The Theory of Business Enterprise
Chapter 3: Business Enterprise
The motive of business is pecuniary gain, the method is essentially purchase and sale. The aim and usual outcome is an accumulation of wealth. Men whose aim is not increase of possessions do not go into business, particularly not on an independent footing.
How these motives and methods of business work out in the traffic of commercial enterprise proper - in mercantile and banking business does not concern the present inquiry, except so far as these branches of business affect the course of industrial business in the stricter sense of the term. Nor is it necessary were to describe the details of business routine, whether in the mer-
(21) -cantile pursuits or in the conduct of an industrial concern. The point of the inquiry is that characteristically modern business that is coextensive with the machine process described above and is occupied with the large mechanical industry. The aim is a theory of such business enterprise in outline sufficiently full to show in what manner business methods and business principles, in conjunction with the mechanical industry, influence the modern cultural situation. To save space and tedium, therefore, features of business traffic that are not of a broad character and not peculiar to this modern situation are left on one side, as being already sufficiently familiar for the purpose in hand.
In early modern times, before the regime of the machine industry set in, business enterprise on any appreciable scale commonly took the form of commercial business - some form of merchandising or banking. Shipping was the only considerable line of business which involved an investment in or management of extensive mechanical appliances and processes, comparable with the facts of the modern mechanical industry. And shipping was
(22) commonly combined with merchandising. But even the shipping trade of earlier times had much of a fortuitous character, in this respect resembling agriculture or any other industry in which wind and, weather greatly affect the outcome. The fortunes of men in shipping were on a more precarious footing than to-day, and the successful outcome of their ventures was less a matter of shrewd foresight and daily pecuniary strategy than are the affairs of the modern large business concerns in transportation or the foreign trade. Under these circumstances the work of the business man was rather to take advantage of the conjunctures offered by the course of the seasons and the fluctuations of demand and supply than to adapt the course of affairs to his own ends. The large business man was more of a speculative buyer and seller and less of a financiering strategist than he has since become.
Since the advent of the machine age the situation has changed. The methods of business have, of course, not changed fundamentally, whatever may be true of the methods of industry; for they are, as they had been, conditioned by the facts of ownership. But instead of investing in the goods as they pass between producer and consumer, as the merchant does, the business man now invests in the processes of industry; and instead of staking his values on the dimly foreseen conjunctures
(23) of the seasons and the act of God, he turns to the conjunctures arising from the interplay of the industrial processes, which are in great measure under the control of business men.
So long as the machine processes were but slightly developed, scattered, relatively isolated, and independent of one another industrially, and so long as they were carried on on a small scale for a relatively narrow market, so long the management of them was conditioned by circumstances in many respects similar to those which conditioned the English domestic industry of the eighteenth century. It was under the conditions of this inchoate phase of the machine age that the earlier generation of economists worked out their theory of the business man's part in industry. It was then still true, in great measure, that the undertaker was the owner of the industrial equipment, and that he kept an immediate oversight of the mechanical processes as well as of the pecuniary transactions in which his enterprise was engaged; and it was also true, with relatively infrequent exceptions, that an unsophisticated productive efficiency was the prime element of business success. A further feature of that precapitalistic business situation is that business, whether handicraft or
(24) trade, was customarily managed with a view to earning a livelihood rather than with a view to profits on investment.
In proportion as the machine industry gained ground, and as the modern concatenation of industrial processes and of markets developed, the conjunctures of business grew more varied and of larger scope at the same time that they became more amenable to shrewd manipulation. The pecuniary side of the enterprise came to require more unremitting attention, as the chances for gain or loss through business relations simply, aside from mere industrial efficiency, grew greater in number and magnitude. The same circumstances also provoked a spirit of business enterprise, and brought on a systematic investment for gain. With a fuller development of the modern close-knit and comprehensive industrial system, the point of chief attention for the business man has shifted from the old-fashioned surveillance and regulation of a given industrial process, with which his livelihood was once bound up, to an alert redistribution of investments from less to more gainful ventures, and to a strategic control of the conjunc-
(25) -tures of business through shrewd investments and coalitions with other business men.
