly ended, I see on all sides marvellous developments of working-class faculty: and, partly in consequence, a broader and firmer foundation for socialistic schemes than existed when MiU wrote. But no socialistic scheme, yet advanced, seems to make adequate provision for the maintenance of high enterprise, and individual strength of character; nor to promise a sufficiently rapid increase in the business plant and other material implements of production, to enable the real incomes of the manual labour classes to continue to increase as fast as they have done in the recent past, even if the total iucome of the country be shared equally by aU. The average level of human nature in the western world has risen rapidly during the last fifty years. But it has seemed to me that those have made most real progress towards the distant goal of ideally perfect social organization, who have concentrated their energies on some particular difficulties in the way, and not spent strength on endeavouring to rush past them.

Accordingly the present volume is in the main occupied with ' the influences which stiU make for sectional and class selfishness: with the limited tendencies of self-interest to direct each individual's action on those lines, in which it will be most beneficial to others; and with the stiU surviving tendencies of associated action by capitalists and other business men, as well as by employees, to regulate output, and action generally, by a desire for sectional rather than national advantage. The hopes and the fears of humanity in these matters underlie a great part of Book III, to which Books I and II are introductory: but of course the desire of the mere student for knowledge for its own sake, and without special reference to any purpose to which it can be applied, may be detected throughout.

Some matters considered in the final chapter of the volume have been affected by events and discussions, so recent that adequate place for their study could not be carved out of the text: and consequently much of Appendix P, and especially its last two sections, may be regarded as properly belonging to that chapter, to which indeed the Appendix is attached.

A little must be said about the use of terms. I have fol-i lowed the practice, that prevails on the other side of the Atlantic,

PREFACE IX

of shortening "United States of America" to "America," where no confusion could be caused thereby: there is no adjective corresponding to "United States." "British" trade is commonly taken to mean that of the United Kiagdom; while the substantive "Great Britain" refers only to a part of the Kingdom. I have ventured to use "Britain" as the substantive corresponding to "British" in its broader use.

Of this volume as of my Principles, but even more than of that, I may say that my wife has aided and advised me at every stage; and that everywhere much of whatever is good is owing to her suggestions, her care and her judgment: the index is entirely her work. Mr A. W. Flux also helped me greatly in regard to a considerable part of an early draft. Dr Clapham has kindly safeguarded my ventures on historical ground in Book I and the early Appendices; and my nephew, Mr C. W. GuiUebaud, was reading my proofs, when the war called him to more important work at Whitehall.

Balliol Croft, Cambeidgb.

P.S. A demand for a second issue of this volume affords opportunity for the restoration of the present pp. 657-672 to their proper place in the text: thus repairing the error, just noted, of under-estimating the space that would be required for the final chapters, which had caused those pages to be relegated to Appendix P (841-857). In consequence the numbering of the former pages 657-840 has been increased by sixteen. In addition a few small corrections have been made, chiefly on the suggestion of friends. I have been under no temptation to controversy, the sterile consumer of time and energy.

14 November, 1919.

P.P.S. This third issue differs from the second only in a few small details, chiefly verbal corrections.

M.I.T.

Book I Some Origins Of Present Problems Of Industry And Trade

Chapter I. Introductory observations, l- The present urgency of the allied problema of industry and trade. 2. Economic conditions are mostly the result of slow and gradual development; and, partly for that reason, they commonly show the One in the Many, the Many in the One. It is necessary to look backwards a little, in order the better to look forwards. 3. The scheme of the present work as a whole. 4. Some details as to the arrangement of Book I. Causes of the large use of appendices and footnotes pp. I — 12

Chapter II. Some general relations between industry and trade, l. The trade of a place is likely to be increased by an advance of its stronger industries, but to be lessened by an advance of its weaker industries. 2. The direct gain that a town, a province, or a country derives from its external trade is the excess of the real value to it of its imports over that of the things, which it could have produced for itself by the labour and capital needed for producing its exports and working the trade. 3. Countries, whose advantages are distributed in unequal proportions between different industries, may generally carry on a trade profitable to both, even though one of them is absolutely the stronger all round. 4. A small country often has a relatively large foreign trade: for she can seldom supply nearly all her own wants as regards raw materials and other things; and her frontier is generally long relatively to her population and industry. But some causes tend in the opposite direction. 5. An increase in the distance which goods can be carried at a given cost, is likely to increase the trade in those goods, in a greater ratio. Spheres of influence of different centres of trade. 6. Some consequences of the fact that the costs of traffic over long distances have fallen more than those over short distances; and that both have fallen unevenly pp. 13 — 31

