 CHAPTER XII. INDUSTRIAL ORGANIZATION CONTINUED. BUSINESS MANAGEMENT. Hithero, we have been considering the work of management chiefly in regard to the operations of a manufacturing or other business employing a good deal of manual labor, but we now have to consider more carefully the variety of the functions which businessmen discharge, the manner in which they are distributed among the heads of a large business, and again between different classes of businesses which co-operate in allied branches of production and marketing. And incidentally, we have to inquire how it occurs that, though in manufacturing, at least nearly every individual business, so long as it is well managed, tends to become stronger the larger it is grown. And through prima facie, we might therefore expect to see large firms driving their smaller rivals completely out of many branches of industry, yet they do not, in fact, do so. Business is taken here broadly to include all provision for the wants of others which is made in the expectation of payment direct or indirect for those who are to be benefited. It is thus contrasted with the provision for his wants which each one makes for himself and which those kindly services which are prompted by friendship and family affection. The primitive handicraftsmen managed his whole business for himself, but since his customers were with few exceptions his immediate neighbors, since he required very little capital, since the plan of production was arranged for him by custom, and since he had no labor to superintend outside his own household, these tasks did not involve any very great mental strain. He was far from enjoying unbroken prosperity, war and scarcity were constantly pressing on him and his neighbors, hindering his work and stopping their demand for his wares. But he was inclined to take good and evil fortune, like sunshine and rain, as things beyond his control. His fingers worked on, but his brain was seldom wary. Even in modern England we find now and then a village artisan who adheres to primitive methods and makes things on his own account, for sale to his neighbors, managing his own business and undertaking all its risks. But such cases are rare. The most striking instances of an adherence to old-fashioned methods of business are supplied by the learned professions. Or a physician or a solicitor manages as a rule his own business and does all its work. This plan is not without its disadvantages. Much valuable activity is wasted or turned to but slight account by some professional men of first-rate ability who have not the special aptitude required for obtaining a business connection. They would be better paid, would lead happier lives, and would do more good service for the world if their work could be arranged for them by some sort of middleman. But yet on the whole things are probably best as they are. There are sound reasons behind the popular instinct which distrusts the intrusion of the middleman in the supply of those services which require the highest and most delicate mental qualities and which can have their full value only when there is complete personal confidence. Old-age solicitors, however, act if not as employers or undertakers, yet as agents for hiring that branch of the legal profession which ranks highest and whose work involves the hardest mental strain. Again, many of the best instructors of youth sell their services not directly to the consumer but to the governing body of a college or school or to a headmaster who arranges for their purchase. The employer supplies to the teacher a market for his labor and is supposed to give to the purchaser who may not be a good judge himself some sort of guarantee as to the quality of the teaching supplied. Again, artists of every kind, however eminent, often find it to their advantage to employ someone else to arrange for them with customers. While those of less established repute are sometimes dependent for their living on capitalist traders who are not themselves artists but who understand how to sell artistic work to the best advantage, but in the greater part of the business of the modern world the task of so directing production that a given effort may be most effective in supplying human wants has to be broken up and given into the hands of a specialized body of employers or to use a more general term of businessmen. They adventure or undertake its risks. They bring together the capital and the labor required for the work. They arrange or engineer its general plan and super intend its minor details. Looking at businessmen from one point of view we may regard them as a highly skilled industrial grade from another as middlemen intervening between the manual worker and the consumer. There are some kinds of businessmen who undertake great risks and exercise a large influence over the welfare both of the producers and of the consumers of the wares in which they deal but who are not, to any considerable extent, direct employers of labor. The extreme types of these is the dealer on the stock exchange or the produce markets whose daily purchases and sales are of vast dimensions and who yet has neither factory nor warehouse but at most an office with a few clerks in it. The good and the evil effects of the action of speculators such as these are, however, very complex. We may give our attention at present to those forms of business in which administration counts for most and the subtler forms of speculation for least. Let us then take some illustrations of the more common types of business and watch the relations in which the undertaking of risks stands to the rest of the work of the businessman. The building trade will serve our purpose well, partly because it adheres in some respects to primitive methods of business. Late in the Middle Ages it was quite common for a private person to build a house for himself without the aid of a master builder. And the habit is not even now altogether extinct. A person who undertakes his own building must hire separately all his workmen. He must watch them and check their demands for payment. He must buy his materials from many quarters and he must hire or dispense with the use of expensive machinery. He probably pays more than the current wages, but here others gain what he loses. There is, however, great waste in the time he spends in bargaining with the men and testing and directing their work by his imperfect knowledge and again in the time that he spends in finding out what kinds and quantities he wants of different materials and where to get them best and so on. This waste is avoided by that division of labor which assigns to the professional builder the task of superintending details and to the professional architect the task of drawing plans. The division of labor is often carried still further when houses are built not at the expense of those who are to live in them but as a building speculation. When this is done on a large scale, as for instance in opening out a new suburb the stakes at issue are so large as to offer an attractive field to powerful capitalists with a very high order of general business ability but perhaps with not much technical knowledge of the building trade. They rely on their own judgment for the decision as to what are likely to be the coming relations of demand and supply for different kinds of houses but they entrust to others the management of details. They employ architects and surveyors to make plans in accordance with their general directions and then enter into contracts with professional builders for carrying them out but they themselves undertake the chief risks of the business and control its general direction. It is well known that this division of responsibility prevailed in the woollen trade just before the beginning of the era of large factories. The more speculative work and the broader risks of buying and selling being taken over by the undertakers who are not themselves employers of labor while the detailed work of superintendents and the narrower risks of carrying out definite contracts were handed over to small masters. This plan is still extensively followed in some branches of the textile trades especially those in which the difficulty of forecasting the future is very great. Manchester warehouse men give themselves to studying the movements of fashion, the markets for raw materials, the general state of trade of the money market and of politics