Principles of Economics

Marshall, Alfred
(1842-1924)
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First Pub. Date
1890
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London: Macmillan and Co., Ltd.
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1920
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8th edition
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BOOK IV, CHAPTER XII

INDUSTRIAL ORGANIZATION, CONTINUED. BUSINESS MANAGEMENT.

IV.XII.1

§ 1. Hitherto 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 labour. But we now have to consider more carefully the variety of the functions which business men discharge; the manner in which they are distributed among the heads of a large business, and again between different classes of business 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 has grown; and though primâ 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.

IV.XII.2

"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 from those who are to be benefited. It is thus contrasted with the provision for his wants which each one makes for himself, and with those kindly services which are prompted by friendship and family affection.

IV.XII.3

The primitive handicraftsman managed his whole business for himself; but since his customers were with few exceptions his immediate neighbours, since he required very little capital, since the plan of production was arranged for him by custom, and since he had no labour to superintend outside of 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 neighbours, 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 weary.

IV.XII.4

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 neighbours; 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; for 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 a 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 where there is complete personal confidence.

IV.XII.5

English 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 head master, who arranges for their purchase: the employer supplies to the teacher a market for his labour; 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.

IV.XII.6

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.

IV.XII.7

§ 2. 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 business men. They "adventure" or "undertake" its risks; they bring together the capital and the labour required for the work; they arrange or "engineer" its general plan, and superintend its minor details. Looking at business men 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.

IV.XII.8

There are some kinds of business men 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 labour. The extreme type 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; and 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 business man.

IV.XII.9

§ 3. 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 labour which assigns to the professional builder the task of superintending details, and to the professional architect the task of drawing plans.

IV.XII.10

The division of labour 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.

IV.XII.11

§ 4. 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 were not themselves employers of labour; while the detailed work of superintendence and the narrower risks of carrying out definite contracts were handed over to small masters*140. 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 warehousemen 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.

IV.XII.12

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*141. 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 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 labour, with a somewhat low physique and morale, that the system is most fully developed, especially in the clothing trades, which employ two hundred thousand 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 sewing 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 hosiery trade is being tempted back to the dwelling-house by recent improvements in hand knitting 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.

IV.XII.13

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 piece-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 workmen sometimes employing others to help them, sometimes working alone.

IV.XII.14

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 labour and supplies the expensive types and machinery required for the business. And a somewhat similar plan is adopted in many branches of the metal trades, and of those which supply furniture, clothing, etc.

IV.XII.15

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.

IV.XII.16

For while the success of a factory depends in 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.

IV.XII.17

§ 5. When the profits of business are under discussion they are generally connected in people's minds with the employer of labour: "the employer" is often taken as a term practically coextensive with the receiver of business profits. But the instances which we have just considered are sufficient to illustrate the truth that the superintendence of labour is but one side, and often not the most important side of business work; and that the employer who undertakes the whole risks of his business really performs two entirely distinct services on behalf of the community, and requires a twofold ability.

IV.XII.18

To return to a class of considerations already noticed (IV. XI. 4 and 5), the manufacturer who makes goods not to meet special orders but for the general market, must, in his first rôle as merchant and organizer of production, have a 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.

IV.XII.19

But secondly in this rôle of employer he must be a natural leader of men. He must have a power of first choosing his assistants 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 origination 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.

IV.XII.20

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.

IV.XII.21

Such then being 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. 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. Hitherto 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, co-operative 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.

IV.XII.22

§ 6. 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*142. 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 business men 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 fathers' work, they have also the vantage ground of established trade connections.

IV.XII.23

It would therefore at first sight seem likely that business men should constitute a sort of caste; 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 fibre 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*143.

IV.XII.24

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.

IV.XII.25

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.

IV.XII.26

§ 7. The oldest and simplest plan for renovating the energies of a business is that of taking into partnership some of its ablest 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 labours, at the same time that he secures that the task of his life will be carried on by those whose habits he has moulded, and for whom he has perhaps acquired something like a fatherly affection*144.

IV.XII.27

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 manufactures 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 has played a great part in the past, and it is full of vitality now.

IV.XII.28

§ 8. 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 effect 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.

IV.XII.29

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 own 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 on 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*145. To the Managers and their assistants 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 higher 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.

IV.XII.30

§ 9. 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 subordinates serve his interests faithfully and discreetly. If those to whom he has entrusted 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 favouritism 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 fulfil the promise of exceptional ability which induced him to give them their first lift, he can discover what is going wrong and set it right.

IV.XII.31

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 marvellous 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 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.

