This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 7. Profit-seeking borrowers and the rate of interest. The enterpriser (and his agent, the manager) is essentially a profit-seeking (so-called productive) borrower. He does not borrow in order to enjoy more in the present in exchange for the future. He borrows to earn more in the present, to spend when he pleases, which may or may not be now. The money which he borrows to invest in business he uses to get better machinery or a larger stock, with which to secure a better or a larger product. The product finally being sold at a profit, the enterpriser is at a point where he can spend without encroaching upon his capital. The consumer of the product pays (or is expected to pay) the interest included in the price, and the final consumer's payment for enjoyment must be deemed the logical source of the money interest. The business loan is made in view of the rate of interest, of the market-price of the goods in which the loan will be reinvested, and of the probable chances for earning profits in the business.
Evidently the price of these goods, to control which is the real object of the loan, is a general market-price reflection of their earning power. It is merely the sum of the expected prices they will yield, capitalized at the prevailing rate of time-premium. But earning power in whose hands? Not in everybody's, for the price of the factors can be recovered in the price of the product only when they are applied to certain uses. "Whoever buys anything to use and sell again, is venturing his judgment that he can make at least as much in the future as the market-price reflects, and possibly more. The borrower expects either to make these particular goods earn incomes larger than those on the basis of which they have been capitalized, or to transfer them to an economy where goods are capitalized at a higher rate than he is paying. The income yielded by these goods, if the borrower's expectation is fulfilled, is but the difference between present and future prices that has been wrapped up in their capitalization. As time elapses and the incomes emerge in wisely chosen investments, the borrower has a surplus large enough to pay the contract interest. It appears, therefore, that the motive of the borrower is to get control of future incomes, at prices that already involve, in their capitalization, a discount of the future uses, as he sees them, somewhat greater than the interest he contracts to pay.
§ 8. Buying materials and labor. The large classes of goods which are to be bought are equipment, materials, and labor. In the main the prices of these things are determined by impersonal forces and can be only slightly modified by a particular buyer. This is especially true in the case of many staple goods. The manager can but look upon the price of these materials as fixed, and seek to combine them as economically as possible into other products. But there are many special patterns and qualities which have no true market-price. By close attention, good judgment, skilful bargaining, one man may be able to buy slightly cheaper than his competitors, and thus have an advantage over them at the outset. When he does this, it is usually by searching out a better market in which to buy, buying at a better time, and judging better than his competitors the quality of the goods.
Failure to have merchandise in stock when called for, and every needed material in stock to fill orders in manufacture, is an occasion of great loss. On the other hand, keeping more than is needed is a useless cost. The ability to buy cheap depends largely on being able to use a large quantity, sparing the seller in this way certain usual costs, and reducing the costs of transportation by economies in large shipments. But buying more than can be used within a short time causes costs for storing, insuring, etc., loss by deterioration, and loss of interest on the investment. Finding the golden mean - just enough and not too much - is one of the arts of business management, and requires a good organization of the purchasing department, and constant watchfulness both in mercantile and in manufacturing business.
Not the least important factor to be bought is labor of every grade. The more successful business men are not found usually paying less than their competitors for the various grades of workers. Success is due rather to utilizing the services so as to make them more effective. The chief executive of a large business must have a knowledge of men, ability to judge of human nature, to select his subordinates, and to animate them with his own purposes and plans. Andrew Carnegie has said that an appropriate epitaph for himself would be, "He was a man who knew how to surround himself with men abler than he was himself." This seems too modest; but in a sense it is not, because he claims for himself, and justly, the highest of all industrial qualities. A great administrator in political or industrial affairs can dispense with everything else rather than with this, the supreme, quality of the great executive.
§ 9. Various policies to upbuild the personnel. Different policies for developing the personnel of an organization are followed in different enterprises. In some there is "inbreeding," always promoting from those in the establishment; in others this policy is followed in the case of all minor places, but higher positions are filled by getting "new blood" from outside; in others, the best man is chosen wherever he may be found. There are advantages in each plan and corresponding disadvantages. In general a small organization needs to look outside for new blood, and a large organization can more safely fill its higher positions from its own staff.
Favoritism in appointments very quickly causes the degeneration of the management of any organization. The inferiority of public industry must be largely attributed to political favoritism, involving the spoils system with its usual accompaniment, insecurity of tenure. Every government, national, state, city, and county, has a good many business matters to attend to. In Germany, where the municipal governments have been such models of efficiency, the policy in engaging managerial ability is much like that of good corporate business in America. The mayor is a professional business manager, who prepares for the work as he would for medicine or for engineering. A city employs a mayor who has had experience and has shown success in the administration of a smaller city in any part of the empire. A beginning has been made in America in calling men from other states, to serve as municipal experts or to be heads of some state enterprises, commissions, and institutions (such as public school system, state university, prisons, philanthropies, etc.), and this use of the merit system is extending in the national service of health, forestry, irrigation, etc. This policy must develop if the public service is to become efficient.
Private business is not immune to the disease of favoritism, which in some of the railroads and of the industrial corporations is a serious hindrance to efficient operation. It is said that in some parts of the country getting even a minor position on a railroad depends upon having a "pull" with an official; directors provide their poor relations jobs as brakemen and conductors. The efficiency of American railroads in general, however, is doubtless due in large part to the wide open market for talent in management. A good shop foreman or a good master mechanic in any part of the country may hope to get a better position either on that road or on another. And to make a success as a division-superintendent or as president on a small road is to become a possible candidate for a larger superintendeney, or for a vice-presidency or for the presidency of one of the larger systems.