Description of industry; an introduction to economics

Front matter

Qfotnell Untocraitg ffiibrarg

BOUGHT WITH THE INCOME OF THE

SAGE ENDOWMENT FUND

Preface

Much of the vocational training in this country, whether in High Schools, Special Comnaerce Schools or Universities, has no adequate historical or descriptive background, and on that account loses, in large measure, its educational value. This book provides a means for the correction of so vital a defect. It undertakes to describe the world of business and to describe it in such a way as to attain two results. It aims, first, to lead the student to an intelligent appreciation of the forces that control in the business world; and, second, to stimulate his faculty for observation by frequent reference to familiar material. SHght use is made of the technical nomenclature of Political Economy, although the essential and enduring principles of that science are fully recognized. These principles, however, are permitted to clarify themselves through description of the industrial process rather than by direct analysis. The danger in this method of treatment is, that accuracy will be sacrificed to simplicity. This danger I have endeavored to avoid. It has been my aim to produce a text that is a simple and yet a truthful description of the structure and life of the modern business world.

H. C. A.

Twin Oaks,

December, 1917.

Chapter I Work Page

) 1. The Nature op Work 3

a. Its definition 3

b. Not bound up mth pain 4

c. Menial and physical work 5

d. Co-operative in character 6

\ 2. Organization through Division of Labor 7

S 3. Meaning op Industrial Society 10

a. The co-operative product 11

b. The directing intelligence 12

c. The element of time 13

) 4. Bastiat's Picture op Co-operative Work 16

Chapter II

I 5. The Fundamental Classification 20

( 6. The Extractive Industries 22

a. Agriculture 22

. h. AguacuUure 23

c. Mining 23

d. Forestration 24

i 7. The Manufacturing Industries 25

a. Classifi,cation by output 25

b. Classification by material used 27

c. Classification by elements of cost 28

I 8. The Carrying Industries 28

a. The service of merchants 28

b. The transportation service 30

c. The service of banks 30

9. The Business op Buying and Selling 32

V vi CONTENTS

Chapter III The Legal Framework Of Industry Page

§ 10. The Princple op Liberty 34

§ 11. Classification of Legal Adjustments 36

§ 12. Law op Property 38

a. Properly in land 39

b. Properly in capital 40

c. Properly in organization 41

d. Properly in consumable goods 41

§ 13. Law of Personal Liberty 42

a. Individual freedom 43

b. Equality of opportunity 45

c. Numbers and movement 45

d. Voluntary association 47

§ 14. Statutes Imposing Conditions op Work 49

a. Laws which prescribe conditions 49

b. Laws which provide for supervisory control 51

c. Laws which provide for administrative control 52

§ 15. Government as Protector 52

a. Protection against aggression from without 53

b. Protection from violence within 54

c. Protection of contracts 55

Chapter IV

§ 16. The Factors, — Land and Capital 65

§ 17. Meaning op Land 57

§ 18. The Law of Return prom Land 59

a. Proof of the law 62

b. Results of the law 63

c. Criticism of the law 64

§ 19. The Law op Rent 65

§ 20. Meaning of Capital 71

a. Improvements in land 73

b. Manufacturing machinery 73

c. Property used in transportation 74

d. Stock awaiting sale 74

e. Organization 76

CONTENTS vii

PAGE

f. Training for industrial service 76

g. 7s money capital? 77

! 21. Capital Maintenance and Capital Building 78

a. Maintenance of capital 78

b. Capital building 80

i 22. The Law of Return prom Capital 82

Chapter V Machinery In Industry

( 23. The Industrial Revolution 85

a. Control of power 86

b. The changed point of view 87

! 24. Steps in the Development of Machine Industry. ... 88

\ 25. The Development of Steam Transportation 92

j 26. Measurement of Increased Efficiency 94:

