be changed. It is assumed, however, that the greater
the amount of capital subscribed by a shareholder, the
greater will be his interest in the success of the company.
And so, if the shareholder acquires what is called a
controlling interest, the probability is that he will
manage the business, to the best of his ability, in the
way which will bring the largest returns to himself and,
presumably also, to the other stockholders.
Theoretically, a corporation never dies. The in-
dividual shareholders do, of course, die, but their place
is taken by others to whom their stock is left or sold,
and so the company goes on doing business. Again,
the laws require always a certain minimum number
of directors who are technically responsible to the
stockholders for the conduct of the business. In the
multitude of counsel there is wisdom. It is assumed
that the inexperience of one director will be nullified
86 AN INTRODUCTIQN TO ECONOMICS
by the experience or skill of the others. On the whole
it may be safely assumed that the corporation is usually
more efficiently managed than the private partnership.
Government of the Modern Corporation The
development of the corporation form of business is in
line with the general development of democratic in-
stitutions. There is a distinct analogy between the
government of a corporation and the government of a
democratic country. The individual stockholders cor-
respond to the individual voters. The Board of Di-
rectors is similar to Congress, and the Chairman, to the
President. The Manager, Secretary, and Treasurer
correspond to the Cabinet officers. Just as the voters
elect Congress and the President, so do the stockholders
elect the Board of Directors.
Bond Issues and Bondholders In modern times,
however, there are other ways in which a corporation
can obtain capital than by securing stockholders. They
may borrow directly from the public. Of course, it is
true that the corporation borrows money from the public
when it issues a prospectus and obtains subscriptions
to its capital. But the subscribers become direct
partners in the institution, sharing its losses as well
as its profits. If the corporation issues bonds, how-
ever, the bondholders assume no responsibility for
the losses of the corporation. They simply lend their
capital for a definite rate of interest for a given length
of time. As they do not share in the losses of the
business, they do not share in its management. The
management lies with the partners, tha^t is, with the
stockholders. As long as the bondholders receive
their interest and the principal of their loan is not
THE ORGANIZATION OF PRODUCTION 87
endangered, they have absolutely no say in the working
of the corporation. They are exactly in the position of
mortgagees who have lent money on the security of real
estate. The mortgagee is not concerned with the way in
which his money is used. He is satisfied so long as the in-
terest on his money is paid regularly and the property
upon which the money is lent is efficiently safeguarded.
Of course if the interest is defaulted, or if the prop-
erty is obviously being depreciated so that the ultimate
security of the money lent on the bonds is endangered,
the bondholders may step in and, upon due legal
process, assume control of the business. It has some-
times happened, indeed, that bondholders have, by
various methods, secured a great apparent depreciation
of the assets of a corporation, and assumed control of
a corporation, ultimately buying the assets of the
company at public sale for a very small sum. No
system has been invented so far, however, which is
proof against unethical forms of manipulation in the
interests of individuals.
Profits of Bond- and Stockholders It would appear
from the above account, that the bondholders are in
a much better position than the stockholders. Their
principal is secured as well as their interest. Their
interest, however, is limited to the stipulated rate,
while the profits of the stockholders are limited only
by the earnings of the corporation. In return for the
risk of loss, the stockholder gains the possibility of
higher returns upon his investment.
Improvements in Production Due to Corporation
Form of Organization The great advantage which
results from the growth of the corporation form of
88 AN INTRODUCTION TO ECONOMICS
organization is the possibility of working in large units.
