Labor And Enterprise
( Originally Published Early 1900's )
1. Labor.—Labor includes all human effort having for its end or aim the gratification of wants or the production of income. Using the term in its broadest sense, we might say that there is not an idler on the earth, for all persons are seeking in one way or another to get some satisfaction out of life. But in the business or economic sense there is a sharp distinction between those who work and those who loaf and play. The workers are those who are helping either to in-crease our store of Intangible economic goods, commonly known as commodities, or to render some personal service to others in return for compensation.
The economist is especially interested in the problems connected with the labors of those people who are engaged, whether directly or indirectly, in the production of commodities. These workers are parts of the great industrial machine and may be roughly divided into two classes, skilled and unskilled laborers.
2. Skilled and unskilled laborers.-A skilled laborer is one who has learned thru training and practice to perform certain tasks with unusual aptitude. He is in a sense a specialist, and the degree of his skill, his rank among skilled laborers, depends upon his use of brain power and the fineness of his senses. A man of sluggish intellect and dull senses might become what the New Englanders call a barn carpenter, but he never could learn to build a fine house and certainly could not become a cabinet maker, for he would lack judgment in the selection of materials and tools and his dull senses would be satisfied with imperfect joints and mortises. Thru inheritance men receive different endowments from nature. Some easily become skilled laborers of a very high class, while others seem doomed to remain thru life in the lowest ranks.
The unskilled laborer is one who performs tasks requiring the minimum of mental effort. Physical strength is his chief asset. He digs, shovels, hoes, lifts, fetches and carries, but he is not paid to think.
Economics is specially concerned with the forces and conditions that determine the wages of both skilled and unskilled labor. The labor problem is recognized as the most important and the most difficult in the whole field of economics. What is a living wage or a fair wage? Why are the wages of some classes of workmen, even those who possess some skill, so low that the workers' families cannot be properly fed and housed? What steps should be taken in order that labor may get a better wage? In the long run what is the effect of strikes and lockouts, of trade unions, of war, of high living upon the welfare of the laboring classes? Economists must find answers to questions of this sort.
3. Division of labor.—Since men and women are differently endowed, they naturally seek the kind of employment for which they are best fitted, or which they like best, or which seems to them the least irk-some. As a result and because of the development of elaborate exchange and transportation facilities, modern business and industry are most highly specialized; every great industry has been subdivided into numerous groups and these again into minor subdivisions. Experience has taught men that greater efficiency results if a workman can concentrate upon a single task or if an entire factory can be devoted to the manufacture of a single simple product. The parts of many complicated machines are now manufactured in different shops and then assembled to create the finished product.
4. Advantages of division of labor.—Division of labor is one of the most conspicuous facts of modern industry and business. It has many advantages. It enables a workman to become more adept and so improves the product and shortens the time of production. It lowers the cost of production, for it in-creases the output per man and so brings into existence a larger supply of economic goods than would be produced if workers were employed at different tasks on the same day. The main reason why specialization of industry has proceeded so rapidly in modern times is because of the reduction in costs which resulted.
Division of labor has made possible a fuller development of the natural resources of different localities. From a social point of view this localization of industry is exceedingly important. A locality is looked upon as one of specialized industry when in the course of time it has demonstrated clearly its advantages over other districts. New England has long been the centre of the textile industry of the United States, tho its prestige has been somewhat affected by the rise of the Southern cotton mills, which have the advantages of nearness to raw material, fuel and cheap labor. But on the other hand, the New England mills possess water-power and proximity to markets.
Another instance of localization of industry is the gathering of flour mills about St. Anthony Falls at Minneapolis. The original reason for their location at that point was the accessibility of water-power and the nearness to a hard-wheat supply. The milling business at Minneapolis has reached such proportions that the waterfalls are no longer adequate for motive power, and of the original advantages of location the nearness to the wheat supply alone remains. New advantages, however, have appeared in the form of a well-trained labor group, together with the necessary commercial and shipping facilities for the handling of the product.
5. Disadvantages of division of labor.--While the division of labor increases the workers' efficiency and tends to the enlargement of a nation's wealth, nevertheless from the workers' point of view it possesses some disadvantages and may be carried to a point that is harmful to society as a whole. The work of many becomes monotonous and wearisome. It is a well-known psychological fact that the incessant employment of the senses and muscles in the same way, even tho pleasurable in the beginning, finally becomes most distasteful if not painful. Two carpenters building a house will do all kinds of tasks during the day—sawing, measuring, fitting, leveling. They will get more satisfaction out of their work and will be less weary at night than if they are part of a gang of twenty men hired to build a house quickly, three or four working constantly with the saw, a few measuring and marking the lumber, some laying the foundation, others digging the cellar, one group putting the parts together with nail and hammer, and the remainder shingling the roof.
