Principles of Economics

§ 1. The advantages of production on a large scale are best shown in manufacture; under which head we may include all businesses engaged in working up material into forms in which it will be adapted for sale in distant markets. The characteristic of manufacturing industries which makes them offer generally the best illustrations of the advantages of production on a large scale, is their power of choosing freely the locality in which they will do their work. They are thus contrasted on the one hand with agriculture and other extractive industries (mining, quarrying, fishing, etc.), the geographical distribution of which is determined by nature; and on the other hand with industries that make or repair things to suit the special needs of individual consumers, from whom they cannot be far removed, at all events without great loss
*128.

The chief advantages of production on a large scale are economy of skill, economy of machinery and economy of materials: but the last of these is rapidly losing importance relatively to the other two. It is true that an isolated workman often throws away a number of small things which would have been collected and turned to good account in a factory
*129; but waste of this kind can scarcely occur in a localized manufacture even if it is in the hands of small men; and there is not very much of it in any branch of industry in modern England, except agriculture and domestic cooking. No doubt many of the most important advances of recent years have been due to the utilizing of what had been a waste product; but this has been generally due to a distinct invention, either chemical or mechanical, the use of which has been indeed promoted by minute subdivision of labour, but has not been directly dependent on it
*130.

Again, it is true that when a hundred sets of furniture, or of clothing, have to be cut out on exactly the same pattern, it is worth while to spend great care on so planning the cutting out of the boards or the cloth, that only a few small pieces are wasted. But this is properly an economy of skill; one planning is made to suffice for many tasks, and therefore can be done well and carefully. We may pass then to the economy of machinery.

§ 2. In spite of the aid which subsidiary industries can give to small manufactures, where many in the same branch of trade are collected in one neighbourhood
*131, they are still placed under a great disadvantage by the growing variety and expensiveness of machinery. For in a large establishment there are often many expensive machines each made specially for one small use. Each of them requires space in a good light, and thus stands for something considerable in the rent and general expenses of the factory; and independently of interest and the expense of keeping it in repair, a heavy allowance must be made for depreciation in consequence of its being probably improved upon before long
*132. A small manufacturer must therefore have many things done by hand or by imperfect machinery, though he knows how to have them done better and cheaper by special machinery, if only he could find constant employment for it.

But next, a small manufacturer may not always be acquainted with the best machinery for his purpose. It is true that if the industry in which he is engaged has been long established on a large scale, his machinery will be well up to the mark, provided he can afford to buy the best in the market. In agriculture and the cotton industries, for instance, improvements in machinery are devised almost exclusively by machine makers; and they are accessible to all, at any rate on the payment of a royalty for patent right. But this is not the case in industries that are as yet in an early stage of development or are rapidly changing their form; such as the chemical industries, the watchmaking industry and some branches of the jute and silk manufactures; and in a host of trades that are constantly springing up to supply some new want or to work up some new material.

In all such trades new machinery and new processes are for the greater part devised by manufacturers for their own use. Each new departure is an experiment which may fail; those which succeed must pay for themselves and for the failure of others; and though a small manufacturer may think he sees his way to an improvement, he must reckon on having to work it out tentatively, at considerable risk and expense and with much interruption to his other work: and even if he should be able to perfect it, he is not likely to be able to make the most of it. For instance, he may have devised a new speciality, which would get a large sale if it could be brought under general notice: but to do this would perhaps cost many thousand pounds; and, if so, he will probably have to turn his back on it. For it is almost impossible for him to discharge, what Roscher calls a characteristic task of the modern manufacturer, that of creating new wants by showing people something which they had never thought of having before; but which they want to have as soon as the notion is suggested to them: in the pottery trade for example the small manufacturer cannot afford even to make experiments with new patterns and designs except in a very tentative way. His chance is better with regard to an improvement in making things for which there is already a good market. But even here he cannot get the full benefit of his invention unless he patents it; and sells the right to use it; or borrows some capital and extends his business; or lastly changes the character of his business and devotes his capital to that particular stage of the manufacture to which his improvement applies. But after all such cases are exceptional: the growth of machinery in variety and expensiveness presses hard on the small manufacturer everywhere. It has already driven him completely out of some trades and is fast driving him out of others
*133.