It is not unvaryingly true that the larger the unit the
better the organization. It will be noted in the next
chapter that the law of diminishing returns operates
in the organization of corporations as well as anywhere
else. Nevertheless, the older organization was so un-
economical that there has been great scope for the
working of the reverse law of increasing returns. The
older system meant the existence of innumerable small
organizations with the attendant waste and duplica-
tion of effort which characterized them. To a very
large extent this waste can be eliminated. It has not
been entirely removed as yet. No one with any real
knowledge of the working of our modern organization
will refuse to acknowledge the enormous amount of
waste of effort and of material which goes on. There
is more talk than actual realization of efficiency. Still,
there is undoubtedly an improvement. The larger
units have eliminated a great deal of the waste. To
take one instance alone, it may be shown that our
modern banking system, working in large units, closely
interrelated with one another, is infinitely more ef-
ficient than the older system of a vast number of private
banks.
Illustration from Banking Business The early
history of banking in the United States shows the
existence of a great number of small banking houses
frequently working with an unduly small capital. In
fact there are instances of men starting banks without
capital at all other than the amount necessary to rent
a room. In order to make profits, risks which were
far from good had to be taken. Rates of interest too
THE ORGANIZATION OF PRODUCTION 89
high to allow conservative business men to avail them-
selves of loans had to be charged. The natural re-
sults were comparative lack of assistance to good
businesses, and overconfident financing of speculative
enterprises. Failures were common. The credit of
the country rested upon a wrong basis. Under the
modern system a much more satisfactory state of
affairs is apparent. The speculative side of industry
is not supported by the banks to the same extent, but
larger banking resources are open for the prosecution
of legitimate commercial enterprises.
The detail of these banking systems will come up
for discussion later. At present, the system is used
merely as an illustration of the improvement due to
the corporation system.
Department and Chain Stores The development
of the great department stores and the " chains " of
stores is another illustration of the elimination of waste
and the securing of economies through the corpora-
tion system. Large capitals are necessary to these
organizations. And large capitals cannot be obtained,
except under very exceptional conditions, from a few
individuals. Hence they must be the result of the
accumulation of small investments which is the es-
sential character of the corporation capital. Even
in the great department stores there is waste, only too
evident to those who manage them. But the waste
there is infinitesimal when compared with what pre-
vails in the small stores. Small stores buy their goods
at a disadvantage. They must take small quantities
at a time, land must consequently pay the high prices
inevitably charged for small amounts. They are not
90 AN INTRODUCTION TO ECONOMICS
in a good position to judge of markets. Their own
market is confined to a small radius and there is con-
sequently little possibility of goods not wanted in one
locality being disposed of by selling them in another.
The department store reaches a much wider market
and can afford to buy in much greater quantities with
the certainty of being able to dispose of a much greater
variety of goods than can the small dealer. The vary-
ing wants of wider markets can be satisfied with less
waste.
The village tailor can only have a small range of
material for his customers to choose from. If he has
a wide range, he will probably find that much of his
stock remains on his shelves. Hence his customers
cannot satisfy themselves readily. They will prefer
to deal with the city store which has variety to satisfy
all tastes and which can nevertheless turn over its
stock much faster than the village tailor can hope to
do. No further illustrations are necessary. Common
observation will furnish infinite numbers to prove the
truth of the contention that the large capital usually
means greater efficiency.
CHAPTER VIII
THE ORGANIZATION OF PRODUCTION (continued)
It is not only in business that great strides have been
made during the past century. The industrial world
has moved too, and, indeed, shows even more differ-
ence from the crude methods of the past than does the
business world. Space does not permit of an exhaus-
tive account of the new developments, but the principles
upon which the present organization is based can be
indicated without occupying too much of our attention.
Agriculture as Industry As was suggested in the
last chapter, it is advisable to consider agriculture as a
branch of industry. There is really no essential dif-
ference between agriculture and manufacture. The
agriculturist merely applies his skill and knowledge
to the changing of the chemical constituents of the
soil into food and the raw material of fabrics. The
farmer's aim as an agriculturist, apart from the pri-
mary necessity to obtain profits, is to produce from the
soil the greatest quantity and best quality of crop that
can be obtained. He should always strive to improve
his production in both directions, and his success may
be illustrated by reference to the methods and results
of past systems.