and all other causes that are likely to influence the prices of different kinds of goods during the coming season and after employing if necessary skilled designers to carry out their ideas just as the building speculator in the previous case employed architects they give out to manufacturers in different parts of the world contracts for making the goods on which they have determined to risk their capital. In the clothing trades especially we see a revival of what has been called the house industry which prevailed long ago in the textile industries that is the system in which large undertakers give out work to be done in cottages and very small workshops to persons who work alone or with the aid of some members of their family or who perhaps employ two or three hired assistants. Footnote German economists call this factory like fabric mausik house industry as distinguished from the national house industry which uses the intervals of other work especially the winter interruptions of agriculture for subsidiary work in making textile and other goods. See Schoenberg on Gwerboy in his handbook. Domestic workers of this last class were common all over Europe and the Middle Ages but are now becoming rare except in the mountains and in Eastern Europe. They are not always well advised in their choice of work and much of what they make could be made better with far less labor in factories so that it cannot be sold profitably in the open market but for the most part they make for their own or their neighbor's use and thus save the profits of a series of middlemen. Compare survival of domestic industries by goner in the economic journal volume two and footnote. In remote villages in almost every county of England agents of large undertakers come round to give out to the cottagers partially prepared materials for goods of all sorts but especially of clothes such as shirts and collars and gloves and take back with them the finished goods. It is however in the great capital cities of the world and in other large towns especially old towns where there is a great deal of unskilled and unorganized labor with a somewhat low physique and morale that the system is most fairly developed especially in the clothing trades which employ 200,000 people in London alone and in the cheap furniture trades there is a continual contest between the factory and the domestic system now one gaining ground and now the other. For instance just at present the growing use of suing machines worked by steam power is strengthening the position of the factories in the boot trade while factories and workshops are getting an increased hold of the tailoring trade. On the other hand the hoistory trade is being tempted back to the dwelling house by recent improvements in hand-ditting machines and it is possible that new methods of distributing power by gas and petroleum and electric engines may exercise a like influence on many other industries or there may be a movement towards intermediate plans similar to those which are largely followed in the Sheffield trades. Many cutlery firms for instance put out grinding and other parts of their work at peace work prices to working men who rent the steam power which they require either from the firm from whom they take their contract or from someone else these workers sometimes employing others to help them sometimes working alone. Again the foreign merchant very often has no ships of his own but gives his mind to studying the course of trade and undertakes himself its chief risks. While he gets his carrying done for him by men who require more administrative ability but need not have the same power of forecasting the subtler movements of trade though it is true that as purchasers of ships they have great and difficult trade risks of their own. Again the broader risks of publishing a book are borne by the publisher perhaps in company with the author while the printer is the employer of labor and supplies the expensive types and machinery required for the business and a somewhat similar plan is adopted in many branches of the middle trades and of those which supply furniture clothing etc. Thus there are many ways in which those who undertake the chief risks of buying and selling may avoid the trouble of housing and superintending those who work for them. They all have their advantages and when the workers are men of strong character as at Sheffield the results are on the whole not unsatisfactory but unfortunately it is often the weakest class of workers those with the least resource and the least self-control who drift into work of this kind. The elasticity of the system which recommends it to the undertaker is really the means of enabling him to exercise if he chooses an undesirable pressure on those who do his work. For while the success of a factory depends on a great measure on its having a set of operatives who adhere steadily to it the capitalist who gives out work to be done at home has an interest in retaining a great many persons on his books. He is tempted to give each of them a little employment occasionally and play them off one against another and this he can easily do because they do not know one another and cannot arrange concerted action. When the profits of business are under discussion they are generally connected in people's minds with the employer of labor. The employer is often taken as a term practically co-extensive with the receiver of business profits but the instances which we have just considered are sufficient to illustrate the truth that the superintendents of labor is but one side and often not the most important side of business work and that the employer who undertakes their whole risks of his business really performs two entirely distinct services on behalf of the community and requires a twofold ability. To return to a class of considerations already noticed the manufacturer who makes goods not to meet special orders but for the general market must in his first role as merchant and organizer of production have the thorough knowledge of things in his own trade. He must have the power of forecasting the broad movements of production and consumption of seeing where there is an opportunity for supplying a new commodity that will meet a real want or improving the plan of producing an old commodity. He must be able to judge cautiously and undertake risks boldly and he must of course understand the materials and machinery used in his trade but secondly in this role of a ployer he must be a natural leader of men. He must have a power of first choosing his assistance rightly and then trusting them fully of interesting them in the business and of getting them to trust him so as to bring out whatever enterprise and power of organization there is in them while he himself exercises a general control over everything and preserves order and unity in the main plan of the business. The abilities required to make an ideal employer are so great and so numerous that very few persons can exhibit them all in a very high degree. Their relative importance however varies with the nature of the industry and the size of the business and while one employer excels in one set of qualities another excels in another. Scarcely any two owe their success to exactly the same combination of advantages. Some men make their way by the use of none but noble qualities while others owe their prosperity to qualities in which there is very little that is really admirable except sagacity and strength of purpose. Such then the general nature of the work of business management we have next to inquire what opportunities different classes of people have of developing business ability and when they have obtained that what opportunities they have of getting command over the capital required to give it scope and we may thus come a little closer to the problem stated at the beginning of the chapter and examine the course of development of a business firm during several consecutive generations and this inquiry may conveniently be combined with some examination of the different forms of business management. Hithero we have considered almost exclusively that form in which the whole responsibility and control rests in the hands of a single individual but this form is yielding ground to others in which the supreme authority is distributed among several partners or even a great number of shareholders. Private firms and joint stock