Furthermore the division of labor naturally tends to the narrowing of a man. The all-round cobbler who can make as well as repair shoes has almost disappeared. So has the old-fashioned Yankee,farmer who could make shoes for himself and harness and shoes for his horse, could build his own barn or house, or make a wagon and a sled. In the country districts we still find men who know something about many trades and who can make themselves very useful in different occupations, but in the cities and towns workers are becoming more and more specialists and more and more ignorant about other callings. If an inventor makes a machine that can do their work more quickly or rapidly, they are helpless. When the typesetting machine came into use thousands of printers in the United States lost their jobs and would have suffered much greater distress than they did had not the stereotyping process been invented. By lowering the costs of publication it led to a great increase in the number of country dailies and weeklies, causing a migration of printers from the great cities into the rural districts.
The undoubted disadvantages of division of labor to the working-man are offset in part, if not wholly, by higher wages and shorter hours. If his work is as a whole less agreeable, he has more time to play, more time for his family, more time for self-improvement if he is so disposed.
6. The enterpriser or entrepreneur.—The fourth and final factor in the production of wealth is the brain power or business ability which directs the labor in its utilization of land and capital, and assumes all responsibility for the payment of wages, rent and interest. When this ability is embodied in a single individual he is called by economists the entrepreneur or enterpriser. Entrepreneur is the French word for undertaker, but in English this term is commonly applied to a single occupation.
The manager or entrepreneur is the most important individual in the business world. If he blunders, capital is wasted and the demand for labor is weakened. In so far as the entrepreneurs or business managers of a country are wise, farseeing, energetic and courageous, its industries and business prosper, abundant opportunities are opened up for labor, and wages tend to rise. The problems of management call for the highest kind of trained ability and it augurs well for the future business and industrial prosperity of the United States that larger numbers of college men are choosing business careers, and that universities in their schools of commerce are doing their best to give young men special and thoro training for the work of the business executive or manager.
7. Profit.—The entrepreneur is the only factor of production whose compensation is not fixed in advance. He is the only productive agent who runs the risk of receiving no compensation whatever for his work. He takes what is known as a business chance, and if he is not an efficient manager of men, a shrewd buyer of materials and a master salesman, the chances are that his enterprise will be a failure. His problem is to sell his product at a price in excess of its cost. This excess over cost constitutes the entrepreneur's reward. It is known as profit.
Every man engaged in the production of wealth is an entrepreneur in so far as he assumes risks. The farmer, tho not known as a business man, is an entrepreneur, for he hires help, is exposed to the risks of the variable seasons and may be compelled to sell his crops at prices which yield him no net re-turn. The owner of a small grocery, cigar store, newsstand, small bakery, or candy shop, is in a small way an entrepreneur. He assumes a business risk and does not know what his compensation will be.
Since the entrepreneur is the manager of a business, his compensation is sometimes called by economists the wages of management, but profit is the better word. Some economists hold that the owner of a business, if he gives all his time to it, should pay himself a salary and count as profit only what then remains of the surplus earnings of his business. In the case of an individual or a partnership this might be called net profit to distinguish it from the gross profit. A man should credit to himself a salary no larger than he could earn if he worked for someone else.
8. Corporation profits.—The great mass of business and industry at the present time is conducted by partnerships and corporations. In a partnership two or more persons are entrepreneurs and they assume the risk jointly. In a corporation shareholders are the risk takers and to a certain extent are therefore entrepreneurs. But they delegate the management of the corporation to a board of directors, who are expected to shape the policy of the corporation and to hire competent managers or executives.
These executives, altho they do not always risk their own capital and are paid salaries fixed in advance, are in a position very much like that of the individual entrepreneur. It is their business to make the corporation earn the largest possible profit. On their so doing hangs their hope of larger salaries.
If they fail to produce a profit, they lose their jobs.
Any employe of a corporation carries on his shoulders the responsibility of an entrepreneur in so far as the authority delegated to him by the board of directors enables him by the exercise of his judgment to increase the profits of the corporation or to prevent losses.
9. Cost of production.—In the preceding paragraphs we have used the phrase cost of production. Let us here get an idea of exactly what it means.