As shown above, the modern industrial system is a concatenation of processes which has much of the character of a single, comprehensive, balanced mechanical process. A disturbance of the balance at any point means a differential advantage (or disadvantage) to one or more of the owners of the sub-processes between which the disturbance falls; and it may also frequently mean gain or loss to many remoter members in the concatenation of processes, for the balance throughout the sequence is a delicate one, and the transmission of a disturbance often goes far. It may even take on a cumulative character, and may thereby seriously cripple or accelerate branches of industry that are out of direct touch with those members of the concatenation upon which the initial disturbance falls. Such is the case, for instance, in an industrial crisis, when an apparently slight initial disturbance may become the occasion of a widespread derangement. And such, on the other hand, is also the case when some favorable condition abruptly supervenes in a given
(26) industry, as, e.g., when a sudden demand for war stores starts a wave of prosperity by force of a large and lucrative demand for the products of certain industries, and these in turn draw on their neighbors in the sequence, and so transmit a wave of business activity.
The keeping of the industrial balance, therefore, and adjusting the several industrial processes to one another's work and needs, is a matter of grave and far-reaching consequence in any modern community, as has already been shown. Now, the means by which this balance is kept is business transactions, and the men in whose keeping it lies are the business men. The channel by which disturbances are transmitted from member to member of the comprehensive industrial system is the business relations between the several members of the system; and, under the modern conditions of ownership, disturbances, favorable or unfavorable, in the field of industry are transmitted by nothing but these business relations. Hard times or prosperity spread through the system by means of business relations, and are in their primary expression phenomena of the business situation simply. It is only secondarily that the disturbances in question show themselves as alterations in the character or magnitude of the mechanical processes involved. Industry is carried on for the sake of business, and not conversely; and the
(27) progress and activity of industry are conditioned by the outlook of the market, which means the presumptive chance of business profits.
All this is a matter of course which it may seem simply tedious to recite. But its consequences for the theory of business make it necessary to keep the nature of this connection between business and industry in mind. The adjustments of industry take place through the mediation of pecuniary transactions, and these transactions take place at the hands of the business men and are carried on by them for business ends, not for industrial ends in the narrower meaning of the phrase.
The economic welfare of the community at large is best served by a facile and uninterrupted interplay of the various processes which make up the industrial system at large; but the pecuniary interests of the business men in whose hands lies the discretion in the matter are not necessarily best served by an unbroken maintenance of the industrial balance. Especially is this true as regards those greater business men whose interests are very extensive. The pecuniary operations of these latter are of large scope, and their fortunes commonly are not permanently bound up with the smooth working of a given Sub-process in the industrial system. Their fortunes are rather related to the larger conjunctures of the industrial
(28) system as a whole, the interstitial adjustments, or to conjunctures affecting large ramifications of the system. Nor is it at all uniformly to their interest to enhance the smooth working of the industrial system at large in so far as they are related to it. Gain may come to them from a given disturbance of the system whether the disturbance makes for heightened facility or for widespread hardship, very much as a speculator in grain futures may be either a bull or a bear. To the business man who aims at a differential gain arising out of interstitial adjustments or disturbances of the industrial system, it is not a material question whether his operations have an immediate furthering or hindering effect upon the system at large. The end is pecuniary gain, the means is disturbance of the industrial system, - except so far as the gain is sought by the old-fashioned method of permanent investment in some one industrial or commercial plant, a case which is for the present left on one side as not bearing on the point immediately in hand. The point immediately in question is the part which the business man plays in what are here called the interstitial adjustments of the industrial system; and so far as touches his transactions in this field it is, by
(29) and large, a matter of indifference to him whether his traffic affects the system advantageously or disastrously. His gains (or losses) are related to the magnitude of the disturbances that take place, rather than to their. bearing upon the welfare of the community.
