This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
In the preceding chapter we have considered the factors of production separately, studying the nature of each, and the principles governing its efficiency and increase. We have now to study the manifold ways in which production in our day has come to be socialized and organized. It is as though we had studied the nature of the various parts of a machine, and were then to study further the different ways and methods of putting the parts together, and to learn how these acted as a unit when the whole machine was "set up."
I. Organization of the Factors Regarded Collectively
Early Simplicity. We have already seen that the three main parts of the great machine of production are land, labor, and capital; and we may therefore first of all inquire how these parts are " assembled" for efficient work. In other words, the first problem in our present study is that of the cooperation or organization of the factors of production taken together or collectively. This organization, in the early stages of social development, was exceedingly simple. The old household economy was so organized that it is scarcely possible to distinguish in it the three separate factors. The same man owned the land, the labor, and the capital, and as sole judge of what was right distributed the total product among those who aided in production. When, with advancing civilization, production came to be carried on by village communities, there was collective ownership of the instruments of production and management by a common authority, and the distribution of the product was regulated by custom. Later, under the gild organization of industry and commerce, there was a similar lack of sharp separation of the factors. The gild of the Middle Ages embraced apprentice, journeyman, and master, and regulated industry and commerce under governmental supervision. The master directed the business, owned the capital, and worked with his own hands. He received the entire product of the business after supporting the apprentice and paying the journeyman. Labor was in a certain degree set off from the other factors, but the separation was by no means complete. The man who at any time supplied labor looked forward not without reason to the time when he himself in turn should become capitalist, employer, and manager, for such advance was a regular part of the gild system.
Growth of Complexity. As has been explained in earlier chapters, the last one hundred and fifty years have witnessed a great change in the organization of the productive factors. Here and there still survive traces of the earlier simplicity, and one great branch of production, agriculture, is still generally carried on in our country without a separation of the factors. A large proportion of our small farmers own the land they cultivate and the capital they employ, and depend wholly or in great part upon their own labor and that of their families for their product. But in commerce, manufacturing, and transportation, we have as a rule to-day one large class furnishing labor only, another class furnishing capital and sometimes land, and a third class organizing and managing business. A modern railway corporation serves as a good illustration of this. The holders of the bonds and in some cases the stocks furnish the capital, and receive in return interest or, in the case of the stocks, dividends. Labor, supplied by others, is paid for by wages and salaries. The land is also regularly supplied by the bondholders, being acquired by the exchange of a part of their capital. Consequently, we have rent also, though this does not usually appear as a separate item in railway bookkeeping, except in those cases where the land has been leased instead of being purchased outright. Finally, the managers and directors of the business, chosen by the stockholders from their own number or from without, constitute a separate class in the organization.
The Entrepreneur. It is easy to see that when business organization has grown so complex, some central guiding intelligence is necessary, which shall overlook the whole field, and, after deciding what things shall be produced, and in what quantities, shall provide that the necessary factors of production work together in creating the product. The man who does this usually assumes the risk of loss or failure, and, on the other hand, pays a stipulated sum to those persons or classes who supply him with the factors of production.
In the England of the eighteenth century such a man was called an "undertaker" or "adventurer." As the word " undertaker " has since come to be applied to one small and special class of business men, and as the word " adventurer " now carries with it an idea of rashness or even dishonesty,the French word " entrepreneur," an exact equivalent of the word " undertaker," is now regularly used instead.
The function of the entrepreneur has become of the utmost importance in modern society, and seems to be growing in importance with every increase in the complexity of industrial organization. He has been well called the " Captain of Industry," since it is he who marshals and commands the industrial forces, and more than any one else bears the responsibility for failure or success. Business enterprises under able leaders achieve brilliant successes only to languish and become bankrupt when death removes the guiding hand and brain. Such was the case with the great mercantile business which was built up in New York City by A. T. Stewart. Whole towns in many cases depend for their prosperity upon a few shrewd Captains of Industry.
The Forms of Business Undertaking. The entrepre-neurship of a business is not always undertaken by a single individual. On the contrary, a rapidly increasing volume of business is coming to be carried on in forms which call for a division of the function or functions of the entrepreneur among many individuals. The following are among the main forms of business undertaking in the modern world:
1. The Single Entrepreneur System.In this form of business, a
single individual owns or hires the capital and land, employs the
labor, directs the business, and bears the whole risk.
2.Partnership. In the case of a partnership, the ownership, direction, and responsibility are shared, sometimes in unequal proportions, by the two or more partners, who are severally liable at law to the full extent of their fortunes.
3.Business Corporations. This form differs from the foregoing chiefly in the fact that the individual responsibility of the members of the corporation is limited by the charter or by the statutes governing such companies, and in the further fact that there is no necessary legal limit to the life of such corporations. On account of the magnitude of business transacted under this form, it often happens that the functions of entrepreneurship are divided, the shareholders owning, controlling, and bearing the risk, but committing the active management to elected directors, and, through the directors, to hired superintendents and managers.
4. Cooperative Businesses. In what is technically known as cooperative production, the workmen combine, in the form of a partnership or corporation, in the ownership or control of the other factors of production, share all risks, and secure direction of the business either through their own members, chosen for the task, or through regular salaried managers. The great weakness of the system has thus far been that the cooperating workmen have too frequently underestimated the importance of efficient direction.
5.Government Enterprise. The Federal, state, and local governments severally own and manage many businesses of great importance. In these instances the people as a whole own the business and bear all risks, while they commit the direction to elected or appointed managers.