The cost of production of any article is the sum total of all labor and capital goods used up in its production. Suppose a man makes a box in an hour, using 100 feet of pine boards and a pound of nails. The cost of production is represented by one hour's labor, the nails and the boards. But the nails and the boards are themselves products of labor and of capital goods. Hence could we go far enough back in the history of production we might find that the chief and almost exclusive source of the cost of any article was the labor embodied in it.
But in the modern world we are not dealing with primitive conditions. In modern production labor is the chief, but not the sole element of cost. No matter how simple the operation there is always some capital employed, the use of which must be remunerated.
In 1909, 65.8 per cent of the expenses of manufacturing reported by the census went into materials and fuel, and 23.7 per cent into labor. The share assigned to labor varied greatly in different industries. While it was 51.5 per cent in marble and stone work, it was 4.1 per cent in flour mills and grist mills.
The fact, however, that in an ultimate analysis a large part of the cost of all articles is reducible to past and present labor has been made the basis of much fallacious reasoning with regard to the nature of value, the ownership of capital goods, and the rights of present-day workers.
10. Land rent not a cost element.—The reader will
note that the rent of land is not included among the elements of costs. That is because nature makes no charge for her services. She rewards man's labor with all the product. The owner of a piece of land, if he does not wish to cultivate it himself, may do one of two things. First, he may hire a man to cultivate it for him and pay him wages, taking himself all the risk as to the product; second, he may lease the land to a man, either on shares or for a specified sum as rent. Whichever method he adopts the cost of production remains the same.
The rent of a building, however, is entirely different from the rent of land. A building is a capital good created by man's labor and sacrifice-saving and the supply of buildings is susceptible of indefinite in-crease. Like a machine, it lasts for only a certain period of time, so that an entrepreneur who needs a building for the manufacture of his article must figure among his costs the price he pays for-the use of that capital good. Some economists do not altogether agree with the view here expressed and the subject will be more fully discussed in the chapter on rent.
11. Expenses of production.—In the business world men always think of the cost of production in terms of money. In figuring their costs they simply add up the sums of money paid out for the hire of labor, for the purchase of raw materials, for insurance, for rent, etc., and a certain percentage of the cost of their plant or fixtures to cover depreciation.' In this way the business man gets the sum total of his money outlay and does not seek to know more. He is anxious of course to have his workmen and his ma-chines produce as many goods every day as possible, and for that reason in many industries manufacturers keep a careful record of the time required for various productive processes. But in their final computation of costs all the labor and capital consumed or employed are reduced to terms of money.
As we shall see later, money does not possess stability of value. It fluctuates in value just as does wheat or corn or any other commodity, altho for reasons which we cannot discuss here its fluctuations are less rapid and violent. But its value does fluctuate, that is to say, its general purchasing power varies. For example, on account of the great increase in the world's stock of gold the value or purchasing power of gold declined 50 per cent in the two decades following 1897. This means that prices in countries using the gold standard were 100 per cent higher in 1917 than in 1897, so that one dollar in 1917 had no greater purchasing power than fifty cents had twenty years before. The reader will easily see that the money costs of producing an article must have risen during this period even tho its production called for the employment of no more labor and no more capital, that is to say, even tho its real cost had not changed.
Because of this instability in the value of money, economists as a rule designate money costs of production as the expenses of production. This seems to be necessary in order to avoid confusion of thought. The business man year by year is interested in his money costs of production, for upon them and upon the market prices depend his money profits. The economist is interested in the same matter, but he is perhaps more deeply concerned about real costs of production, for their reduction is one sign of economic progress and he knows that the real costs of production may be declining during a period when money costs are advancing. For example, because freight rates have been advanced in recent years the aver-age man thinks of the costs of transportation as being higher. Yet the real cost of moving a ton of freight one hundred miles is probably considerably less today than it was twenty years ago, for labor has not lost in efficiency while the capital goods employed in transportation, such as locomotives, rail-road tracks, coupling and signaling devices, terminal and unloading facilities, have been considerably improved. When an economist says that the cost of transportation has declined he means that it involves the employment of less labor and the use and destruction of less capital. This is sometimes spoken of as the real cost opposed to the money cost.
12. Competition.—In civilized countries today both the production and consumption of wealth proceed in the main under conditions of competition, each individual being permitted under the law to produce and consume as he will. The great economist, Adam Smith, was the first to point out the advantages of competition as compared with governmental control and regulation of industry. The essence of his argument in behalf of free trade as op-posed to protection lies in the advantages of inter-national competition. All trades and callings should be freely open to all the people of a nation in order that each may choose the one for which he is best fitted. Then the wealth of the nation will increase at the highest possible rate, for the men best fitted for leadership will get to the top and direct the great machinery of production. Governments should not interfere as they do when they enact protective tariffs, for then they compel a nation to devote part of its capital and labor to the production of things which it might get more cheaply from abroad.