The outcome of this management of industrial affairs through pecuniary transactions, therefore, has been to dissociate the interests of those men who exercise the discretion from the interests of the community. This is true in a peculiar degree and increasingly since the fuller development of the machine industry has brought about a close-knit and wide-reaching articulation of industrial processes, and has at the same time given rise to a class of pecuniary experts whose business is the strategic management of the interstitial relations of the system. Broadly, this class of business men, in so far as they have no ulterior strategic ends to serve, have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges. Qualifications of this proposition may be needed, and it will be necessary to return to this point presently.
It is, as a business proposition, a matter of indifference to the man of large affairs whether the disturbances which his transactions set up in the industrial system help or hinder the system at
(30) large, except in so far as he has ulterior strategic ends to serve. But most of the modern captains of industry have such ulterior ends, and of the greater ones among them this is peculiarly true. Indeed, it is this work of far-reaching business strategy that gives them full title to the designation, "Captains of Industry." This large business strategy is the most admirable trait of the great business men who with force and insight swing the fortunes of civilized mankind. And due qualification is accordingly to be entered in the broad statement made above. The captain's strategy is commonly directed to gaining control of some large portion of the industrial system. When such control has been achieved, it may be to his interest to make and maintain business conditions which shall facilitate the smooth and efficient working of what has come under his control, in case he continues to hold a large interest in it as an investor; for, other things equal, the gains from what has come under his hands permanently in the way of industrial plant are greater the higher and more uninterrupted its industrial efficiency.
An appreciable portion of the larger transactions in railway and "industrial" properties, e.g., are carried out with a view to the permanent ownership of the properties by the business men into whose hands they pass. But also in a large pro-
(31) -portion of these transactions the business men's endeavors are directed to a temporary control of the properties in order to close out at an advance or to gain some indirect advantage; that is to say, the transactions have a strategic purpose. The business man aims to gain control of a given block of industrial equipment - as, e.g., given railway lines or iron mills that are strategically important - as a basis for further transactions out of which gain is expected. In such a case his efforts are directed, not to maintaining the permanent efficiency of the industrial equipment, but to influencing the tone of the market for the time being, the apprehensions of other large operators, or the transient faith of investors. His interest in the particular block of industrial equipment is, then, altogether transient, and while it lasts it is of a factitious character.
The exigencies of this business of interstitial disturbance decide that in the common run of cases the proximate aim of the business man is to upset or block the industrial process at some one or more points. His strategy is commonly directed against other business interests and his ends are
(32) commonly accomplished by the help of some form of pecuniary coercion. This is not uniformly true, but it seems to be true in appreciably more than half of the transactions in question. In general, transactions which aim to bring a coalition of industrial plants or processes under the control of a given business man are directed to making it difficult for the plants or processes in question to be carried on in severalty by their previous owners or managers. It is commonly a struggle between rival business men, and more often than not the outcome of the struggle depends on which side can inflict or endure the greater pecuniary damage. And pecuniary damage in such a case not uncommonly involves a setback to the industrial plants concerned and a derangement, more or less extensive, of the industrial system at large.