Chapter III. Foundations of England's industrial leadership. Her drift towards massive production. 1. Introductory. England's forenmners in the industrial leadership of Western Europe. The spirit of economic nationality. 2. The qualities, which gave leadership to Englishmen in industry and trade in the nineteenth century, had their roots in early times. 3. The progress of England's internal and external trade during the Mercantile Age. 4. England's Mercantile policy was adapted to conditions

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which were passing away, as the increasing mobility of industry promoted the concentration of textile industries in the neighbourhood of water power. 5. The new structure of the textile industries, which was set on foot in the latter half of the eighteenth century, indicates the gradual transition from the methods of the Mercantile Age to those of the nineteenth century. 6. The financial structure of English agriculture and its influence on progress. 7. The merging of England in Britain PP- 32 — 54

Chapter IV. Britain's industrial leadership: its long freedom from

challenge, l- Characteristics of modern manufacturing processes. 2. The massive results at which English inventions were aimed, called for simplicity in method and machinery; but that could seldom be reached without working patiently through complexity. Nearly all of them were associated with uses of coal and iron in making and driving the new appliances. 3. The long war retarded Britain's economic progress : but it threw other European countries back, and so strengthened her leadership. 4. In the second quarter of the nineteenth century the growth of railways helped to consolidate England's industries, and to expand her trade. 5. The growth of factories made prominent the evils inherent in crude capitalistic control, but was not largely responsible for them. 6. Influences of war and fiscal policy on England's industry and trade in the first half of the nineteenth century, pp. 55 — 85

Chapter V. Britain's industrial leadership under strong challenge.

1. A rare consilience of favourable influences promoted the expansion of Britain's industry and trade after she had thrown her markets open to the world. 2. After 1873 various signs of weakness were perceived; and later on some exaggerated alarms arose. But the national character is again showing itself in a resolute facing of difficulties. 3. The needs of Britain's industries gave additional momentum to a movement, that had long been on the way, for a reform of her educational system. 4. National funds are rightly given liberally to the advancement of knowledge for its own sake. Research for the attainment of particular ends is receiving some support from open associations of producers or traders, specially interested in their attainment. 5. Britain's industrial leadership is in process of being fulfilled and merged in that of the British Federation of Nations; the younger members of which are learning much from the present leadership of her first great Colony pp. 8&— 106

Chapter VI. The industrial leadership of France. Individuality and

refinement in production, l. The physical features of France have not favoured industrial concentration. 2. The political conditions of the seventeenth and eighteenth centuries suppressed the middle class; so that French industry was mainly given to cheap local products, on the one hand; and, on the other, to fine goods, embodying some artistic feeling and individual judgment. 3. The Revolution removed many obstacles to massive production. But the equal division of property made for industrial quietism; and in spite of the exceptional brilliancy of her engineers, France owes relatively little to the aid of mechanical power in maniifacture. 4. Individuality in production contends under ever increasing difficulties against the forces of massive organization. Illustration from industries connected with fashion.

CONTENTS xiii

Chapter VII. The industrial leadership of Germany : science in the

service of industry, l- The economic vmity of Germany was aohieved tardily, and in spite of many hindrances: but the movement was workii^ under the surface for some time before it succeeded with apparent suddenness. 2. The facilities for trafSo, begun by the Zollverein, were developed by railways, and have helped to build up much the largest industrial district in Europe. 3. Germany's zeal for solid education laid the foundation of her industrial progress. 4. Germany's leadership is mainly in industries, in which academic training and laboratory work can be turned to good account; and these are growing in relative importance. 5. Germany's industry and trade have some advantages which attach to youth ; their strength and its limitations pp. 121 — 139

Chapter VIII. The industrial leadership of the United States : multiform standardization, l. introductory. 2. The United States has remained young very long, partly because the geographical distribution of her resources has been such as to tempt men of strong character to move to new scenes, in which their enterprise has been further stimulated. 3. The various races of which the population is composed are homogeneous in matters of consumption; but they are diverse and mutually supplementary in industrial aptitudes. The homogeneity of demand creates an unrivalled market for standardized products: while the diversity of aptitude leads some to invent, and others contentedly to use semi-automatic machinery for making them. 4. The drift of America's industries towards massive multiform standardization is further associated, both as cause and as efiect, with their widespread geographical distribution, and also with the special features of her great railway service. 5. America's movable capital has grown very fast in recent years. Its ownership is widely distributed; but natural selection of singular efficiency has brought to the front a relatively small number of men with high business genius, and has given them control of a considerable part of her capital. 6. Some slight speculations as to future homes of industrial leadership pp. 140 — 162

Chapter IX. Transition to present problems of industry and trade.

1. The foundations of modem business in general confidence and credit.

2. A preliminary review of changes, which sometimes render n very large manufacturing or mining business in a measure independent of other industries in its neighbourhood. A note on the meaning of the term "productive."