Primitive Agriculture Primitive agriculture con-
sisted of a simple scratching of the almost virgin soil
91
92 AN INTRODUCTION TO ECONOMICS
and allowing the processes of nature to work with
little assistance from the farmer. Even as late as
the seventeenth century, the highlander plowed the
mountain sides in Scotland by means of a primitive
implement tied to the end of the ox's tail. The actual
origins of agriculture are doubtful. Probably man
learned very gradually that the growth of the wild
crops could be stimulated by simple tilling of the soil,
exposing to the sun fresh earth. With this as a basis,
and with very little knowledge of the effects of cropping
upon the constituents of the soil, his knowledge was
increased by experience when he found that continual
cropping with the same cereal impoverished the soil.
Various methods were adopted to prevent this im-
poverishment. Possibly, as the farmer wandered from
exhausted fields to virgin soil he arrived in his wander-
ings at last at a field which had already been tilled and
left upon its exhaustion. He discovered that in the
interval during which the land had lain idle it had
regained its fertility, and thus arose the knowledge of
the value of letting land lie fallow. Every one is famil-
iar with the biblical method of allowing one year in
seven to the soil in which to recover its resources. The
method adopted in the northern parts of Europe from
which our ancestors came was somewhat different.
There the cultivated lands were divided into three
parts, two of which were tilled each year while one
remained fallow. Each of the " fields " had its turn
of fallow once every three years.
Communal Tillage The lands were tilled in com-
mon, although not necessarily communally owned.
Each of the cultivated fields was divided into strips,
THE ORGANIZATION OF PRODUCTION 93
separated from one another by " balks " of grass
strips of grass from four to six feet wide. Each of the
cultivators possessed the produce recovered from one
or more of the strips. When the crops had been reaped
and the cattle fed upon the stubble, the time came for
the re-cultivation of the field. The strips were divided
among the cultivators again, although it did not follow
that each would receive the same strips whose produce
was his property in the previous year.
This three-field system was a distinct improvement
over the old system of continuous cropping to the
point of exhaustion, but it was nevertheless wasteful.
Moreover, the communal method of operating the
land made it almost impossible to conduct experiments
for improving the crops.
Difficulties in the Way of Progress There is a
general feeling that farmers are a conservative class,
hating innovations. That may not be true at present,
particularly in America, but it undoubtedly was so in
the past. And when there came a farmer sufficiently
radical to suggest a new method, he found it almost
impossible to persuade his fellow cultivators to agree
to the " new-fangled " idea. Progress was only possible
when experiments were made upon land which was not
included in the three-field system. In England the
system broke down during the eighteenth century.
The individual farms were " inclosed." That is, each
of the cultivators became the possessor of an amount
of land roughly equivalent to the area whose produce
he had formerly received. Then the individual could
experiment for himself, if he so wished, without con-
sulting the opinions of other farmers. It was during
94 AN INTRODUCTION TO ECONOMICS
this period that what was known as Dutch culture was
inaugurated. In other words, continuous cropping
with one crop gave place to a rotation of crops, it hav-
ing been found that what one crop took from the soil
was replaced by another.
The experiments of some cattle breeders at the same
time improved the breed of cattle to an extent which
seemed almost miraculous. This was made possible
by the utilization of root crops for winter feed.
Extensive Culture in America The greatest strides
in farming methods, however, occurred in the American
continent. Here was a land in which virgin soil seemed
almost inexhaustible. Careful tilling was not, at first,
necessary. The size of the farms was infinitely greater
than in Europe, where for centuries almost every avail-
able acre had been tilled. When a larger crop was re-
quired, instead of manuring the existing farm land,
fresh virgin soil was plowed and sown. The wide area
of land under tillage and the comparative scarcity
of labor tended to encourage the use of labor-saving
machinery, and to-day America is preeminently the
land of machine farming. Virgin soil no longer exists
in unlimited acres. Careful cropping is necessary, and
the wide areas cultivated must employ the best of the
machines in order to provide food not only for the culti-
vators themselves, but also for the peoples of the old
world, who have come to depend very largely upon the
produce of America for their daily food.