There are however some trades in which the advantages which a large factory derives from the economy of machinery almost vanish as soon as a moderate size has been reached. For instance in cotton spinning, and calico weaving, a comparatively small factory will hold its own and give constant employment to the best known machines for every process: so that a large factory is only several parallel smaller factories under one roof; and indeed some cotton-spinners, when enlarging their works, think it best to add a weaving department. In such cases the large business gains little or no economy in machinery; and even then it generally saves something in building, particularly as regards chimneys, and in the economy of steam power, and in the management and repairs of engines and machinery. Large soft-goods factories have carpenters’ and mechanics’ shops, which diminish the cost of repairs, and prevent delays from accidents to the plant
*134.

Akin to these last, there are a great many advantages which a large factory, or indeed a large business of almost any kind, nearly always has over a small one. A large business buys in great quantities and therefore cheaply; it pays low freights and saves on carriage in many ways, particularly if it has a railway siding. It often sells in large quantities, and thus saves itself trouble; and yet at the same time it gets a good price, because it offers conveniences to the customer by having a large stock from which he can select and at once fill up a varied order; while its reputation gives him confidence. It can spend large sums on advertising by commercial travellers and in other ways; its agents give it trustworthy information on trade and personal matters in distant places, and its own goods advertise one another.

The economies of highly organized buying and selling are among the chief causes of the present tendency towards the fusion of many businesses in the same industry or trade into single huge aggregates; and also of trading federations of various kinds, including German cartels and centralized co-operative associations. They have also always promoted the concentration of business risks in the hands of large capitalists who put out the work to be done by smaller men
*135.

§ 3. Next, with regard to the economy of skill. Everything that has been said with regard to the advantages which a large establishment has in being able to afford highly specialized machinery applies equally with regard to highly specialized skill. It can contrive to keep each of its employees constantly engaged in the most difficult work of which he is capable, and yet so to narrow the range of his work that he can attain that facility and excellence which come from long-continued practice. But enough has already been said on the advantage of division of labour: and we may pass to an important though indirect advantage which a manufacturer derives from having a great many men in his employment.

The large manufacturer has a much better chance than a small one has, of getting hold of men with exceptional natural abilities, to do the most difficult part of his work—that on which the reputation of his establishment chiefly depends. This is occasionally important as regards mere handiwork in trades which require much taste and originality, as for instance that of a house decorator, and in those which require exceptionally fine workmanship, as for instance that of a manufacturer of delicate mechanism
*136. But in most businesses its chief importance lies in the facilities which it gives to the employer for the selection of able and tried men, men whom he trusts and who trust him, to be his foremen and heads of departments. We are thus brought to the central problem of the modern organization of industry, viz. that which relates to the advantages and disadvantages of the subdivision of the work of business management.

§ 4. The head of a large business can reserve all his strength for the broadest and most fundamental problems of his trade: he must indeed assure himself that his managers, clerks and foremen are the right men for their work, and are doing their work well; but beyond this he need not trouble himself much about details. He can keep his mind fresh and clear for thinking out the most difficult and vital problems of his business; for studying the broader movements of the markets, the yet undeveloped results of current events at home and abroad; and for contriving how to improve the organization of the internal and external relations of his business.

For much of this work the small employer has not the time if he has the ability; he cannot take so broad a survey of his trade, or look so far ahead; he must often be content to follow the lead of others. And he must spend much of his time on work that is below him; for if he is to succeed at all, his mind must be in some respects of a high quality, and must have a good deal of originating and organizing force; and yet he must do much routine work.

On the other hand the small employer has advantages of his own. The master’s eye is everywhere; there is no shirking by his foremen or workmen, no divided responsibility, no sending half-understood messages backwards and forwards from one department to another. He saves much of the book-keeping, and nearly all of the cumbrous system of checks that are necessary in the business of a large firm; and the gain from this source is of very great importance in trades which use the more valuable metals and other expensive materials.

And though he must always remain at a great disadvantage in getting information and in making experiments, yet in this matter the general course of progress is on his side. For External economies are constantly growing in importance relatively to Internal in all matters of Trade-knowledge: newspapers, and trade and technical publications of all kinds are perpetually scouting for him and bringing him much of the knowledge he wants—knowledge which a little while ago would have been beyond the reach of anyone who could not afford to have well-paid agents in many distant places. Again, it is to his interest also that the secrecy of business is on the whole diminishing, and that the most important improvements in method seldom remain secret for long after they have passed from the experimental stage. It is to his advantage that changes in manufacture depend less on mere rules of thumb and more on broad developments of scientific principle; and that many of these are made by students in the pursuit of knowledge for its own sake, and are promptly published in the general interest. Although therefore the small manufacturer can seldom be in the front of the race of progress, he need not be far from it, if he has the time and the ability for availing himself of the modern facilities for obtaining knowledge. But it is true that he must be exceptionally strong if he can do this without neglecting the minor but necessary details of the business.

