centration, largely because of the great numbers of newspaper publishing establishments whose products are wanted only by the local communities. If the industry is one that tends to monopoly, that tendency will be facilitated within the locality, as is the case with gas, electricity, and street railway transportation; and the establishment will be relatively large. Otherwise, the business unit which produces local consumption goods will be relatively small. Doubtless the ability to standardize products facilitates the building up of large establishments: when the commodity can be easily graded and marketed in a uniform manner, large-scale methods can be adopted where a widespread demand exists. This is the case with petroleum, salt, sugar, and whisky, and the standardization of machine parts has made the manufacture of machinery a large-scale industry. 4. Markets. The nature of the market, as determined by the character and number of consumers, reacts upon the size of the business unit in several ways. (a) For one thing, the area covered is of some importance, as it will ordinarily require a larger unit to handle an extensively scattered business. (b) The quantity demanded has an an obvious influence. (c) The complexity and (d) the stability of the market also have their influence. If the demand is large and stable, the opportunity for business on the largest scale is good. Great stocks may be accumulated, and a large, well-organized plant be run on full time. This has been a characteristic feature of the development of large scale manufacturing in the great staple industries of to-day: cloth, iron, boots and shoes, leather, paper, and others. If, moreover, the market is simple in that it is rather uniform and does not require careful and minute attention, the tendency to large-scale production is facilitated. It is to be remembered also that these factors act to encourage the use of machinery and the division of labor, which use, in turn, reacts to encourage large units. Certain economies in selling are also to be mentioned in connection with market conditions. When advertising is a large factor in marketing the product, there is a tendency to large-scale production, though this tendency need not necessarily work itself out fully. The reason is that the larger the output, the less the cost per unit for the advertisement: it costs no more to advertise the products of a big firm than those of a little one. So it is with salesmen: a given number can attend to a given territory regardless of the quantity sold. It has been one of the economies of large industry to dispense with much commercial traveling. Finally, a large establishment can fill orders more promptly and carry a more varied line of goods than a small one. In many cases this fact helps determine the size of the business organization. B. Compound Establishments. The problem of combination arises out of a tendency to form large business units by federating existing establishments, while retaining their separate existence as operating units. Such compound establishments are the "trusts" and combinations of the day. It goes without saying that such compound organizations are generally larger than simple ones, and that the discussion is incomplete until just a word has been said about the factors which determine combination. We return to the subject elsewhere in this volume. In general, the conclusion must be that three desires are the chief active factors in bringing about combination: the desire (1) to save the wastes of competition, (2) to acquire monopoly power, and (3) to make the economies of large-scale production. The last factor has just been treated, and most of what was said about its working in the simple business establishment will apply to the combination, except that in the combination the large-scale is obtained by federating different plants and specializing by plants. Furthermore, combination is generally resorted to to secure production on the very largest scale. It is probably the first factor, the elimination of competition, that is the real moving force in a majority of cases. Without attempting a careful analysis of the wastes of competition at this point, it may be said that the chief ones are the acquisitive expenses of advertising and salesmen, and the uneconomic use of plant. Under the latter head come the wastes of duplicated plants, especially the fixed capital part, leading to burdensome fixed charges on all competitors; failure to use the most productive devices, and suppression of patents; waste transportation and needless "cross freight" bills; and irregularity and idleness, leading to incomplete utilization of capital and skill. Such is the case against competition as it often works, and the preceding points outline the forces that tend to cause the formation of large compound business establishments. The desire for monopoly power is an interesting cause of combination, but is one which may be more logically discussed in later pages. The pessimist is apt to assert that most combinations are impelled by that desire rather than by the effort to make economies and save wastes. Certainly this is sometimes the case; and it must be recognized as a distinct cause of combination. There were The census of 1900 attempted to present statistics of combinations, and the results are not without interest. found to be 185 "combinations "1 in manufactures, controlling 2160 separate plants. These plants formed a little over 0.4 per cent of the total number of establishments; they employed over 8 per cent of the total number of wage earners; and they were reported to have turned out over 12 per cent of the value of all manufactured products. By far the largest number (489) were in the iron and steel industry, with a large number in "food and allied products," chemicals and allied products, and "liquors and beverages." The census of 1910 will certainly show a larger proportion of products turned out by combinations or "compound establishments." 