! 27. Some Results of the Industrial Revolution 98

a. Reclassification of society 98

b. Corporate organization of business 100

c. Organization of wage-earners 100

Chapter VI Motive In Industry

j 28. Wants as Motives to Work 102

a. Analysis of wants 103

b. The law of wants 105

5 29. The Law of Effort 106

a. Fact of decreasing desires 106

b. Fact of increasing fatigue 107

c. Desire for money an exception 108

§ 30. Organization of Motives 110

a. Marks of a well-adjusted business Ill

b. Comparative study of motive in industry Ill

c. Lesson taught by the comparison 116

Chapter VII

5 31. Statement of the Question 118

S 32. Marks op a Successful Industrial Organization. . . . 12C viii CONTENTS

PAGE

a. The placement of men 120

b. The adjustment of ■production 124

c. The application of effort 127

d. Comparative costs 128

e. Justice in industry 130

§ 33. Evils of Competition 132

a. The wastes of competition 132

b. The unstable character of industry 134

c. Useless investments of capital 136

Chapter VIII

§ 34. General Description of a Market 138

§ 35. Characteristics of the Modern Market 139

a. Retail stores 140

b. Wholesale dealers 141

c. Demand meas:ured through the market 142

d. The national market 144

e. Market for staples 145

f. The stock market 146

§ 36. The Machinery op the Market 148

a. A monetary system 149

b. A banking system 149

c. Organization of intelligence 150

d. Machinery of transportation 152

§ 37. The Market and the Productive Process 152

Chapter IX

§ 38. Statement op the Question 156

§ 39. The Market Price 158

a. Purpose of price 158

b. Demand and supply 159

c. The competition of goods 161

d. The effect of different standards of living 163

§ 40. Normal Price 164

§ 41. Monopoly Price 168

§ 42. Speculative Price 172

CONTENTS ix

Chapter X The Money System Of Exchanges Page

I 43. The Functions op Monet 176

a. Money as a medium of exchange 177

b. Money as a measure of value 178

c. Money as a standard of deferred payments 180

i 44. Monet Material 181

( 45. Coined Monet 184

a. Kinds of coins 185

b. Form of coins 187

c. Ruk of free coinage 189

d. Laws of legal tender 190

t 46. Paper Money 19J

a. Bank notes 191

b. Treasury notes 194

c. Certificates of deposit 195

) 47. Monet Principles 196

a. The value of money 196

b. Gresham's Law 197

c. The diffusion of money 199

( 48. The United States Monet System 200

Chapter XI The Credit System Of Exchanges

) 49. The Nature of the Banking Business 202

! 50. The Exchange Function op Banks 206

a. Exchanges by means of checks and drafts 206

b. Exchanges through bank discounts 212

CHAPTER XII j 51. Statement op the Question 216

j 52. The Production Contract 219

j 53. The Secondaht Distribution Groups 223

a. Incomes derived from direct service 224

b. Income derived from rents 226

c. Speculative and monopoly incomes 228

j 54. Summary op the Analtsis 229

£ CONTENTS

Chapter XIII Business Integration Pagb

! 55. Business Units 233

a. Partnership 233

b. Corporations 235

c. Trusts and holding companies 239

i 56. Organization fob Bargaining 241

a. Labor organizations 242

b. Employers' associations 244

CHAPTER XIV i 57. Factory Legislation 248

I 58. Enforcement of Competition 251

I 59. Exclusion op Competition 253

I 60. Supervision op Competition 255

I 61. Other Avenues op Influence 257

a. Services that must be universal 258

b. Services that must be standardized 258

c. Industrial significance of taxes 259

62. Conclusion 262

Chapter I Work

"A body is said to be well organized when each part has its own work to perform, when by performing this work it contributes to the well-being of the whole, so that any stopping of this work injures the whole; while, on the other hand, each part depends for its own well-being on the efficient working of the other parts." — Marshall.

This book undertakes to describe the business world, and to explain the rules and principles that control men as citizens in that world. The badge of citizenship in the business world is work. Everyone who lives must live from work, for there is no other way of producing those things that support life or that contribute to the comforts and pleasures of living. While work may not be, and should not be, the chief end of living, it is the chief occupation in life. It is for this reason that a study of the nature of work, of the conditions under which men work, and of the rules and principles according to which efficient work may be done, is a highly important study. To understand the business world is a significant part of education.

§ 1. The Nature of Work. — ^The nature of work will be adequately presented by considering four points respecting it.

(a) lis Definition. — That work is bound up with energy and effort is the common experience of all; but not all effort and energy is work. Work is a means to an end; it is not an end in itself. This distinction will be clear when it is seen that an expenditure of effort and energy may be either work or play according to the conditions under which it is made, or the reasons for which it is undertaken. When boys play ball, for example, they put forth a large amount of effort and energy, but this is not work. They play for fun, they do not play for pay. It is not a means by which they secure an income. The physical pleasure of action and the mental pleasure of emulation is all the pay they ask. When, however, a member of the American League plays ball he does so for the money paid him as a player. When he receives money for plajdng, he is no longer an amateur; he becomes a professional ball player. He is a worker and as much a member of the business world as a man who digs coal in a mine, who drives a locomotive, who clerks in a store, or who follows the calling of a teacher.

From this illustration, and many others will suggest themselves, one significant fact is disclosed with regard to work. The word covers all effort, energy, or activity put forth as a means to an end, that end being the attainment of an income.