3. General causes which have given to the leaders of productive industry much of the prominence and responsibility, which formerly belonged almost exclusively to great merchants. 4. Some observations on the assumption that social and economic tendencies, which are general and seem natural, are to be accepted as inevitable and beneficial. . . . pp. 163-177

XIT CONTENTS

Book II Dominant Tendencies Of Business Organization

Chapter I. The adjustment of production to demand in an open market. 1. Some introductory observations. 2. Ambiguities of the terms Market, and Cost of production. 3. Increased supply, demand being constant, lowers price both immediately and ultimately ; though in various degreesf or different things. Increased demand for a manufactured product generally sets up forces tending to lower cost, and therefore price, except when increased supplies of raw material can be obtained only at greater cost: but its immediate effect is always to raise price. 4. The cost of production which controls value relates to whole processes of production, rather than to any particular parcel of products. 5. The distribution of the general costs of a business among the various products, to which its resovirces are devoted: whether they are "joint" in the sense of being practically inseparable, or are produced "in common" for any other reason. 6. General conclusions as to limitations of the tendency towards such an adjustment of supply to demand, as would cause market price to cover expenses of production with normal profits.

Chapter II. Debts of industrial technique to systematic record and to standardization, l- In early times the cumulative progress of industrial technique was in the main dependent on the informal records of customary usage: and this primitive method was until quite recently the chief resource of agriculture in sparsely peopled districts. 2. Various uses of the term Standard. Influences on technique exerted by clear and exact registration of the results of progressive experiments, such that each can be used as a stepping-stone to later endeavour. 3. Distribution of the studies, that make for progress, among men of various kinds and degrees of ability.

4. Influences on industrial technique exerted by the cumiilative power of carefully made machines to create others, that are capable of work even more exactly standardized than their own. 5. The good and evil of machines that supplant fine skilled handiwork pp. 197 — 213

Chapter III. Some: technical influences on the size of the representative business unit. 1. Some introductory observations. Different methods of the expansion of the business unit. 2. Many causes make for the expansion of the business unit in the steel industry, especially in its heavy -- branches. 3. Tendencies of Particular standardization to become General. —-4. A partial specialization of particular establishments in certain branches of the steel industry has long been in progress, partly under the influence of mutual understandings: and it has received a great impetus from the experiences of the industry under State control during the world-war.

5. Recent developments of the means of communication have facilitated the escape of a large business in a heavy industry from the constraint imposed by lack of space for expansion. 6. Illustrations, drawn from textile and boot industries, of diverse influences which partial standardization and specialization exert on the size of the business unit. . pp. 214 234

CONTENTS

XV

Chapter IV. Further technical influences on the size of the business unit. !• The expansion of the business unit in inddstries which handle continuous streams of homogeneous materials is being promoted by new economies appertaining to uniform and continuous process. 2. The handling of large masses of homogeneous material is often associated with the utilization of by-products, which further strengthens the tendencies to increase in the size of the business unit. 3. The increased dependence of those, who pioneer progress in broad fields of industrial technique, on the aid of large capital. 4. Opportunities of a strong man with moderate means, who concentrates his energies on a speciality. . . . pp. 235 — 249

Chapter V. Constructive speculation. Organized produce markets. 1. Introductory observations. 2. Modemorganizationtends so to distribute the risks inherent in making and marketing, that they fall increasingly on the shoulders best fitted to bear them. 3. Characteristics of organized markets. 4. The services rendered by constructive speculation on a Wheat Exchange, illustrated by its eflScacy in lightening the burden of risks borne by grain merchants and millers. 5. Dealings in organized markets are liable to abuse by unscrupulous men, aided as they often are by the folly of ill-informed speculators: but the power of selling the future command of a thing, not yet in possession, has important uses. 6. Some marketing risks relating to "ordinary" products can be transferred by forward contracts: but the majority can be delegated only as incidents of the delegation of corresponding functions pp. 250 — 268

Chapter VI. Some broad problems of general marketing, i. The costs

and risks of marketing attach to whole processes rather than to particular transactions : many of them are common to a great part, and some even to the whole, of the affairs of a business. 2. The organization of trade is in the long run as vital to consumers as to producers and traders : but the ever increasing energy, with which sellers push their goods on the notice of buyers, is an inevitable result of modem developments. 3. The distribution of the general costs of marketing, and especially those connected with the holding of stocks for sale. 4. Functions of middlemen as links between producer and consumer. 6. Costs of marketing may be increased by difficulties of meeting demands for a constant supply of goods of uniform quality, and for supplies varying greatly from one season to another. 6. Heavy industries seek access to their materials. Light industries, and especially the highest and the lowest of them, seek large cities and their environment. Causes of the enduring hold which an alert centre of industry, handling light products, keeps on its markets pp. 269 — 288