Competition is nature's method. Blades of grass in a field are competitors of one another for food. In the dead saplings of a forest you see a relic of the fierce struggle in which the trees have engaged to maintain life and growth. All wild animals compete fiercely with one another for the available food sup-ply. The well-known result of all this competition in vegetable and animal life is a survival of the fittest and the ultimate destruction of the unfit. Competition among men has the same result and to many, therefore, seems cruel, ruthless and irrational. Can we retain the advantages of competition and gradually eliminate the evils? Shall society abandon the competitive regime and adopt some other method of consumption and production, or would it be wiser by means of education, training, to lessen the number of the unfit and seek thru legislation to give them greater security of occupation and income? These are questions on reform for the solution of which an understanding of economics is absolutely essential.
13. Monopoly.—Unrestricted competition logically tends toward monopoly. The fact that in any industry the strongest survive leads to the inevitable conclusion that the industry will finally be controlled by the one strongest man or strongest group of men. Such has been the actual course of events in nearly all countries during the last one hundred years. Especially since 1880 in all civilized countries there has been a fuller realization of the advantages of large-scale production and of large combinations of capital, and as a result there has been a lessening of competitive opportunity in many industries. The fear of monopoly and a desire to keep competition open, free and fair have led to the enactment of many laws in different countries, all having for their aim the protection of the weak from exploitation by the strong. The trust problem of the United States is to be found in one form or another in every civilized country. What people really fear and seek to destroy is monopoly which is the opposite of competition. A monopoly has the power to regulate the supply of the article it produces and is therefore in some measure able to regulate the price which it may exact from the consumer. Under the common law of Anglo-Saxon peoples any attempt to create a monopoly or to lessen the possibility of competition in an industry is illegal. In the United States and Canada special legislation has been enacted for the suppression of monopoly. This is an important subject and is fully treated in Volume 24 of the Modern Business Texts.
A monopoly exists whenever a single man or a group of men acting in concert are able to regulate the production of an article to such a degree that they are in some measure able to control the price. If a monopoly's control of production is due to its owner-ship of certain natural resources, it is called a natural monopoly; if due to its possession of certain legal privileges or to a patent it is known as a legal monopoly. A street railway with an exclusive franchise for operation of certain streets may be regarded as both a natural and legal monopoly. So may a tele phone company if its charter or franchise excludes competition. If a corporation obtains virtual monopoly thru its command of large capital it is often spoken of as a capitalistic monopoly, altho commonly called a trust.
Only occasionally does a monopoly have absolute control. Afore often it has only a partial control, be-cause in most instances there can be some substitute for the article which a monopoly owns. This question of control depends, however, upon the supply, whether it is increased with difficulty or with ease. The area of a monopoly may be local, national or international.
14. Forms of organization.—Every enterprise has four phases, namely, production, accounting, selling and financing. In small businesses all four of these phases are frequently looked after by a single man, but the use of steam and electricity, making possible great improvements in the means of transportation and communication, brought about the development of industries requiring capital and resources beyond the means of a single individual. As a result men have combined their resources and abilities in various ways; first, in a partnership, then in a joint stock company, later in a corporation and finally in the great industrial combination known in the United States as the trust. The great advantage of the corporation under the laws of the United States is the limited liability of the stockholders. In America the principle of limited liability was developed early, for capital needed encouragement. As far back as 1835 charters were granted to corporations in the United States in which the liability of a shareholder was expressly limited. In England the principle was not taken up as quickly. Even the English railway charters prior to 1879 contain no mention of limited liability. On the continent of Europe, the liability of a share-holder of a corporation is usually limited. These various forms of organization constitute the subject matter of Volumes 3 and 11 of the Modern Business Texts.
What is division of labor? Give its advantages and its disadvantages.
What is an entrepreneur and why is he so important in the business world? How is his compensation determined?
How do the stockholders of a corporation differ essentially from partners in a company? How does a manager employed by a board of directors resemble an entrepreneur?
What is meant by the cost of production? Why is land rent not included in this cost?
In considering the costs of production how does the business man differ from the economist? In what costs is each one interested? Illustrate.
What are the advantages of competition as set forth by Adam Smith?
What determines a monopoly? What is a natural monopoly?