§ 5. In agriculture and other trades in which a man gains no very great new economies by increasing the scale of his production, it often happens that a business remains of about the same size for many years, if not for many generations. But it is otherwise in trades in which a large business can command very important advantages, which are beyond the reach of a small business. A new man, working his way up in such a trade, has to set his energy and flexibility, his industry and care for small details, against the broader economies of his rivals with their larger capital, their higher specialization of machinery and labour, and their larger trade connection. If then he can double his production, and sell at anything like his old rate, he will have more than doubled his profits. This will raise his credit with bankers and other shrewd lenders; and will enable him to increase his business further, and to attain yet further economies, and yet higher profits: and this again will increase his business and so on. It seems at first that no point is marked out at which he need stop. And it is true that, if, as his business increased, his faculties adapted themselves to his larger sphere, as they had done to his smaller; if he retained his originality, and versatility and power of initiation, his perseverance, his tact and his good luck for very many years together; he might then gather into his hands the whole volume of production in his branch of trade for his district. And if his goods were not very difficult of transport, nor of marketing, he might extend this district very wide, and attain something like a limited monopoly; that is, of a monopoly limited by the consideration that a very high price would bring rival producers into the field.

But long before this end is reached, his progress is likely to be arrested by the decay, if not of his faculties, yet of his liking for energetic work. The rise of his firm may be prolonged if he can hand down his business to a successor almost as energetic as himself
*137. But the continued very rapid growth of his firm requires the presence of two conditions which are seldom combined in the same industry. There are many trades in which an individual producer could secure much increased “internal” economies by a great increase of his output; and there are many in which he could market that output easily; yet there are few in which he could do both. And this is not an accidental, but almost a necessary result.

For in most of those trades in which the economies of production on a large scale are of first-rate importance, marketing is difficult. There are, no doubt, important exceptions. A producer may, for instance, obtain access to the whole of a large market in the case of goods which are so simple and uniform that they can be sold wholesale in vast quantities. But, most goods of this kind are raw produce; and nearly all the rest are plain and common, such as steel rails or calico; and their production can be reduced to routine, for the very reason that they are plain and common. Therefore in the industries which produce them, no firm can hold its own at all unless equipped with expensive appliances of nearly the latest type for its main work; while subordinate operations can be performed by subsidiary industries; and in short there remains no very great difference between the economies available by a large and by a very large firm; and the tendency of large firms to drive out small ones has already gone so far as to exhaust most of the strength of those forces by which it was originally promoted.

But many commodities with regard to which the tendency to increasing return acts strongly are, more or less, specialities: some of them aim at creating a new want, or at meeting an old want in a new way. Some of them are adapted to special tastes, and can never have a very large market; and some have merits that are not easily tested, and must win their way to general favour slowly. In all such cases the sales of each business are limited, more or less according to circumstances, to the particular market which it has slowly and expensively acquired; and though the production itself might be economically increased very fast, the sale could not.

Lastly, the very conditions of an industry which enable a new firm to attain quickly command over new economies of production, render that firm liable to be supplanted quickly by still younger firms with yet newer methods. Especially where the powerful economies of production on a large scale are associated with the use of new appliances and new methods, a firm which has lost the exceptional energy which enabled it to rise, is likely ere long quickly to decay; and the full life of a large firm seldom lasts very long.

§ 6. The advantages which a large business has over a small one are conspicuous in manufacture, because, as we have noticed, it has special facilities for concentrating a great deal of work in a small area. But there is a strong tendency for large establishments to drive out small ones in many other industries. In particular the retail trade is being transformed, the small shopkeeper is losing ground daily.

Let us look at the advantages which a large retail shop or store has in competing with its smaller neighbours. To begin with, it can obviously buy on better terms, it can get its goods carried more cheaply, and can offer a larger variety to meet the taste of customers. Next, it has a great economy of skill: the small shopkeeper, like the small manufacturer, must spend much of his time in routine work that requires no judgment: whereas the head of a large establishment, and even in some cases his chief assistants, spend their whole time in using their judgment. Until lately these advantages have been generally outweighed by the greater facilities which the small shopkeeper has for bringing his goods to the door of his customers; for humouring their several tastes; and for knowing enough of them individually to be able safely to lend them capital, in the form of selling them goods on credit.