Chapter VII. Problems of general marketing continued: massive retail

trade, l- Massive retail trade is commonly associated with eager forms of competition. But some of its methods were pioneered by workmen's cooperative societies, in which the spirit of brotherhood strengthened the policy of economy. 2. Some remarks on the strength and the limitations of cooperative trading. 3. Other developments of massive retail trading. Grands Magasins, and Department-stores: Multiple-shop Companies, and Chain-stores. 4. Influences on the methods of marketing of goods, "branded"

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with a mark which conveys a guarantee of quality. 5. The great ability and energy, which have been devoted in America to massive retail trade, tend to lower prices: but they are still rather high. 6. Constructive uses of "advertisement" in that original broad use of the term, in which it includes all measures designed to draw the attention of people to opportunities for buying or selling, of which they may be willing to avail themselves. 7. Advertisements, which are mainly combative, generally involve social waste pp. 289—307

Chapter VIII. Business organization: the growth and influence of

joint stock companies, l. Some of the modem problems of administration on a large scale were anticipated long ago by private and corporate owners of great estates : though they, did not often need to balance their incomings against their outgoings closely. The fiduciary element in corporate administration. 2. The growth of the le^al freedom and of the inclination to develop businesses in joint stock: their paramount influence on economic structure. 3. So wide are the varieties of the arrangements between ownership and control of capital, which are now included under the common name of joint stock association, that almost any class of business can be properly conducted by some one or more of them. 4. The obscurity of the affairs of many smaU companies: the exceptional case of manufacturing companies owned largely by working-men. 5. Temptations of joint stock Companies to excessive enlargement of scope. 6. The mechanical methods of administration, which are inevitable in a joint stock company, are often mitigated by the professional emiilation and the esprit de corps of its officials. Good and evil of the progressive supersession of private businesses by joint stock companies pp. 308 — 328

Chapter IX. Business organization : its financial basis, i. Functions

of the promoter in relation to joint stock companies. 2. Some difficulties connected with the valuation of a company, and especially an amalgamation of several companies. Opportunities for, and temptations to, excessive valuation. 3. The part played by banks and other financial agencies in the adaptation of industry and trade to the enlarged financial requirements of the modem age. British banks. 4. Relations of banks to industry and trade in Germany and America. 5. Suggestions that Britain's industry and trade might derive material assistance from powerful and prominent financial institutions, which would supplement, and cooperate with, her great banks.

Chapter X. Business organization: its tasks, and requirements of

faculty. 1. The value of a machine to a business can be calculated on the basis of its efficiency for its immediate work. But the value of an employee must be estimated, partly by instinct, with a view to the probable development of his capacities: and the difficulty of this task is increased by the conditions of modem business. 2. Faculties needed by the head of a large business; and by its chief officials. 3. The education of business faculty. 4. In periods of economic reconstruction there is an urgent demand for creative faculty; and those who come to the front, seldom owe much to any formal preparation for their work. 5. The increasing scope for trained

CONTENTS xvii

faculty and methodical organization of detail in industry and trade. 6. The organizing faculty of a masterful mind can sometimes make itself felt over the whole of a large business, even when owned in joint stock, largely through its influence on well-chosen chiefs of departments, pp. 350 — 364

Chapter XI. Business organization : applications of scientific method. 1. Movements towards the general application of scientific methods in business administration were pioneered by studies of cost-accounts. 2. A general view of the aims and methods of the movement that goes by the title, "Scientific Management." 3. The chief responsibility for the affairs of a great business in Scientific Management is intrusted to a Planning Department: and this, together with the higher control under which it works, develops the organization of the business according to "function" rathfer than "line." 4. In Scientific Management it is arranged that, as far as possible, each frequently recurring manual operation shall be made the subject of elemental time studies, conducted imder favourable conditions by highly trained observers, who seek guidance from the traditional practice of skilled operatives pp. 365 — 380

Chapter XII. Business organization : applications of scientific method, continued, l- The principles of Scientific Management lead up to a careful analysis, partly on lines which have long been followed in some British and other industries, of the notion implied in the term "a standard rate of wages." A claim to be working towards " absolute " standards. 2. Suggestions that very high efficiency of plant can be obtained without overstraining the operative in charge of it, by supplying him with high standard conditions of work, and causing his remuneration for each job to increase with every increase in the speed of its performance. 3. General relations of Scientific Management to the remuneration of manual labour and to the democratic control of industry. 4. Though the wage systems of Scientific Management give small scope for collective action by employees, its open methods of planning may do a little towards fitting manual workers for the responsibilities of democratic control pp. 381 — 394