The work of the greater modern business men, in so far as they have to do with the ordering of the scheme of industrial life, is of this strategic character. The dispositions which they make are
(33) business transactions, "deals," as they are called in the business jargon borrowed from gaming slang. These do not always involve coercion of the opposing interests; it is not always necessary to "put a man in a hole" before he is willing to "come in on" a "deal." It may often be that the several parties whose business interests touch one another will each see his interest in reaching an amicable and speedy arrangement; but the interval that elapses between the time when a given "deal" is seen to be advantageous to one of the parties concerned and the time when the terms are finally arranged is commonly occupied with business manoeuvres on both or all sides, intended to "bring the others to terms." In so playing for position and endeavoring to secure the largest advantage possible, the manager of such a campaign of reorganization not infrequently aims to "freeze out" a rival or to put a rival's industrial enterprise under suspicion of insolvency and "unsound methods," at the same time that he "puts up a bluff" and manages his own concern with a view to a transient effect on the opinions of the business community. Where these endeavors occur, directed to a transient derangement of a rival's business or to a transient, perhaps specious, exhibition of industrial capacity and earning power on the part of one's own concern, they are commonly detrimental to the industrial system at large; they act
(34) temporarily to lower the aggregate serviceability of the comprehensive industrial process within which their effects run, and to make the livelihood and the peace of mind of those involved in these industries more precarious than they would be in the absence of such disturbances. If one is to believe any appreciable proportion of what passes current as information on this head, in print and by word of mouth, business men whose work is not simply routine constantly give some attention to manoeuvring of this kind and to the discovery of new opportunities for putting their competitors at a disadvantage. This seems to apply in a peculiar degree, if not chiefly, to those classes of business men whose operations have to do with railways and the class of securities called "industrials." Taking the industrial process as a whole, it is safe to say that at no time is it free from derangements of this character in any of the main branches of modern industry. This chronic state of perturbation is incident to the management of industry by business methods and is unavoidable under existing conditions. So soon as the machine industry had developed to large proportions, it became unavoidable, in the nature of the case, that the business men in whose hands lies the conduct of affairs should play at cross-purposes and endeavor to derange industry. But chronic perturbation is so much a matter of course and prevails with so
(35) rare interruptions, that, being the normal state of affairs, it does not attract particular notice.
In current discussion of business, indeed ever since the relation of business men to the industrial system has seriously engaged the attention of economists, the point to which attention has chiefly been directed is the business man's work as an organizer of comprehensive industrial processes. During the later decades of the nineteenth century, particularly, has much interest centred, as there has been much provocation for its doing, on the formation of large industrial consolidations; and the evident good effects of this work in the way of heightened serviceability and economies of production are pointed to as the chief and characteristic end of this work of reorganization. So obvious are these good results and so well and widely has the matter been expounded, theoretically, that it is not only permissible, but it is a point of conscience, to shorten this tale by passing over these good effects as a matter of common notoriety. But there are other features of the case, less obtrusive and less attractive to the theoreticians, which need more detailed attention than they have commonly received.
The circumstances which condition the work of consolidation in industry and which decide whether a given move in the direction of a closer and wider organization of industrial processes will be practi-
(36) -cable and will result in economies of production, -- these circumstances are of a mechanical nature. They are facts of the comprehensive machine process. The conditions favorable to industrial consolidation on these grounds are not created by the business men. They are matters of "the state of industrial arts," and are the outcome of the work of those men who are engaged in the industrial employments rather than of those who are occupied with business affairs. The inventors, engineers, experts, or whatever name be applied to the comprehensive class that does the intellectual work involved in the modern machine industry, must prepare the way for the man of pecuniary affairs by making possible and pitting in evidence the economies and other advantages that will follow from a prospective consolidation.
But it is not enough that the business man should see a chance to effect economies of production and to heighten the efficiency of. industry by a new combination. Conditions favorable to consolidation on these grounds must be visible to him before he can make the decisive business arrangements; but these conditions, taken by themselves, do not move him. The motives of the business man are pecuniary motives, inducements in the way of pecuniary gain to him or to the business enterprise with which he is identified. The end of his endeavors is, not simply to effect an industrially
(37) advantageous consolidation, but to effect it under such circumstances of ownership as will give him control of large business forces or bring him the largest possible gain. The ulterior end sought is an increase of ownership, not industrial serviceability. His aim is to contrive a consolidation in which he will be at an advantage, and to effect it on the terms most favorable to his own interest.