But within recent years there have been many changes all telling on the side of large establishments. The habit of buying on credit is passing away; and the personal relations between shopkeeper and customer are becoming more distant. The first change is a great step forwards: the second is on some accounts to be regretted, but not on all; for it is partly due to the fact that the increase of true self-respect among the wealthier classes is making them no longer care for the subservient personal attentions they used to require. Again, the growing value of time makes people less willing than they were to spend several hours in shopping; they now often prefer to spend a few minutes in writing out a long list of orders from a varied and detailed price-list; and this they are enabled to do easily by the growing facilities for ordering and receiving parcels by post and in other ways. And when they do go shopping, tramcars and local trains are often at hand to take them easily and cheaply to the large central shops of a neighbouring town. All these changes render it more difficult than it was for the small shopkeeper to hold his own even in the provision trade, and others in which no great variety of stock is required.

But in many trades the ever-growing variety of commodities, and those rapid changes of fashion which now extend their baneful influence through almost every rank of society, weight the balance even more heavily against the small dealer, for he cannot keep a sufficient stock to offer much variety of choice, and if he tries to follow any movement of fashion closely, a larger proportion of his stock will be left stranded by the receding tide than in the case of a large shopkeeper. Again, in some branches of the clothing and furniture and other trades the increasing cheapness of machine-made goods is leading people to buy ready-made things from a large store instead of having them made to order by some small maker and dealer in their neighbourhood. Again, the large shopkeeper, not content with receiving travellers from the manufacturers, makes tours either himself or by his agent in the most important manufacturing districts at home and abroad; and he thus often dispenses with middlemen between him and the manufacturer. A tailor with moderate capital shows his customers specimens of many hundreds of the newest cloths, and perhaps orders by telegraph the selected cloth to be sent by parcels’ post. Again, ladies often buy their materials direct from the manufacturer, and get them made up by dressmakers who have scarcely any capital. Small shopkeepers seem likely always to retain some hold of the minor repairing trades: and they keep their own fairly well in the sale of perishable food, especially to the working classes, partly in consequence of their being able to sell goods on credit and to collect small debts. In many trades however a firm with a large capital prefers having many small shops to one large one. Buying, and whatever production is desirable, is concentrated under a central management; and exceptional demands are met from a central reserve, so that each branch has large resources, without the expense of keeping a large stock. The branch manager has nothing to divert his attention from his customers; and, if an active man, with direct interest in the success of his branch, may prove himself a formidable rival to the small shopkeeper; as has been shown in many trades connected with clothing and food.

§ 7. We may next consider those industries whose geographical position is determined by the nature of their work.

Country carriers and a few cabmen are almost the only survivals of small industry in the carrying trade. Railways and tramways are constantly increasing in size, and the capital required to work them is increasing at an even greater rate. The growing intricacy and variety of commerce is adding to the advantages which a large fleet of ships under one management derives from its power of delivering goods promptly, and without breach of responsibility, in many different ports; and as regards the vessels themselves time is on the side of large ships, especially in the passenger trade
*138. As a consequence the arguments in favour of the State’s undertaking business are stronger in some branches of the carrying trade than in any other, except the allied undertakings of carrying away refuse, and bringing in water, gas, etc.
*139

The contest between large and small mines and quarries has not so clearly marked a tendency. The history of the State management of mines is full of very dark shadows; for the business of mining depends too much on the probity of its managers and their energy and judgment in matters of detail as well as of general principle, to be well managed by State officials: and for the same reason the small mine or quarry may fairly be expected, other things being equal, to hold its own against the large one. But in some cases the cost of deep shafts, of machinery and of establishing means of communication, are too great to be borne by any but a very large business.

In agriculture there is not much division of labour, and there is no production on a very large scale; for a so-called “large farm” does not employ a tenth part of the labour which is collected in a factory of moderate dimensions. This is partly due to natural causes, to the changes of the seasons and to the difficulty of concentrating a great deal of labour in any one place; but it is partly also due to causes connected with varieties of land tenure. And it will be best to postpone discussion of all of them till we come to study demand and supply in relation to land in the sixth Book.