For a comparatively long period, American farms
worked under the law of increasing returns. Intensive
culture in Europe had shown that land could be im-
proved in quality and greater crops secured by the
THE ORGANIZATION OF PRODUCTION 95
artificial supply of chemicals which were lacking in
the soil. But Europe had reached the stage where
the law of diminishing returns was in operation, and
although the powers of the soil were improved each
addition to the crops cost a proportionately greater
expenditure of labor and capital. America learned
from the experience of Europe, and vast changes have
been made in the methods of agriculture. Farmers
have at their service the best knowledge of the govern-
ment experts, and the universities have devoted much
attention to improving methods and to eliminating
the drawbacks to successful cultivation.
Increased Use of Fixed Capital The essential
change in our methods of agriculture, however, is due
ultimately to the increased amount of fixed capital.
The simple plow drawn by horse or ox has given
place to the steam or gasoline tractor drawing many
plows. Seeding, harrowing, reaping, binding, and
threshing are all done by machinery, and done more
economically and with better results than formerly.
The use of machinery, while it has proved infinitely
more satisfactory than hand labor, has not diminished
the number of people engaged in farming. On the
contrary it has increased the number dependent upon
agriculture for their living to an enormous extent. It
is true, however, that this increase, big as it is in actual
numbers, is not proportionate to the increase in popu-
lation. Irrigation, involving an immense expenditure
of capital and labor, has brought into cultivation areas
which used to be deserts. The needs of a growing
manufacturing community have demanded an increase
in production which has made it profitable to apply a
96 AN INTRODUCTION TO ECONOMICS
new army of agriculturists, armed with the best weapons
of the modern scientific farmer, to the cultivation of
all available soil. The new methods have lightened
the lot of the farmer, and the increased means of com-
munication, necessary for the removal of his produce,
have brought him into closer touch with his neighbors,
and stimulated him mentally.
Manufactures. Subordinate Nature of Early Manu-
facture Although agriculture has made great strides it
is in the manufacturing side of industry that the great-
est changes are to be seen. Formerly all manufacture
was carried on merely as an adjunct to agriculture.
Agriculture was the mainstay, and a limited amount of
specialization allowed of the existence of trades un-
connected with farming. The smith and the carpenter
did not devote any of their time to farming, or, at least,
devoted very little ; but the spinning and weaving of
cloth were carried on by the farmers themselves.
Manufacture then meant what the word really signifies,
the making of things by hand. The spinning wheels
and the hand looms were hand made. They were
operated by hand in the houses of the working people.
Industry was domestic, but it was not without its
organization.
The Gild System When specialization of occu-
pation grew to such an extent that trades developed
beyond the simple blacksmithing and carpentering;
when the butcher and the baker developed their crafts
and the gold- and silversmiths arose, each craft at-
tempted to secure the welfare of those who carried on
those industries. They united in organizations which
were termed gilds. The gilds were bodies which
THE ORGANIZATION OF PRODUCTION 97
comprised all who were engaged in a particular craft,
or trade. They were organized under definite rules
which provided for all the necessities of the trade.
Before a workman could be admitted, he had to pass
through a period of apprenticeship, during which he
lived with his employer. The employer undertook to
teach him the craft and to clothe and feed him while
he learned. At the end of his apprenticeship he be-
came a journeyman and looked forward to the time
when he could begin business himself as a master. The
gild included those in all three stages apprentices,
journeymen, and masters. Rules prevented one master
from obtaining more than his share of the amount of
work to be done; the manner of the work done was
criticized by the officers of the gild in order! to main-
tain good standards of workmanship. Competition
was not allowed.
The sick and infirm among its members were cared
for by the gild funds, from which also the orphans
and widows of deceased members were aided.