companies, cooperative societies and public corporations are taking a constantly increasing share in the management of business and one chief reason of this is that they offer an attractive field to people who have good business abilities but have not inherited any great business opportunities. It is obvious that the son of a man already established in business starts with very great advantages over others. He has from his youth up special facilities for obtaining the knowledge and developing the faculties that are required in the management of his father's business. He learns quietly and almost unconsciously about men and manners in his father's trade and in those from which that trade buys and to which it sells. He gets to know the relative importance and the real significance of the various problems and anxieties which occupy his father's mind and he acquires a technical knowledge of the processes and the machinery of the trade. Footnote, we have already noticed how almost the only perfect apprenticeships of modern times are those of the sons of manufacturers who practice almost every important operation that is carried on in the works sufficiently to be able in after years to enter into the difficulties of all their employers and form a fair judgment of their work and footnote. Some of what he learns will be applicable only to his father's trade but the greater part will be serviceable in any trade that is in any way allied with that. While those general faculties of judgment and resource of enterprise and caution of firmness and courtesy which are trained by association with those who control the larger issues of any one trade will go a long way towards fitting him for managing almost any other trade. Further, the sons of successful businessmen start with more material capital than almost anyone else except those who by nurture and education are likely to be disinclined for business and unfitted for it and if they continue their father's work they have also the vantage ground of establishing trade connections. It would therefore at first sight seem likely that businessmen should constitute a sort of case dividing out among their sons the chief posts of command and founding hereditary dynasties which should rule certain branches of trade for many generations together but the actual state of things is very different for when a man has got together a great business his descendants often fail in spite of their great advantages to develop the high abilities and the special turn of mind and temperament required for carrying it on with equal success. He himself was probably brought up by parents of strong earnest character and was educated by their personal influence and by struggle with difficulties in early life but his children at all events if they were born after he became rich and in any case his grandchildren are perhaps left a good deal to the care of domestic servants who are not of the same strong fiber as the parents by whose influence he was educated and while his highest ambition was probably success in business they are likely to be at least equally anxious for social or academic distinction. Footnote until lately there has ever been in England a kind of antagonism between academic studies and business. This is now being diminished by the broadening of the spirit of our great universities and by the growth of colleges in our chief business centers the sons of businessmen when sent to the universities do not learn to despise their father's trade as often as they used to do even a generation ago many of them indeed are drawn away from business by the desire to extend the boundaries of knowledge but the higher forms of mental activity those which are constructive and not merely critical tend to promote a just appreciation of the nobility of business work rightly done and footnote for a time indeed all may go well his sons find a firmly established trade connection and what is perhaps even more important a well-chosen staff of subordinates with a generous interest in the business by mere assiduity and caution availing themselves of the traditions of the firm they may hold together for a long time but when a full generation has passed when the old traditions are no longer a safe guide and when the bonds that held together the old staff have been dissolved then the business almost invariably falls to pieces unless it is practically handed over to the management of new men who have meanwhile risen to partnership in the firm but in most cases his descendants arrive at this result by a shorter route they prefer an abundant income coming to them without effort on their part to one which though twice as large could be earned only by incessant toil and anxiety and they sell the business to private persons or a joint stock company or they become sleeping partners in it that is sharing in its risks and in its profits but not taking part in its management in either case the active control over their capital falls chiefly into the hands of new men the oldest and simplest plan for renovating the energies of the business is that of taking into partnership some of its ableist employees the autocratic owner and manager of a large manufacturing or trading concern finds that as years go on he has to delegate more and more responsibility to his chief subordinates partly because the work to be done is growing heavier and partly because his own strength is becoming less than it was he still exercises a supreme control but much must depend on their energy and probity so if his sons are not old enough or for any other reason are not ready to take part of the burden off his shoulders he decides to take one of his trusted assistants into partnership he thus lightens his own labors and at the same time that he secures that the task of his life will be carried on by those whose habits he has molded and for whom he has perhaps acquired something like a fatherly affection footnote much of the happiest romance of life much that is most pleasant to dwell upon in the social history of england from the middle ages up to our own day is connected with the story of private partnerships of this class many a youth has been stimulated to a brave career by the influence of ballads and tales which narrate the difficulties and the ultimate triumph of the faithful apprentice who has at length been taken into partnership perhaps on marrying his employer's daughter there are no influences on national character more far reaching than those which thus give shape to the aims of aspiring youth and footnote but there are now and there always have been private partnerships on more equal terms two or more people of about equal wealth and ability combining their resources for a large and difficult undertaking in such cases there is often a distinct partition of the work of management in manufacturers for instance one partner will sometimes give himself almost exclusively to the work of buying raw material and selling the finished product while the other is responsible for the management of the factory and in a trading establishment one partner will control the wholesale and the other the retail department in these and other ways private partnership is capable of adapting itself to a great variety of problems it is very strong and very elastic it is played a great part in the past and it is full of vitality now but from the end of the middle ages to the present time there has been in some classes of trades a movement towards the substitution of public joint stock companies the shares of which can be sold to anybody in the open market for private companies the shares in which are not transferable without the leave of all concerned the effects of this change has been to induce people many of whom have no special knowledge of trade to give their capital into the hands of others employed by them and there has thus arisen a new distribution of the various parts of the work of business management the ultimate undertakers of the risks incurred by a joint stock company are the shareholders but as a rule they do not take much active part in engineering the business and controlling its general policy and they take no part in superintending its details after the business has once got out of the hands of its original promoters the control of it is left chiefly in the hands of directors who if the company is a very large one probably owned but a very small proportion of its shares