IV.XII.32

The same may be said of the undertakings of Governments imperial and local: they also may have a great future before them, but up to the present time the tax-payer who undertakes the ultimate risks has not generally succeeded in exercising an efficient 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.

IV.XII.33

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 the 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.

IV.XII.34

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 root. 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.

IV.XII.35

§ 10. The system of co-operation aims at avoiding the evils of these two methods of business management. In that ideal form of co-operative society, for which many still fondly hope, but which as yet has been scantily realized in practice, a part 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 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 averse to any shirking of work either by himself or by his fellow-workmen.

IV.XII.36

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 at 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 the strain involved in the highest work of engineering the business, and to grudge its being paid for at anything like as high a rate as it could earn elsewhere. And in fact the managers of a co-operative society seldom have the alertness, the inventiveness and the ready versatility of the ablest 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 co-operative system has seldom been carried out in its entirety; and its partial application has not yet attained a conspicuous success except in retailing commodities consumed by working men. But within the last few years more hopeful signs have appeared of the success of bonâ fide productive associations, or "co-partnerships."

IV.XII.37

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 co-operation 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 co-operator combines a keen business intellect with a spirit full of an earnest faith; and some co-operative societies have been served excellently by men of great genius both mentally and morally—men who for the sake of the co-operative 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 this stamp are more common among the officers of co-operative 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 co-operation, and the increase of general education, are every day fitting a larger number of co-operators for the complex problems of business management.

IV.XII.38

Meanwhile many partial applications of the co-operative 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 Piece-work, 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 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*146.

IV.XII.39

Another partially co-operative scheme is that of some Oldham 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 co-operative stores, through their agents, the co-operative 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.

IV.XII.40

At a later stage we shall have to study all those various co-operative and semi-co-operative 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 co-operative movement; and that its 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 practise 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.

IV.XII.41

§ 11. In speaking of the difficulty that a working man has in 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 co-operative 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 that they had the capacity for dealing with difficult business problems. Co-operators 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 a 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 endeavours to obtain from the ordinary sources the loan of the capital required to start him in business.

IV.XII.42

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 of 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 in 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.

IV.XII.43

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 after life by newspapers, and from the work of co-operative societies and trades-unions, and in other ways.

IV.XII.44

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 banks 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 has also "patience, genius and good fortune" he is pretty sure to command a goodly capital before he dies*147. In a factory those who work with their hands have better opportunities of rising to posts of command than the book-keepers 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.

IV.XII.45

There is then 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 to 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 his 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.

IV.XII.46

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 high ambitions for his sons, seek to put them to office work. There they are in danger of losing the physical vigour and the force of character which attaches to constructive work with the hands, and to become commonplace members of the lower middle classes. 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.

IV.XII.47

§ 12. 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 even 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*148: and in fighting his way upwards he may have a chequered 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 business man generally finds that in the long run the capital at his command grows in proportion to his ability.

IV.XII.48

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 has 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 turn-over 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 turn-over very fine. A village trader may make five per cent. less profits on his turn-over than his able rival, 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 turn-over are often so very small that a person who falls behind his rivals by even a small percentage loses a large sum at every turn-over; while in those large businesses which are difficult and do not rely on routine, and which afford high profits on the turn-over to really able management, there are no profits at all to be got by anyone who attempts the task with only ordinary ability.

IV.XII.49

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 business men and the size of the businesses 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 high 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.

IV.XII.50

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 are its applications.

IV.XII.51

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 the 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.

IV.XII.52

Finally, we may regard this 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.


Notes for this chapter


Compare Appendix A, 13.
German economists call this "factory like" (fabrikmässig) 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 Schönberg on Gewerbe in his Handbuch.) Domestic workers of this last class were common all over Europe in 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 labour 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 neighbours' use, and thus save the profits of a series of middlemen. Compare Survival of domestic industries by Gonner in the Economic Journal, Vol. II.
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 employees and form a fair judgment on their work.
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 centres. The sons of business men when sent to the universities do not learn to despise their fathers' trades 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.
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.
Bagehot delighted to argue (see for instance English Constitution, ch. VII.) 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 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.
Compare Schloss, Methods of Industrial Remuneration; and Gilman, A dividend to labour.
The Germans say that success in business requires "Geld, Geduld, Genie und Glück." The chances that a working man has of rising vary somewhat with the nature of the work, being greatest in those trades in which a careful attention to details 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 Josiah Wedgwood" (see G. Wedgwood'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.
The danger of not being able to renew his borrowings just at the time when he wants them 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 this among other reasons, profits are something more than interest in addition to net earnings of management, i.e. those earnings which are properly to be ascribed to the abilities of business men.

End of Notes


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