(b) Not Bound up with Pain. — It is commonly said that work is bound up with pain, but this assumption is not quite correct. Some kinds of work are painful. All kinds of work may be painful imder some conditions; but the pleasure that comes with mental and physical effort, when one feels strength and vigor, is quite the same whether the effort is work or play. The difference is that effort put forth as an end may be stopped when one has had enough; while work, effort put forth for an end and under the pressure of an organized service, is seldom stopped this side of exhaustion.

The idea that work is painful and on that account to be

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shunned, grew up because workers have been driven, or drive themselves, beyond the hrait of endurance. When one rises in the morning refreshed by healthful sleep, he feels ready for anything. He goes to work and for a time his work is a pleasure. As the hours pass, and he has spent the freshness of his vitaUty, he begins to know that he is working. He is conscious that his muscles and nerves need prodding. He is inclined to stop because he has had enough.

This, however, is not the way of the business world. Work commonly continues until the last hour of the working day. Then work brings pain and only the lashing of the will keeps the weary mind and body up to the mark. This picture of the working day is, of course, a figure of speech, but it makes clear the fact that, while work in itself is not painful, we have come to think of it as bound up with pain, because we remember only the pain that comes with over-work. If a decree should go forth that all men must play for twelve hours a day, and for six days in a week, they would, at the close of a century, hate play worse than they now hate work. Even school boys get tired of too much vacation.

This explanation of the desire to shun work is of considerable importance, for one who desires to know the true nature of work, and this is as far as we care to carry the analysis at this time.

(c) Mental and Physical Work. — In speaking of work we commonly hold in mind physical effort, but mental effort put forth for industrial ends is also work. Indeed, a close study will show that the two kinds of work cannot be separated. All physical activity requires some degree of mental effort, and all mental effort is bound up with some degree of physical activity. Work is called mental or physical according as the one or the other of these two kinds of effort is predominant.

This distinction between mental and physical work is made primarily for our convenience in the study of industrial matters. The work of the physician, the legislator, the teacher, or the preacher is called mental work. The management of an industry, whether great or small, falls in the same class. On the other hand, carpenters, masons, and all men who follow trades, are classed as physical workers. The same is true of farmers, miners, employees of railways, and the like. The impression to be gleaned from this paragraph is, that the common distinction between mental and physical work is of slight importance. Both classes of workers are citizens of the business world, and both must be considered in a study of industry.

(d) Co-operative in Character. — Another fact respecting the kind of work one sees in the business world is that it is co-operative. No man makes all the things he requires to sustain his Ufe or to give him pleasure. On the contrary, he works at a particular trade, or gives all his time to some particular factory, or follows some particular profession or calling. In short, the work of every member of the business world is special in character. Every man produces more of that which he makes than he can possibly consume, and he does so day after day, and year after year. This he is safe in doing because he knows that what he makes can be sold, and that with the proceeds of the sale he can buy other things that he does not make.

This means that every worker who confines himself to a single line of work, does so with the understanding

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that other workers will produce other lines of goods and that by exchange of goods between all workers, each can satisfy his many and varied wants.

§ 2. Organization Through Division of Labor.— The foregoing paragraph reads as though each worker owned the product of his work, and kept for himself the proceeds of its sale. This, of course, is not the case. The modern industrial world is a highly organized affair. One feature of this organization consists in the separation of workers into groups and the assignment of some particular task to each group or individual within the group. The combined result of work done in this way is a continuous flow of consumable goods of all kinds and sorts; that is to say, of those products that minister to the many and varied wants of men. The relation thus established between co-operative workers creates what is called industrial society, — a result of the extensive application of the principle of division of labor.

One feature of the organization of workers under the influence of the principle of division of labor is found in the many kinds and grades of industries that together make up the business world. Agriculture, Manufacturing, and Transportation may be named as grand divisions of industry, and many independent lines of production are to be found within the boundaries of each division. Every productive process, in its turn, is separated into business units which stand for groups of organized workers. The production of cotton goods may serve for an illustration. Here we have the growers of the raw cotton; the brokers and the railways who collect and carry the cotton bales to the factory; the factory which manufactures the raw cotton into cloth; the distribution of the cloth by the wholesale dealers to the retail dealers; and, finally, the sale of the cloth by the retail dealers to the thousands of customers for whom it was made. In this illustration, six independent lines of business are combined to furnish consumers with cotton goods.

