This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 8. Economical use of machinery in large production. In these examples the saving in labor is not merely the result of increased personal skill, but of the use of machinery. There is economy in the use of machinery partly because with a large output more complex, more nearly automatic, machinery can be used. Even when the same kinds of machines are used they can be kept specially adjusted for each pattern and process, whereas in a small factory much time and energy are wasted in adjusting one machine for various processes. The machinery in a large factory is thus better and more fully utilized. A comparison has been made of the machinery that would be used in one large ax-factory and in twenty-five small ax-factories having, it is assumed, the same number of workmen and the same total output, as follows:
Twenty-five small factories
One large factory
Saving Number Per cent
Grindstone pits .............
Polishing frames ....
Total machines ..........
The difference in cost due to machinery is not so great as these figures indicate, as the unused machine lasts longer; but in the small factory there is more depreciation from rust and decay, and a larger investment of capital for each unit of product. The average amount of stock and materials required in a small factory is greater in proportion to the output.
The cost of producing steam power is usually less per horse power in a large plant, because of automatic devices for unloading and handling coal and ashes, and because of greater efficiency of larger boilers and engines, etc. The use of power is, by the law of averages, distributed more evenly in a large plant than in a small one. Water power in some places may be developed at low cost per unit for a very large plant, by construction of large reservoirs, etc., where the cost would be prohibitive in a small plant.
§ 9. Economy of buying and selling in large quantities. Materials can be more exactly standardized as to quality when bought regularly and in larger amounts, and in many cases more cheaply. Shipments in carload and trainload and shipload lots make freight rates per unit less for large amounts even without illegal concessions.
The cost per unit of selling the product in many cases becomes less as the output increases. Advertising to make a name "a household term" would be ruinous for a small enterprise, but becomes a minute item of unit cost when divided by a multitude of sales. Often more orders come unsolicited as a business grows. A larger organization of commercial travelers, carrying a larger line of goods, and each covering a smaller territory more thoroly, makes the unit selling cost lower.
§ 10. Certain limitations of large production. Not one of these advantages is absolute and unlimited, and for most of them there are offsetting disadvantages which at length put an end to the economy of size. Labor can not be indefinitely divided, and when the factory is large enough to keep running one each of the best machines known, there is little or no economy in duplicating machines. As the factory grows the head manager can have less and less complete oversight; the eye of the master can not be over all as in the smaller establishment. This defect soon proves disastrous unless mended by more elaborate methods of organization, reporting, records, bookkeeping, etc., and the best of these prove expensive. In a small perfectly equipped factory making a patented specialty, and employing about one hundred men all of whom are personally known to the executive, the office "overhead" is only about 5 per cent; whereas in very large factories this item sometimes amounts to 20 per cent.
The cost of transmitting steam power by shafts and pulleys puts a limit to the economy of large steam power; and in many locations electric power is or can be supplied as cheaply to the small factory as to the large one. The natural limit of water power sometimes gives a maximum of power economy to a factory while it is small, and as it grows additional power from coal costs more per horse power. As large factories tend to create cities around them, land rises in value and higher wages must be paid the workmen in large cities. Small factories are constantly seeking out lower rents, taxes, wages, salaries, cheaper local sources of materials, cheap tho limited sources of power, and thus they compete successfully in many markets.
§ 11. Certain disadvantages of large buying and selling. In many cases growth in size is in some respects a disadvantage both in buying and in selling. To serve a local market a small establishment has certain advantages which no large competitor can equal. A factory using materials found in the locality, as lumber for wagons and furniture, wheat for flour, etc., has an advantage in costs by saving of freights and the cost of this item increases with the output. In selling, likewise, the nearest market is partially a protected field, to which distant competitors can come only at greater cost. It costs more to send agents further, and either prices must be reduced or freights paid by the seller, and this cost of overcoming the limits of the market finally must offset all the other advantages of large industry. These facts help to explain the survival and modest success of many thousands of retail stores, most notably grocery and drug stores, and of small factories such as grist mills, lumber and planing mills, wagon and furniture factories, fruit canneries, and thousands of small local shops for repairs and local orders in all the various crafts, working in gold, silver, iron, tin, wood, leather, etc. Further, it may be observed that the advantages of size are greatest where the production is the multiplication of a few patterns, most fully standardized; small production holds its place most successfully where there is need of individuality, variety, art, personal attention to the consumer's wishes, and prompt service that can be rendered only in a narrow neighborhood.
It is evident that most of these limitations to growth apply to a single local factory as regards its internal economies, but do not apply fully to the buying and selling of a combination under one management of geographically scattered plants. The federative plan has thus been applied to the "chain store" of various kinds - groceries, drugs, tobacco, shoes, clothing, five and ten cent, general department. It has been applied to manufacturing on an enormous scale in such corporations as the U. S. Steel Corporation. These enterprises often, but not always, contain an element of monopoly. There are also cases where the necessary size for minimum cost is dependent on the existence of a condition of monopoly, as in most so-called "public utilities."4