But it is not commonly evident at the outset what are the most favorable terms that he can get in his dealings with other business men whose interests are touched by the proposed consolidation, or who are ambitious to effect some similar consolidation of the same or of competing industrial elements for their own profit. It rarely happens that the interests of the business men whom the prospective consolidation touches all converge to a coalition on the same basis and under the same management. The consequence is negotiation and delay. It commonly also happens that some of the business men affected see their advantage in staving off the coalition until a time more propitious to their own interest, or until those who have the work of consolidation in hand can be brought to compound with them for the withdrawal of whatever obstruction they are able to offer. Such a coalition involves a loss of independent standing,
(38) or even a loss of occupation, to many of the business men interested in the deal. If a prospective industrial consolidation is of such scope as to require the concurrence or consent of many business interests, among which no one is very decidedly preponderant in pecuniary strength or in strategic position, a long time will be consumed in the negotiations and strategy necessary to define the terms on which the several business interests will consent to come in and the degree of solidarity and central control to which they will submit.
It is notorious, beyond the need of specific citation, that the great business coalitions and industrial combinations which have characterized the situation of the last few years have commonly been the outcome of a long-drawn struggle, in which the industrial ends, as contrasted with business ends, have not been seriously considered, and in which great shrewdness and tenacity have commonly been shown in the staving off of a settlement for years in the hope of more advantageous terms. The like is true as regards further coalitions, further consolidations of industrial processes which have not been effected, but which are known to be feasible and desirable so far as regards the mechanical circumstances of the case. The difficulties in the way are difficulties of ownership, of business interest, not of mechanical feasibility.
These negotiations and much of the strategy
(39) that leads up to a business consolidation are of the nature of derangements of industry, after the manner spoken of above. So that business interests and manoeuvres commonly delay consolidations, combinations, correlations of the several plants and processes, for some appreciable time after such measures have become patently advisable on industrial grounds. In the meantime the negotiators are working at cross-purposes and endeavoring to put their rivals in as disadvantageous a light as may be, with the result that there is chronic derangement, duplication, and misdirected growth of the industrial equipment while the strategy is going forward, and expensive maladjustment to he overcome when the negotiations are brought to a close.
Serviceability, industrial advisability, is not the decisive point. The decisive point is business expediency and business pressure. In the normal course of business touching this matter of industrial consolidation, therefore, the captain of industry works against, as well as for, a new and more efficient organization. He inhibits as well as furthers the higher organization of industry. Broadly,
(40) it may be said that industrial consolidations and the working arrangements made for the more
(41) economical utilization of resources and mechanical contrivances are allowed to go into effect only after they are long overdue.
In current economic theory the business man is spoken of under the name of "entrepreneur" or "undertaker," and his function is held to be the coordinating of industrial processes with a view to economics of production and heightened serviceability. The soundness of this view need not be questioned. It has a great sentimental value and is useful in many ways. There is also a modicum of truth in it as an account of facts. In common with other men, the business man is moved by ideals of serviceability and an aspiration to make the way of life easier for his fellows. Like other men, he has something of the instinct of workmanship. No doubt such aspirations move the great business man less urgently than many others, who are, on that account, less successful in business affairs. Motives of this kind detract from business efficiency, and an undue yielding to them on the part of business men is to be deprecated as an infirmity. Still, throughout men's dealing
(42) with one another and with the interests of the community there runs a sense of equity, fair dealing, and workmanlike integrity; and in an uncertain degree this bent discountenances gain that is got at an undue cost to others, or without rendering some colorable equivalent. Business men are also, in a measure, guided by the ambition to effect a creditable improvement in the industrial processes which their business traffic touches. These sentimental factors in business exercise something of a constraint, varying greatly from one person to another, but not measurable in its aggregate results. The careers of most of the illustrious business men show the presence of some salutary constraint of this kind. Not infrequently an excessive sensitiveness of this kind leads to a withdrawal from business, or from certain forms of business which may appeal to a vivid fancy as peculiarly dishonest or peculiarly detrimental to the community.(13) Such
(43) grounds of action, and perhaps others equally genial and equally unbusinesslike, would probably be discovered by a detailed scrutiny of any large business deal. Probably in many cases the business strategist, infected with this human infirmity, reaches an agreement with his rivals and his neighbors in the industrial system without exacting the last concession that a ruthless business strategy might entitle him to. The result is, probably, a speedier conclusion and a smoother working of the large coalitions than would follow from the unmitigated sway of business principles.