while the greater part of them have not much technical knowledge of the work to be done they are not generally expected to give their whole time to it but they are supposed to bring wide general knowledge and sound judgment to bear upon the broader problems of its policy and at the same time to make sure that the managers of the company are doing their work thoroughly footnote bhajiyot delighted to argue see for instance english constitution chapter 12 that a cabinet minister often derives some advantage from his want of technical knowledge of the business of his department for he can get information on matters of detail from the permanent secretary and other officials who are under his authority and while he is not likely to set his judgment against theirs on matters where their knowledge gives them the advantage his unprejudiced common sense may well overrule the traditions of officialism in broad questions of public policy and in the like manner the interests of a company may possibly sometimes be most advanced by those directors who have the least technical knowledge of the details of its business and footnote to the managers and their assistance is left a great part of the work of engineering the business and the whole of the work of superintending it but they are not required to bring any capital into it and they are supposed to be promoted from the lower ranks to the highest according to their zeal and ability since the joint stock companies in the united kingdom do a very great part of the business of all kinds that is done in the country they offer very large opportunities to men with natural talents for business management who have not inherited any material capital or any business connection joint stock companies have great elasticity and can expand themselves without limit when the work to which they have set themselves offers a wide scope and they are gaining ground in nearly all directions but they have one great source of weakness in the absence of any adequate knowledge of the business on the part of the shareholders who undertake its chief risks it is true that the head of a large private firm undertakes the chief risks of the business while he entrusts many of its details to others but his position is secured by his power of forming a direct judgment as to whether his subordinate serve his interests faithfully and discreetly if those to whom he hasn't trusted the buying or selling of goods for him take commissions from those with whom they deal he is in a position to discover and punish the fraud if they show favoritism and promote incompetent relations or friends of their own or if they themselves become idle and shirk their work or even if they do not fulfill the promise of exceptional ability which induced him to give them their first lift he can discover what is going on and set it right but in all these matters the great body of the shareholders of a joint stock company are save in a few exceptional instances almost powerless though a few of the larger shareholders often exert themselves to find out what is going on and are thus able to exercise an effective and wise control over the general management of the business it is a strong proof of the marvelous growth in recent times of a spirit of honesty and uprightness in commercial matters that the leading officers of great public companies yield as little as they do to the vast temptations to fraud which lie in their way if they showed an eagerness to avail themselves of opportunities for wrong doing at all approaching that of which we read about in the commercial history of earlier civilization their wrong uses of the trusts imposed in them would have been on so great a scale as to prevent the development of this democratic form of business there is every reason to hope that the progress of trade morality will continue aided in the future as it has been in the past by a diminution of trade secrecy and by increased publicity in every form and thus collective and democratic forms of business management may be able to extend themselves safely in many directions in which they have hitherto failed and may far exceed the great services they already render in opening a large career to those who have no advantages of birth the same may be said of the undertakings of government's imperial and local they also may have a great future before them but up to the present time the taxpayer who undertakes the ultimate risks has not generally succeeded in exercising inefficient control over the businesses and in securing officers who will do their work with as much energy and enterprise as is shown in private establishments the problems of large joint stock company administration as well as of governmental business involve however many complex issues into which we cannot enter here they are urgent because very large businesses have recently increased fast though perhaps not quite so fast as is commonly supposed the change has been brought about chiefly by the development of processes and methods in manufacture and mining in transport and banking which are beyond the reach of any but very large capitals and by the increase in the scope and functions of markets and in technical facilities for handling large masses of goods the democratic element in governmental enterprise was at first almost wholly vivifying but experience shows creative ideas and experiments in business technique and in business organization to be very rare in governmental undertakings and not very common in private enterprises which have drifted towards bureaucratic methods as the result of their great age and large size a new danger is thus threatened by the narrowing of the field of industry which is open to the vigorous initiative of smaller businesses production on the largest scale of all is to be seen chiefly in the united states where giant businesses with some touch of monopoly are commonly called trusts some of these trusts have grown from a single route but most of them have been developed by the amalgamation of many independent businesses and a first step towards this combination was generally an association or cartel to use a german term of a rather loose kind the system of cooperation aims at avoiding the evils of these two methods of business management in that ideal form of cooperative society for which many still fondly hope but which as yet has been scantily realized in practice apart or the whole of those shareholders who undertake the risks of the business are themselves employed by it the employees whether they contribute towards the material capital of the business or not have a share in its profits and some power of voting at the general meetings at which the broad lines of its policy are laid down and the officers appointed who are to carry out that policy into effect they are thus the employers and masters of their own managers and foremen they have fairly good means of judging whether the higher work of engineering the business is conducted honestly and efficiently and they have the best possible opportunities for detecting any laxity or incompetence in its detailed administration and lastly they render unnecessary some of the minor work of superintendence that is required in other establishments for their own pecuniary interests and the pride they take in the success of their own business make each of them adverse to any shirking of work either by himself or by his fellow workmen but unfortunately the system has very great difficulties of its own for human nature being what it is the employees themselves are not always the best possible masters of their own foremen and managers jealousies and frettings that reproof are apt to act like sand that has got mixed with the oil in the bearings of a great and complex machinery the hardest work of business management is generally that which makes the least outward show those who work with their hands are apt to underrate the intensity of this train involved in the highest work of engineering the business and to grudge it's being paid for at anything like as high a rate as it could earn elsewhere and in fact the managers of a cooperative society seldom have the alertness the inventiveness and the ready versatility of the ableist of those men who have been selected by the struggle for survival and who have been trained by the free and unfettered responsibility of private business partly for these reasons the cooperative