2. Relative Importance of Factors of Production in the Establishment. — If we regard the business unit as a complex of land, labor, and capital, operating under the direction of entrepreneurial ability, we may find another basis of classification in the relative importance of these factors within the unit. Which is the dominating element, land, labor, capital, or entrepreneur? One great development has been in the increasing 1 Unions of previously separate plants. relative importance of capital; and to-day two great classes of business units may be distinguished on this basis: the shophandicrafts class and the factory-machine class, the former being often regarded as a survival of early days. 1 From the point of view of evolution, one may see at least four stages and as many types of business organization. First came the primitive household stage. "The industrial family, owning the raw material and the requisite tools, and working with the power of their own bodies in their own houses, produce commodities for their own consumption." Here, in one sense, there was no question of dominance of any factor; but capital was relatively unimportant and could have been produced by an individual's labor time of a few months at the most. Such a productive unit — it can hardly be called a business unit — can now be found only on the receding outskirts of civilization. Next came the gild system and handicraft production. Primarily the gild was a means of regulating the business units of medieval times; but it was associated with a characteristic type of unit organization, which differed from the preceding type chiefly in that family lines were less closely followed, more capital was used, and the entrepreneur's function emerged more clearly. The master workman who directed the business organization owned the capital and worked at the trade along with his journeymen and apprentices. Human power was still mainly used, and, as goods were produced only as ordered by customers, no great stocks were maintained. Thus both fixed and circulating capitals were small, and relatively unimportant. As has been well observed, "The size of the representative firm under a system which compelled the master to be a skilled artisan, a shrewd financier, and an able salesman, but insisted on each article bearing the impress of his individual skill, must of necessity have been very small.” 2 The "domestic system" which followed is characterized by the fact that the workman owned his tools and simple machines, and worked at home, whereas the marketing of the 1 Hobson, Evolution of Modern Capitalism, p. 35. product was done by a middleman. Gradually the workman became dependent upon the merchant middleman for his raw material, and the same condition began to appear in the ownership of such simple machinery as existed, e.g. the "frames" used in weaving stockings. But the domestic system flourished in the pre-machinery era, and, although some small developments occurred, fixed capital still played a slight part. Furthermore, the markets were narrow and processes slow, so that circulating capital in the shape of stocks of materials and products were also small. Labor still predominated on the whole, and small business units held their own. The transition to the "factory system came in the middle part of the eighteenth century. The business unit under this system is characterized by the relatively important part played by capital, especially fixed capital in the shape of machinery and buildings, by a wage-earning class which is almost divorced from the ownership of capital, and by an employing entrepreneur class which is closely connected with the ownership of capital. With the separation of labor and capital the entrepreneur's function of coördinating the factors became more important. Perhaps the time has come to distinguish a fifth stage, the stage of combination or the "trust system." In this stage the business unit is generally compound, and while it embraces more capital then ever, the entrepreneur-the promoter and director—is the dominant factor. The capitalist class is more and more separated from any direct participation in the direction of industry. A glance at the census figures reveals recent tendencies as to relative amounts of labor and capital. Since 1850, both value of capital and cost of materials used in manufactures have pretty steadily increased at a far more rapid rate than the number of wage earners and the total wages. This is the tendency, taking manufacturing as a whole. But still one may see all the types mentioned above: handicrafts system in the various "custom" trades, cigar making, farming, etc.; domestic system in the clothing industry; simple factory system in most manufactur 1 Nineteenth Census, Bulletin on "Manufactures: United States," Abstract of Statistics for states, cities, and industries, p. 5. |