The application of the principle of division of labor may be seen also in the organization of each particular business. Every business unit shows as many groups of workers as there are clearly defined kinds of work. The manufacture of furniture, for example, calls for the selection and preparation of the lumber, the sawing to pattern, the carving or turning, the assembling of parts, the painting or finishing of the product. In large plants the arrangement of the buildings as well as the assignment of workers to working groups, shows the co-operative character of work within the factory grounds. An independent worker in a factory is impossible.

Even within the factory group, the results of the principle of division of labor may be seen. Each group worker may be assigned a different task and confine himself to the performance of that task. In the paint shop of our furniture factory, for example, one workman may have charge of finishing mahogany, one of cherry, one of maple, while to others may be given the task of finishing painted furniture. Specialization of the same sort will be found in the other groups of workers. But the important fact is that the work which each workman does fits in with what other workmen do and the result of this combined work is the finished factory product.

It thus appears that the principle of division of labor is responsible for the manner in which the productive process is organized. It first breaks up industry into a large num-

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ber of business units, such as the growing of wheat, the mining of coal, the manufacture of shoes, the selling of groceries, and the like. In the second place, it breaks up these large units into groups of workers, and assigns to each group a specific task in the process of production. And, finally, specialization of work within the several groups is under the control of the principle of division of labor. Organization through specialization is the watchword of modem industrial methods.

The advantages that accrue on account of specialization in work, are many. It develops efficiency and skill on the part of individual workmen and by this means increases both the quantity and the quality of current production. It calls for an analysis of the various processes of production, and thus leads to the invention of labor-saving machinery. It provides an opportunity for men of peculiar gifts to do the kind of work for which they are best fitted. It makes general the benefits of varying climates, soil, mineral deposits, and the like. In short, it makes the industrial process a single process, in which each individual finds the place where he can do the best for himself and for the community, and in which Nature's gifts, although localized on the earth's surface, are made general for all. It is, of course, true that, at any particular time, the principle of division of labor is limited in its application, and that some of the results of the way in which this principle works are unfortimate. This, however, is nothing against the principle as such. It means rather that the perfect industrial organization has not yet been worked out. Our present lesson is that modern industrial efficiency rests on organization, and business organization in its turn is a result of the principle of division of labor.

§ 3. Meaning of Industrial Society. — It is usual for writers to use the phrase industrial society rather than business world, when explaining the manner in which the workers of the world are bound together. This phrase makes clear the fact that the idea of a business world is something more than that of an individual at work. Robinson Crusoe, while alone on his island, occupied most of his time in getting and fashioning those things necessary to sustain life and to gain some degree of comfort in living; but Robinson Crusoe, With his fishing, his planting, his herding, and his building, was not an industrial society. The point is that work, as it exists among peoples who have progressed beyond primitive conditions, is done by groups of workers organized under well-established and well-known conditions. We cannot imderstand the modem business world if we confine our attention to individuals. We must think of men as members of groups of workers, and of these groups as held together by some bond of common interest. We must think of them as forming an industrial society.

Society may be defined as a union of men in unity of purpose. There are as many societies as there are kinds of purposes or aims that lead men to act together. An organization for the control and management of school athletics is a society. So is a church, or the poUtical union of men which makes the State. Industrial society stands for the union of men organized for the production and purchase of those things that minister to the necessities, the comforts, and the luxuries of fife, or which in any way satisfy what is called our economic wants. It is a little difficult to grasp this idea of co-operative work as distinct from individual work. As a help to such an

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understanding, three facts will be mentioned, designed to show the difference between work done individually and work done by groups industrially organized.

(a) The Co-operative Product. — The total amount of well-being, so far as that depends on the production and purchase of the products of work, is increased many fold by the fact that men work co-operatively rather than individually. Assume, for the purpose of illustration, a community composed of 10,000 men, and that each man working by himself can produce in a year one x wealth. The aggregate amount of wealth produced would be 10,000 X wealth. Suppose now this same number of men to work as a well-organized and well-administered body of workers; that many of these men are specialists and work together for the production of some particular things, which they offer in exchange for things produced by other workers; the amount of wealth produced under such conditions would be far in excess of the 10,000 x which resulted when each man in the community endeavored to satisfy his personal wants by his own labor. The product of 10,000 men organized as a body of industrial workers, might be 30,000 x wealth, the difference, or 20,000 X wealth, being the result of co-operation.

It is the extent to which team work, organized work, specialized work, is carried on that. makes the industrial world of to-day so different from that of centuries ago. The fact that all work is now co-operative is the secret of the enormous growth of wealth in modern times. Even machinery and capital, of which we hear so much, is the result of co-operative industrial effort. The lesson to be learned from this paragraph is, that the manner in which men work is of more importance, so far as results are concerned, than the fact that work is done. To understand the industrial organization, and to know the place which each worker holds in that organization, are the primary aims of a study of industrial society.