system has seldom been carried out in its entirety and its partial application has not yet attained a conspicuous success except in retelling commodities consumed by working men but within the last few years more hopeful signs have appeared of the success of bona fide productive associations or co-partnerships those working men indeed whose tempers are strongly individualistic and whose minds are concentrated almost wholly on their own affairs will perhaps always find their quickest and most congenial path to material success by commencing business as small independent undertakers or by working their way upwards in a private firm or a public company but cooperation has a special charm for those in whose tempers the social element is stronger and who desire not to separate themselves from their old comrades but to work among them as their leaders its aspirations may in some respects be higher than its practice but it undoubtedly does rest in a great measure on ethical motives the true cooperator combines a keen business intellect with a spirit full of an earnest faith and some cooperative societies have been served excellently by men of great genius both mentally and morally men who for the sake of the cooperative faith that is in them have worked with great ability and energy and with perfect uprightness being all the time content with lower pay than they could have got as business managers on their own account or for a private firm men of the stamp are more common among the officers of cooperative societies than in other occupations and though they are not very common even there yet it may be hoped that the diffusion of a better knowledge of the true principles of cooperation and the increase of general education are every day fitting a larger number of cooperators for the complex problems of business management meanwhile many partial applications of the cooperative principle are being tried under various conditions each of which presents some new aspect of business management thus under the scheme of profit sharing a private firm while retaining the unfettered management of its business pays its employees the full market rate of wages whether by time or piecework and agrees in addition to divide among them a certain share of any profits that may be made above a fixed minimum it being hoped that the firm will find a material as well as a moral reward in the diminution of friction in the increased willingness of its employees to go out of their way to do the little things that may be of great benefit comparatively to the firm and lastly in attracting to itself workers of more than average ability and industry footnote compare schloss methods of industrial renumeration and gillman a dividend to labor and footnote another partially cooperative scheme is that of some old and cotton mills they are really joint stock companies but among their shareholders are many working men who have a special knowledge of the trade though they often prefer not to be employed in the mills of which they are part owners and another is that of the productive establishments owned by the main body of cooperative stores through their agents the cooperative wholesale societies in the scotch wholesale but not in the english the workers as such have some share in the management and in the profits of the works at a later stage we shall have to study all those various cooperative and semi cooperative forms of business more in detail and to inquire into the causes of their success or failure in different classes of business wholesale and retail agricultural manufacturing and trading but we must not pursue this inquiry further now enough has been said to show that the world is only just beginning to be ready for the higher work of the cooperative movement and that it's many different forms may therefore be reasonably expected to attain a larger success in the future than in the past and to offer excellent opportunities for working men to practice themselves in the work of business management to grow into the trust and confidence of others and gradually rise to posts in which their business abilities will find scope in speaking of the difficulty that a working man has of rising to a post in which he can turn his business ability to full account the chief stress is commonly laid upon his want of capital but this is not always his chief difficulty for instance the cooperative distributive societies have accumulated a vast capital on which they find it difficult to get a good rate of interest and which they would be rejoiced to lend to any set of working men who could show they have the capacity for dealing with difficult business problems cooperators who have firstly a high order of business ability and probity and secondly the personal capital of a great reputation among their fellows for these qualities will have no difficulty in getting command of enough material capital for considerable undertaking the real difficulty is to convince a sufficient number of those around them that they have these rare qualities and the case is not very different when an individual endeavors to obtain from the ordinary sources the loan of the capital required to start him in business it is true that in almost every business there is a constant increase in the amount of capital required to make a fair start but there is a much more rapid increase in the amount of capital which is owned by people who do not want to use it themselves and are so eager to lend it out that they will accept a constantly lower and lower rate of interest for it much of this capital passes into the hands of bankers who promptly lend it to anyone who whose business ability and honesty they are convinced to say nothing of the credit that can be got in many businesses from those who supply the requisite raw material or stock and trade the opportunities for direct borrowing are now so great that a moderate increase in the amount of capital required for a start in business is no very serious obstacle in the way of a person who has once got over the initial difficulty of earning a reputation for being likely to use it well but perhaps a greater though less conspicuous hindrance to the rise of the working man is the growing complexity of business the head of a business has now to think of many things about which he never used to trouble himself in earlier days and these are just the kind of difficulties for which the training of the workshop affords the least preparation against this must be set the rapid improvement of the education of the working man not only at school but what is more important in afterlife by newspapers and from the work of cooperative societies and trade unions and in other ways about three fourths of the whole population of england belong to the wage earning classes and at all events when they are well fed properly housed and educated they have their fair share of that nervous strength which is the raw material of business ability without going out of their way they are all consciously or unconsciously competitors for posts of business command the ordinary workman if he shows ability generally becomes a foreman from that he may rise to be a manager and to be taken into partnership with his employer or having saved a little of his own he may start one of those small shops which still can hold their own in a working man's quarter stock it chiefly on credit and let his wife attend to it by day while he gives his evenings to it in these or in other ways he may increase his capital till he can start a small workshop or factory once having made a good beginning he will find the bank's eager to give him generous credit he must have time and since he is not likely to start in business till after middle age he must have a long as well as a strong life but if he has this and also patience genius and good fortune he is pretty sure to command a goodly capital before he dies footnote the germans say that success in business requires geld geduld genny and glug the chances that a working man has of rising very somewhat with the nature of the work being greater in those trades in which a careful attention to detail counts for most and a wide knowledge whether of science or of the world movements of speculation counts for least thus for instance thrift and the knowledge of practical details are the most important elements of success in the ordinary work of the pottery trade and in consequence