This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. The function of management. § 2. Direction of simple and interrelated groups. § 3. Selection of managed and of managers. § 4. Division of labor in management. § 5. A large commercial policy. § 6. Obtaining of capital. § 7. Profit-seeking borrowers and the rate of interest. § 8. Buying materials and labor. § 9. Various policies to upbuild the personnel. § 10. Management of technical processes. § 11. Management of men. § 12. The right proportioning of the factors. § 13. Adjustment of production to changing conditions.
§ 1. The function of management. The owner of a fund of purchasing power can not leave it to invest itself. The primary function of enterprise is the choice of a business in which to invest; the next, and essentially last function, is to provide competent management. Every act of labor and every use of goods calls for some decision and direction. This is management, which is one of the forms and aspects of labor, quite easily distinguishable from mere physical action. In the simplest kinds of individual production the amount and quality of the goods obtained depend on intelligent choice often far more than on physical force. Even for the solitary worker the choice of the right time, kind, place, and method of work is most important. The first thing Robinson Crusoe did was to go to the ship and to save as much as possible of the cargo before it was dashed to pieces by the waves. If he had begun first to till the soil to provide a future supply of food it would have shown foresight, but very poor judgment. Every moment of delay in recovering the cargo of the wrecked vessel cost him many useful materials. The humblest farmer has a great range of choice and a need of good judgment in fixing the time to sow, to reap, to do each simple task. There is the same need to-day for small producers of all kinds, whether shopkeepers or blacksmiths, to make wise choice of time in the use of their own labor. There is also a wide range of choice in the distributing and combining of labor, agents, and materials. A limited supply of agents can be used to secure a variety of goods, more or less desirable. There is a choice in ways and methods by which a thing may be done. There are many wrong ways, there is but one best way, at any stage of industrial progress. While most work is done in customary ways and little independent judgment is required, yet in every kind of industry new problems constantly arise and call for the exercise of choice as to methods. Moral qualities are continually called for, such as control of impulse and the giving up of the comfort of the moment. The wisdom of our fathers is embodied in a multitude of proverbs that suggest the wise course. Men must " make hay while the sun shines," and " plow deep while sluggards sleep." But virtue fails less often from lack of knowledge than from lack of will. As men differ in judgment, character, and will-power, their products differ, even in the simplest circumstances. The ability to choose and to do wisely is an element in personal skill in every economic activity. This quality in the man is managing ability, and the action of directing economic activity is business management. § 2. Direction of simple and of interrelated groups. "When men work in an associated group, the direction of effort becomes relatively more important. The first and simplest advantage of association is working in unison. Men unite their muscular efforts for a single task, and accomplish what is impossible to them working singly. There must, however, be a foreman to call out "heave ho," or to lead the song, or to set the stroke for the oarsmen. "When many are working together, good judgment in the selection of time and way yields larger results and a mistake wastes more materials and agents than when each works for himself. If association is to yield its advantages, it must go further than working in unison at a single task; there must be division of labor, hence harmony of effort, hence agreement and direction within the industry. While the gain of well-directed association is large, the waste of ill-directed effort is greater when specialization has taken place, than with isolated workers. Most communal societies have failed because of the lack of a good head. The few exceptional successes have been due to the presence of a man of superior ability, such as George Rapp of the Harmonist Community, who, had he lived in this day, could have easily become the head of a great business corporation.
"When various industrial groups are associated, direction becomes still more important and the need grows for high ability to manage and direct the great units of industry. In the single group it is an internal harmony alone that is needed. The work of a dozen men must be so arranged that each is in his fitting place. But as this group comes into contact with others, the relationship becomes twofold, and there must be both internal and external harmony. Outlook upon business conditions and commercial ability become necessary. The more complex the economic organization of society, the greater the chance of mistake and the more injurious are the mistakes to a wide range of interests. Large amounts of wealth and labor can be rapidly lost through lack of wise direction of an associated group.
§ 3. Selection of managed and of managers. Ever since the beginning of human society some degree of organization of industry has existed. In every community by some method, however crude, a practical way has been found of determining who shall organize and manage the factors of production, and who shall work under direction. Economic organization has always been more or less connected with and affected by political organization, and in many ages has had a distinctly political character through the institutions of slavery, serfdom, caste, and heredity in politics. But in modern times, under conditions of political freedom, this classifying of men so that those less capable of managing industry come under the direction of those who on the whole are more capable, has grown more and more economic and competitive. This selection is often unsatisfactorily done no doubt, through the quips of chance and through many influences of personal favor and political injustice. In most cases, however, the selection is of a very exact and effective sort. The need of organizing industrial forces is so great that any method that works at all is better than no method. The man who shovels dirt must do it at the right time and place if, in this complex society, it is to count for something and give the effort value. If he can not choose well for himself, he comes under direction. The average man can not decide nearly as well here as he could on a desert island where and when to put in his spade. There it would be to raise food for the current year; here it may be to dig a canal or a tunnel whose uses will not become actual for many years. The more distant the end sought, the more difficult is the choice. To every worker, according to his personal skill, is left some degree of choice in the method of his work, but in a large part of industry the range of choice is very narrow. The man with the shovel and the man with the hoe come under direction. Likewise there is a constant process of selecting and advancing the efficient managers. There is, to be sure, an element of chance in this selection. The process in general is a rude one. Accidents and unforeseen changes, industrial crises, failure of health at a critical moment, fraud and crime, may defeat men of ability and they may never regain their foothold. Men that have worked their way up from the ranks bequeath their business positions to their sons and grandsons. Lack of experience may lead to disaster a naturally able but youthful heir, too suddenly burdened with the responsibilities of a business. On the other hand, men of limited ability may inherit fortunes and preserve them by caution, without much energy or ability. Often they retain the investment while delegating the management to more capable hands. It is not always true, even in America, that "it is but three generations from shirt-sleeves to shirtsleeves," altho many fortunes slip away from the sons of rich fathers. In general, success in retaining either the control or the active management of a business is an evidence of considerable ability. By loss of fortune unwisely risked, through unforeseen changes in methods, and after manifold blunders, the less capable drop out. Thus, by the ceaseless working of competition, the higher places are taken by those fairly capable of filling them, and the efficiency of the management of business as a whole is maintained or increased.