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
Modern times have witnessed a wonderfully rapid growth in the average size of the individual business. Indeed, the change in the size of the business unit during the past half-century is almost as striking as the change from house industry to factory industry in the second half of the eighteenth century. The movement has gone so far and is still proceeding so rapidly as to excite very general fear as to its social consequences. Certain dangers resulting from the consolidation of large competing corporations will be discussed elsewhere.; but it is pertinent at this point, in connection with the subject of the organization of production, to advert briefly to the advantages claimed for large scale production and to the compensating advantages enjoyed by small scale producers.
Advantages of Large Scale Production. The advantages claimed for production on a large scale resolve themselves into two general classes: (1) economies in making the goods, and (2) economies in marketing the goods. As to the first, it is claimed that in production on a large scale there is a saving in (a) capital cost, per unit of product, both in fixed and in circulating capital; in (5) labor cost, owing to the possibility of more efficient organization ; in (c) the possibility of making improvements, both through the employment of special investigators and inventors, and through the comparison of methods in different departments of the same factory or in the same departments of different factories under the same ownership; in (d) the cost of superintendence; in (e) the utilization of waste, as is instanced by the Standard Oil Company and the large beef and pork packing companies; in (f) providing their own aids to making and marketingmaking their own cans, boxes, etc., and owning railways and steamship lines, etc. In businesses enjoying this last advantage, we have examples of integration of industry as well as of concentration of industry.
Among the second class of advantages claimed for large scale production, economies in marketing the goods, are the following: (a) economy in securing trade, through advertising and commercial travellers; (6) economy in "carrying " stocks of goods, a relatively smaller stock being sufficient to meet the fluctuations in demand; (c) economy in getting goods to consumers, through the power to secure better freight rates for large shipments, and through the power possessed by some concerns to avoid "cross freights"; (d) economy in securing a foreign market, through the greater power of the large concern to withstand the cutthroat competition common in "hard times."
The Strong Points of Small Scale Productio. Against these alleged advantages of large scale production may be set the following considerations which seem to promise a continuation of a considerable measure of small scale production, at least in certain lines of industry: (a) First of all, it is claimed by experts that in many lines of business a plant of moderate size is the plant of really maximum efficiency in regard to capital and labor costs. (6) In many cases the advantage of the large scale business in the matter of concentration of power is neutralized by the fact that modern invention, especially in connection with electricity, is revolutionizing the methods of distribution of power, putting the small manufacturer on a level with his greater rival, (c) It is, furthermore, very doubtful whether large scale producers can secure that minute and economical supervision which characterizes small scale industry ; whether, in other words, hired managers can compete in this regard with individual entrepreneurs who will reap all gains as they bear all risks. (d) The small producer has a distinct advantage in his greater power to know the personal wants of his market. In many industries the personal element plays so large a part that the small producer will for a long time be able to hold his own, even if he cannot oust the large producer from the field. Finally, by cooperation of neighboring small producers, it is possible to secure much the same opportunities as to (e) invention and improvement of processes and (f) utilization of " waste " that we have spoken of as regularly inhering in large scale industry.
It must be borne in mind that our comparison has been between small scale and large scale production, not between small scale production and monopolized production. Monopolized production is usually, though by no means always, production on a large scale. But production on a large scale is not at all the same thing as monopolized production. Had we been speaking of the production of monopolized goods, it would have been possible to add many to the list of alleged advantages or economies in production, and some of the advantages of which we have spoken would in the case of a monopoly have been much more marked and undisputed. Thus in the matter of "cross freights" and again in the case of advertising, many would admit advantages in the case of a monopoly who would deny that they accrue simply to large scale production.
This whole matter of the relative advantages of small scale and large scale production has been of late days the subject of rather acrimonious debate, and can by no means be regarded as settled. We have chosen, therefore, to write rather suggestively than positively. For this very reason, however, the topic should furnish the better material for discussions and debate by the class.
1. Growth in the magnitude of industry has resulted in increased complexity of industrial organization.
2. The entrepreneur directs the organization of the factors, but his function is sometimes shared among many individuals.
3. Forms of organization of the factor labor are simple associated effort, division of occupations, and division of labor.
4. Organization of the factor nature gives rise to localization of industry.
5. The limits of profitable organization of industry are the size and character of the population, the amount of capital, the character of the industry itself, and the character of the government.
6. In some industries there are many advantages in production on a large scale. Against these may be set other features in which the small scale producer may hold his own, or even enjoy an advantage.
1. How was cooperation of the factors secured before the Industrial Revolution? Where does this method obtain to-day in advanced nations ?
2. Name some of the duties of an entrepreneur.
3.Name the different forms of business undertaking. Discuss them from the standpoint of their relative strength and weakness.
4. How does division of occupations differ from division of labor ?
5. State the advantages of the division of labor; the disadvantages; the advantages of large scale production; the advantages of production on a small scale.
6. Describe the processes under a system of divided labor in some industry with which you are acquainted. Why does not farming lend itself to the division of labor?
Ely, R. T.: Monopolies and Trusts, pp. 187-190.
Jenks, J. W.: The Trust Problem.
Report of the United States Industrial Commission, Vol. II.
Smith, Adam : Wealth of Nations, Bk. I, Ch. I.
Von Halle, E.: Trusts and Industrial Combinations, pp. 30-52.