most of those who have done well in it have risen from the bench like hosea wedgewood cg wedgewood's evidence before the commission on technical education and a similar statement might be made about many of the sheffield trades but some of the working classes develop a great faculty for taking speculative risks and if the knowledge of facts by which successful speculation must be guided comes within their reach they will often push their way through competitors who have started above them some of the most successful wholesale dealers in perishable commodities such as fish and fruit have begun life as market porters and footnote in a factory those who work with their hands have better opportunities of rising to posts of command than the bookkeepers and many others to whom social tradition has assigned a higher place but in trading concerns it is otherwise what manual work is done in them has as a rule no educating character while the experience of the office is better adapted for preparing a man to manage a commercial than a manufacturing business there is on the whole a broad movement from below upwards perhaps not so many as formerly rise at once from the position of working men to that of employers but there are more who get on sufficiently far to give their sons a good chance of attaining to the highest posts the complete rise is not so very often accomplished in one generation it is more often spread over two but the total volume of the movement upwards is probably greater than it has ever been and perhaps it is better for society as a whole that the rise should be distributed over two generations the workmen who at the beginning of the last century rose in such large numbers to become employers were seldom fit for posts of command they were too often harsh and tyrannical they lost their self-control and were neither truly noble nor truly happy while their children were often haughty extravagant and self-indulgent squandering their wealth on low and vulgar amusements having the worst faults of the older aristocracy without their virtues the foreman or superintendent who has still to obey as well as the command but who is rising and sees his children likely to rise further is in some ways more to be envied than the small master his success is less conspicuous but the work is often higher and more important for the world while his character is more gentle and refined and not less strong his children are well trained and if they get wealth they are likely to make a fairly good use of it it must however be admitted that the rapid extension of vast businesses and especially of joint stock companies in many branches of industry is tending to make the able and thrifty workman with his high ambitions for his sons seek to put them to office work there they are in danger of losing the physical vigor and the force of character which attaches to constructive work with the hands and to become commonplace members of the lower middle class but if they can keep their force unimpaired they are likely to become leaders in the world though not generally in their father's industry and therefore without the benefit of specially appropriate traditions and aptitude when a man of great ability is once at the head of an independent business whatever be the route by which he has got there he will with moderate good fortune soon be able to show such evidence of his power of turning capital to good account as to enable him to borrow in one way or another almost any amount that he may need making good profits he adds to his own capital and this extra capital of his own is a material security for further borrowings while the fact that he has made it himself tends to make lenders less careful to insist on a full security for their loans of course fortune tells for much in business a very able man may find things going against him the fact that he is losing money may diminish his power of borrowing if he is working partly on borrowed capital it may make those who have lent it refuse to renew their loans and may thus cause him to succumb to what would have been but a passing misfortune if he had been using no capital but his own footnote the danger of not being able to renew his borrowings just at the time when he wants the most puts him at a disadvantage relatively to those who use only their own capital much greater than is represented by the mere interest on his borrowings and when we come to that part of the doctrine of distribution which deals with earnings of management we shall find that for among other reasons profits are something more than interest in addition to net earnings of management those earnings which are properly to be ascribed to the abilities of businessmen and footnote and in fighting his way upwards he may have a chuckered life full of great anxieties and even misfortunes but he can show his ability in misfortune as well as in success human nature is sanguine and it is notorious that men are abundantly willing to lend to those who have passed through commercial disaster without loss to their business reputation thus in spite of vicissitudes the able businessman generally finds that in the long run the capital at his command grows in proportion to his ability meanwhile as we have seen he who with small ability is in command of a large capital speedily loses it he may perhaps be one who could and would have managed a small business with credit and left it stronger than he had found it but if he is not the genius for dealing with great problems the larger it is the more speedily will he break it up for as a rule a large business can be kept going only by transactions which after allowing for ordinary risks leave but a very small percentage of gain a small profit on a large turnover quickly made will yield a rich income to able men and in those businesses which are of such a nature as to give scope to very large capitals competition generally cuts the rate of profits on the turnover very fine a village trader may make five percent less profits on his turnover than his able arrival and yet be able to hold his head above water but in those large manufacturing and trading businesses in which there is a quick return and a straightforward routine the whole profits on the turnover are often so very small that a person who falls behind his rivals by even a small percentage loses a large sum at every turnover while in those large businesses which are difficult and do not rely on routine and which afford high profits on the turnover to really able management there are no profits at all to be got by anyone who attempts the task with only ordinary ability these two sets of forces the one increasing the capital at the command of able men and the other destroying the capital that is in the hands of weaker men bring about the result that there is a far more close correspondence between the ability of businessmen and the size of the business which they own than at first sight would appear probable and when to this fact we add all the many routes which we have already discussed by which a man of great natural business ability can work his way up in some private firm or public company we may conclude that wherever there is work on a large scale to be done in such a country as england the ability and the capital required for it are pretty sure to be speedily forthcoming further just as industrial skill and ability are getting every day to depend more and more on the broad faculties of judgment promptness resource carefulness and steadfastness of purpose faculties which are not specialized to any one trade but which are more or less useful in all so it is with regard to business ability in fact business ability consists more of these non-specialized faculties than do industrial skill and ability in the lower grades and the higher the grade of business ability the more various arts applications since then business ability in command of capital moves with great ease horizontally from a trade which is overcrowded to one which offers good openings for it and since it moves with great ease vertically the abler men rising to higher posts in their own trade we see even at this early stage of our inquiry some good reasons for believing that in modern england the supply of business ability in command of capital accommodates itself as a general rule to the demand for it and thus has a fairly defined supply price finally we may regard the supply price