The gilds broke down very largely because of an
ever growing strictness in the rules for admittance. No
one was allowed to practice a craft who did not belong
to the gild in his district. He could only be admitted
to the gild as an apprentice, or upon payment of a
heavy entrance fee. Then the apprentices were charged
fees which grew to such an extent that they became
almost prohibitive. The gilds became close corporations
instead of free associations, and the resultant outside
competition gradually broke down their organization.
Manufacture on a Small Scale Whether organized
in gilds, however, or working as free individuals, the
98 AN INTRODUCTION TO ECONOMICS
workmen carried on their occupations on a small scale.
Factories did not exist, although as early as the fifteenth
century there were evidences of the possibilities of
factory organization.
The Factory System It was not until the advent
of the age of the great inventions that factory organiza-
tion came into being to any great extent. The latter
part of the eighteenth century saw the invention of
many new machines, particularly applied to the textile
trades, which rendered necessary the grouping of work-
men in buildings. The change from the older system
was at first gradual, but toward the end it came with
increased speed. Under the older method, at first, the
workman owned the building in which he worked, the
tools of his trade, the materials from which the product
was made, and he supplied the power from his own
physical energy. He gradually came to work upon
materials supplied him by others. Later he worked
with tools lent to him by the owners of the materials.
Still later those same owners supplied the buildings
in which he worked and at last the power which drove
the tools, or machines, ceased to be his own physical
force, and was derived from steam.
Increased Use of Fixed Capital in Manufacture -
With each stage of development there is seen an in-
crease in the amount of fixed capital necessary to carry
on an industry. When spinning and weaving were done
by hand, the tools were simple and every peasant had
his spinning wheel and hand loom. When the spinning
jenny and the power loom were to be used, the cost
was too great for the individual, unless he possessed a
large amount of capital. The workman lost more and
THE ORGANIZATION OF PRODUCTION 99
more the possibility of becoming a master and tended
to become a mere wage earner, supplying nothing but
his physical powers and his skill toward the manu-
facture of the completed product.
With each stage of growth there is seen an increase
in the amount of production from the individual.
Each stage means an increased use of the principle of
division of labor. With every additional machine
the necessity for the use of highly skilled labor is
lessened, and, as a consequence, the average produc-
tivity of the workman is increased. Factory organiza-
tion is not profitable unless there exists a market for a
large production. Those industries which command
only a very small market still depend upon the skill
of the individual workman.
It is in the organization of industry on the factory
basis that the best examples of the law of increasing
returns can be seen. When the industry is on a small
scale, each of the workmen must perform the greater
number of the operations necessary to turn out the
finished product. In the manufacture of furniture, for
instance, if the work is done in a small workshop, em-
ploying perhaps two or three workmen, the amount
produced does not warrant much machine work.
Hence there is a great deal of handwork in the neces-
sary planing, sawing, fitting, etc. Each of the work-
men divides his time among the various occupations.
At one time he is drawing the design of the cabinet
or whatever is to be made. Then he is cutting out
the different shapes which he must proceed to plane
and fit up. Finally he smooths the whole and turns
it out ready for polishing. He cannot be expert at all
100 AN INTRODUCTION TO ECONOMICS
the operations. Or, at least, he cannot be as expert
as one who spends his whole time in one operation.
Under the factory organization the shapes can be
cut by machinery in large numbers. The workmen
necessary to operate the machines are few in com-
parison with the amount turned out. The planing
and fitting are done by machinery also, and likewise
the sanding and finishing. If the expense of pro-
ducing each particular part of the finished piece of
furniture be calculated under the hand-work system and
under the factory system, it will invariably be found
that the cost of the latter method is very much less
than that of the former. On the whole it is safe to
say, also, that the factory work will be better done,
provided that the element of individual artistry does
not enter into the product. Each of the workmen,
aided by the machines specially designed to perform
functions formerly carried out by hand, acquires a