(b) The Directing Intelligence. — A second fact that helps to explain co-operative work is that organized industry seems to have an intelligence far beyond the intelligence of the men, or specialized groups of men, of whom industrial society is made up. The wonderful thing about the business world is, that some one somewhere knows the wants of every man and is working to make the particular thing that is able to satisfy those wants. A cowboy in Texas wants a dipper and he buys it at some cross-roads store. This dipper is made by a tinsmith in St. Louis, who buys the tin of a factory located in Indiana. For the manufacture of tin, sheet iron is needed, which is procured from Pittsburg where iron is manufactured. To make iron, ore is needed which comes from the mines in Mirmesota. How does the man who digs ore in Miimesota know that the cowboy in Texas wants a dipper?

Or perhaps the Minnesota miner wants a woolen shirt, which he buys at the company store. The shirt is made by a clothier in St. Paul out of flarmel manufactured in Massachusetts, out of wool grown in Argentina. How does the sheep herder in Argentina know that the miner in Minnesota wants a flarmel shirt?

Or, to turn the illustration about, a physician in London prescribes beef tea for an invalid, and the cook is told to buy some beef to make the tea. This beef, procured from a London marketer, is cut from a quarter of beef that once roamed the plains of Texas and was herded by our cowboy who bought the dipper. How does the cowboy

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know that an invalid in London will be in need of a cup of beef tea?

Most things appear simple until we try to explain them. The answer to the questions asked above is, that the Minnesota miner does not know that the Texas cowboy wants a dipper. The Argentina herder does not know that the Minnesota miner wants a flannel shirt. The Texas cowboy does not know that the London invalid wants a cup of beef tea. No one who works to make things for the market knows by whom they are to be consumed. There are millions of groups of workers making things that will be consumed by hundreds of millions of people diffused through many lands. The producer does not know the consvuner, nor does he need to know him. There seems to be in industrial society an intelligence that works automatically and adjusts the amount and kind of things that workers produce to the needs and whims of those for whom the goods are made. This is a remarkable situation. It makes yet more clear the fact that the working organization which we call industrial society is something more than a mere aggregation of workers. It is an organization guided by an intelligence that eliminates useless work, and encourages useful work. How this is accomplished will be explained in the chapter that treats of Control of Industry. For the present, the lesson of this paragraph is that, in order to understand the business world, we must think of industrial society as though it possessed a peculiar intelligence of its own. The rules according to which this intelligence works, provided these can be discovered and expressed, are what Political Economists call the natural laws of the business world.

(c) The Element of Time. — ^A third fact may be mentioned which throws yet added light on the character of the modern industrial world. In primitive industry, the time between the beginning and the end of a productive process was very short; in modern industry, years may intervene before a product is finished and made ready for consumption. An illustration will make this clear.

So far as primitive industry is concerned, the matter is very simple. A savage on the shore of a tropical island feels the need of food; he walks to a grove and having selected a ripe banana, plucks it, eats it, and returns to sleep on the bed of sand that the waves have spread. The period of time covered by this cycle of industrial events, — the want, the work, and the satisfaction, — ^may be half an hour.

An inland savage in the Temperate Zone is not so favored by nature. Here the seasons determine the harvest, and the work demanded is to gather in the Fall what is to be consumed during the Winter. In this case, the cycle of industrial events covers a period of four or five months. The wants of the future are foreseen, and present work is done to provide for future satisfaction.

Neither of these cases, however, carries the idea of co-operative work, and in both cases the amount of satisfaction is limited by what Nature gratuitously gives. Let us assume that new wants have come into existence, such as the want of clothing and of shelter, and that the industrial process has developed far enough to make clear to the worker that these new wants can be satisfied with less work if part of the working time is given to the making of tools and machines with which to work. A tool may last for twenty years, and each year of its use it lightens the work of him who made it. It permits the worker either

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to satisfy his wants with less labor, or to so use his labor as to satisfy a larger range of wants.

Let it be assumed, further, that the conditions of industry have so changed that our worker is a member of a working group, and that industrial intelligence has grown lar enough to permit all workers to see that the product of the same working time will be increased by specialization, that is to say: by dividing the work up between them. Before this can happen it is, of course, necessary that the wants of workers have grown far beyond the simple wants of coarse food and rude shelter. A variety of wants must be felt before workers will organize their work according to the principle of division of labor. The point, however, is that when this stage of industrial development is reached, the element of time enters in as a condition of fruitful work in every line of labor.