of business ability in command of capital as composed of three elements the first is the supply price of capital the second is the supply price of business ability and energy and the third is the supply price of that organization by which the appropriate business ability and the requisite capital are brought together we have called the price of the first of these three elements interest we may call the price of the second taken by itself net earnings of management and that of the second and third taken together gross earnings of management end of book four chapter 12 chapter 13 of principles of economics book four this is a LibriVox recording all LibriVox recordings are in the public domain for more information or to volunteer please visit LibriVox.org principles of economics book four by Alfred Marshall chapter 13 conclusion correlation of the tendencies to increasing and to diminishing return at the beginning of this book we saw how the extra return of raw produce which nature affords to an increased application of capital and labor other things being equal tends in the long run to diminish in the remainder of the book and especially in the last four chapters we have looked at the other side of the shield and seen how man's power of productive work increases with the volume of the work that he does considering first the causes that govern the supply of labor we saw how every increase in the physical mental and moral vigor of a people makes them more likely other things being equal to rear to adult age a large number of vigorous children turning next to the growth of wealth we observed how every increase of wealth tends in many ways to make a greater increase more easy than before and lastly we saw how every increase of wealth and every increase in the numbers and intelligence of the people increase the facilities for a highly developed industrial organization which in its turn adds much to the collective efficiency of capital and labor looking more closely at the economies arising from an increase in the scale of production of any kind of goods we found that they fell into two classes those dependent on the general development of the industry and those dependent on the resources of the individual houses of business engaged in it and the efficiency of their management that is into external and internal economies we saw how these latter economies are liable to constant fluctuations so far as any particular house is concerned an able man assisted perhaps by some strokes of good fortune gets a firm footing in the trade he works hard and lives sparely his own capital grows fast and the credit that enables him to borrow more capital grows still faster he collects around him subordinates of more than ordinary zeal and ability as his business increases they rise with him they trust him and he trusts them each of them devotes himself with energy to just that work for which he especially fitted so that no high ability is wasted on easy work and no difficult work is entrusted to unskillful hands corresponding to this steadily increasing economy of skill the growth of his business brings with it similar economies of specialized machines and plant of all kinds every improved process is quickly adopted and made the basis of further improvements success brings credit and credit brings success credit and success help to retain old customers and to bring new ones the increase of his trade gives him great advantages in buying his goods advertise one another and thus diminish his difficulty in finding event for them the increase in the scale of his business increases rapidly the advantages which he has over his competitors and lowers the price at which he can afford to sell this process may go on as long as his energy and enterprise his inventive and organizing power retain their full strength and freshness and so long as the risks which are inseparable from business do not cause him exceptional losses and if it could endure for a hundred years he and one or two others like him would divide between them the whole of that branch of industry in which he is engaged the large scale of their production would put great economies within their reach and provided they competed to their utmost with one another the public would derive the chief benefit of these economies and the price of the commodity would fall very low but here we may read a lesson from the young trees of the forest as they struggle upwards through the benumbing shade of their older rivals many succumb on the way and a few only survive these few become stronger with every year they get a larger share of light and air with every increase of their height and at last in their turn they tower above their neighbors and seem as though they would grow on forever and forever become stronger as they grow but they do not one tree will last longer in full vigor and attain a greater size than another but sooner or later age tells on them all though the taller ones have a better access to light and air than their rivals they gradually lose vitality and one after another they give place to others which though of less material strength have on their side the vigor of youth as with the growth of trees so was it with the growth of businesses as a general rule before the great recent development of vast joint stock companies which often stagnate but do not readily die now that rule is far from universal but it still holds in many industries and trades nature still presses on the private businesses by limiting the life of its original founders and by limiting even more narrowly that part of their lives in which their faculties retain full vigor and so after a while the guidance of the business falls into the hands of people with less energy and less creative genius if not with less active interest in its prosperity if it is turned into a joint stock company it may retain the advantages of division of labor of specialized skill and machinery it may even increase them by a further increase of its capital and under favorable conditions it may secure a permanent and prominent place in the work of production but it is likely to have lost so much of its elasticity and progressive force that the advantages are no longer exclusively on its side in its competition with younger and smaller rivals when therefore we are considering the broad results which the growth of wealth and population exert on the economies of production the general character of our conclusions is not very much affected by the facts that many of these economies depend directly on the size of the individual establishments engaged in the production and that in almost every trade there is a constant rise and fall of large businesses at any one moment some firms being in the ascending phase and others in the descending for in times of average prosperity decay in one direction is sure to be more than balanced by growth in another meanwhile an increase in the aggregate scale of production of course increases those economies which do not directly depend on the size of individual houses of business the most important of these results from the growth of correlated branches of industry which mutually assist one another perhaps being concentrated in the same localities but anyhow availing themselves of the modern facilities for communication offered by steam transport by the telegraph and by the printing press the economies arising from such sources of this which are accessible to any branch of production do not depend exclusively upon its own growth but yet they are sure to grow rapidly and steadily with that growth and they are sure to dwindle in some though not in all respects if it decays these results will be of great importance when we come to discuss the causes which govern the supply price of a commodity we shall have to analyze carefully the normal cost of producing a commodity relatively to a given aggregate volume of production and for this purpose we shall have to study the expenses of a representative producer for that aggregate volume on the one hand we shall not want to select some new producer just struggling into business who works under many disadvantages and has to be content for a time with little or no profits but who is satisfied with the fact that he is establishing a connection and taking the first steps towards building up a successful business nor on the other hand shall we want to take a firm which by exceptionally long sustainability and good fortune has got together a vast business and huge well ordered workshops that give it a superiority over almost all its rivals but our representative firm must be one which has had a fairly long life and fair success which is managed with normal ability which has normal access to the economies external and internal which belong to that aggregate volume of production account being taken of the class of goods produced the conditions of marketing them and the economic environment generally thus a representative firm is in a sense an average firm but there are many ways in which the term average might be interpreted in connection with a business and a representative firm is that particular sort of average firm at which we need to look in order to see how far the economies internal and external of a production on a large scale have extended generally in the industry and country in question we cannot see this by looking at one or two firms taken at random but we can see it fairly well by selecting after a broad survey a firm whether in private or joint stock management or better still more than one that represents to the best of our judgment this particular average the general argument of the present book shows that an increase in the aggregate volume of production of anything will generally increase the size and therefore the internal economies possessed by such a representative firm that it will always increase the external economies to which the firm has access and thus will enable it to manufacture at a less proportionate cost of labor and sacrifice them before in other words we say broadly that while the part which nature plays in production shows a tendency to diminishing return the part which man plays shows a tendency to increasing return the law of increasing return may be worded thus an increase of labor and capital leads generally to improved organization which increases the efficiency of the work of labor and capital therefore in those industries which are not engaged in raising raw produce an increase of labor and capital generally gives a return increased more than in proportion and further this improved organization tends to diminish or even override any increased resistance which nature may offer to raising increased amounts of raw produce if the actions of the laws of increasing and diminishing return are balanced we have the law of constant return and an increased produce is obtained by labor and sacrifice increased just in proportion for the two tendencies towards increasing and diminishing return press constantly against one another in the production of wheat and wool for instance the latter tendency has almost exclusive sway in an old country which cannot import freely in turning the wheat into flour or the wool into blankets and increase in the aggregate volume of production brings some new economies but not many for the trades of grinding wheat and making blankets are already on so great a scale that any new economies that they may attain are more likely to be the result of new inventions than of improved organization in a country however in which the blanket trade is but slightly developed these latter may be important and then it may happen that an increase in the aggregate production of blankets diminishes the proportionate difficulty of manufacturing by just as much as it increases that of raising the raw material in that case the actions of the laws of diminishing and of increasing return would just neutralize one another and blankets would conform to the law of constant return but in most of the more delicate branches of manufacturing where the cost of raw materials counts for little and in most of the modern transport industries the law of increasing return acts almost unopposed increasing return is a relation between the quantity of effort and sacrifice on the one hand and a quantity of produce on the other the quantities cannot be taken out exactly because changing methods of production call for machinery and for unskilled and skilled labor of new kinds and in new proportions but taking a broad view we may perhaps say vaguely that the output of a certain amount of labor and capital in an industry has increased by perhaps a quarter or a third in the last 20 years to measure outlay and output in terms of money is attempting but a dangerous resource for a comparison of money outlay with money returns is apt to slide into an estimate of the rate of profit on capital we may now sum up provisionally the relations of industrial expansion to social well-being a rapid growth of population has often been accompanied by unhealthy and inner rating habits of life in overcrowded towns and sometimes it is started badly outrunning the material resources of the people causing them with imperfect appliances to make excessive demands on the soil and so to call forth the stern action of the law of diminishing return as regards raw produce without having the power of minimizing its effects having thus begun with poverty and increase in numbers may go on to its two frequent consequence in that weakness of character which unfits a people for developing highly organized industry these are serious perils but yet it remains true that the collective efficiency of the people with the given average of individual strength and energy may increase more than in proportion to their numbers if they can for a time escape from the pressure of the law of diminishing return by importing food and other raw produce on easy terms if their wealth is not consumed in great wars and increases at least as fast as their numbers and if they avoid habits of life that would infebel them then every increase in their numbers is likely for the time to be accompanied by more than proportionate increase in their power of obtaining material goods for it enables them to secure the many various economies of specialized skill and specialized machinery of localized industries and production on a large scale it enables them to have increased facilities of communication of all kinds while the very closeness of their neighborhood diminishes the expense of time and effort involved in every sort of traffic between them and gives them new opportunities of getting social enjoyments and the comforts and luxuries of culture in every form no doubt deduction must be made for the growing difficulty of finding solitude and quiet and even fresh air but there is in most cases some balance of good taking account of the fact that an increasing density of population generally brings with it access to new social enjoyments we may give a rather broader scope to this statement and say an increase of population accompanied by an equal increase in the material sources of enjoyment and aids to production is likely to lead to a more than proportionate increase in the aggregate income of enjoyment of all kinds provided firstly an adequate supply of raw produce can be obtained without great difficulty and secondly there is no such overcrowding as causes physical and moral vigor to be impaired by the want of fresh air and light and of healthy and joyous recreation for the young the accumulation of wealth of civilized countries is at present growing faster than the population and though it may be true that the wealth per head would increase somewhat faster if the population did not increase quite so fast yet as a matter of fact an increase of population is likely to continue to be accompanied by a more than proportionate increase of the material aids to production and in England at the present time with easy access to abundant foreign supplies of raw material an increase of population is accompanied by a more than proportionate increase of the means of satisfying human wants other than the need for light fresh air etc much of this increase is however attributable not to the increase of industrial efficiency but to the increase of wealth by which it is accompanied and therefore it does not necessarily benefit those who have no share in that wealth and further england's foreign supplies of raw produce may at any time be checked by changes in the trade regulations of other countries and may be almost cut off by a great war while the naval and military expenditure which would be necessary to make the country fairly secure against this last risk would appreciably diminish the benefits that she derives from the action of the law of increasing return.