But the sentiment which in this way acts in constraint of business traffic proceeds on such grounds of equity and fair dealing as are afforded by current business ethics; it acts within the range of business principles, not in contravention of them; it acts as a conventional restraint upon pecuniary advantage, not in abrogation of it. This code of business ethics consists, after all, of mitigations of the maxim, Caveat emptor. It touches primarily the dealings of man with man,
(44) and only less directly and less searchingly inculcates temperance and circumspection as regards the ulterior interests of the community at large. Where this moral need of a balance between the services rendered the community and the gain derived from a given business transaction asserts itself at all, the balance is commonly sought to be maintained in some sort of pecuniary terms; but pecuniary terms afford only a very inadequate measure of serviceability to the community.
Great and many are the items of service to be set down to the business man's account in connection with the organization of the industrial system, but when all is said, it is still to be kept in mind that his work in the correlation of industrial processes is chiefly of a permissive kind. His furtherance of industry is at the second remove, and is chiefly of a negative character. In his capacity as business man he does not go creatively into the work of perfecting mechanical processes and turning the means at hand to new or larger uses. That is the work of the men who have in hand the devising and oversight of mechanical processes. The men in industry must first create the mechanical possibility of such new and more efficient methods and correlations, before the business man sees the chance, makes the necessary business arrangements, and gives general directions that the contemplated industrial advance shall go into
(45) effect. The period between the time of earliest practicability and the effectual completion of a given consolidation in industry marks the interval by which the business man retards the advance of industry. Against this are to be offset the cases, comparatively slight and infrequent, where the business men in control push the advance of industry into new fields and prompt the men concerned with the mechanics of the case to experiment and exploration in new fields of mechanical process.
When the recital is made, therefore, of how the large consolidations take place at the initiative of the business men who are in control, it should be added that the fact of their being in control precludes industrial correlations from taking place except by their advice and consent. The industrial system is organized on business principles and for pecuniary ends. The business man is at the centre; he holds the discretion and he exercises it freely, and his choice falls out now On one side, now on the other. The retardation as well as the advance is to be set down to his account.
As regards the economies in cost of production effected by these consolidations, there is a further characteristic feature to be noted, a feature of some significance for any theory of modern business. In great measure the saving effected
(46) is a saving of the costs of business management and of the competitive costs of marketing products and services, rather than a saving in the prime costs of production. The heightened facility and efficiency of the new and larger business combinations primarily affect the expenses of office work and sales, and it is in great part only indirectly that this curtailment and consolidation of business management has an effect upon the methods and aims of industry proper. It touches the pecuniary processes immediately, and the mechanical processes indirectly and in an uncertain degree. It is of the nature of a partial neutralization of the wastes due to the presence of pecuniary motives and business management, - for the business management involves waste wherever a greater number of men or transactions are involved than are necessary to the effective direction of the mechanical processes employed. The amount of "business" that has to be transacted per unit of product is much greater where the various related industrial processes are managed in severalty than where several of them are brought under one business management. A pecuniary discretion has to be exercised at every point of contact or transition, where the process or its product touches or passes the boundary between different spheres of ownership. Business transactions have to do with ownership and changes of ownership. The greater
(47) the parcelment in point of ownership, the greater the amount of business work that has to be done in connection with a given output of goods or services, and the slower, less facile, and less accurate on the whole, is the work. This applies both to the work of bargain and contract, wherein pecuniary initiative and discretion are chiefly exercised, and to the routine work of accounting, and of gathering and applying information and misinformation.
The standardization of industrial processes, products, services, and consumers, spoken of in an earlier chapter, very materially facilitates the business man's work in reorganizing business enterprises on a larger scale; particularly does this standardization serve his ends by permitting a uniform routine in accounting, invoices, contracts, etc., and so admitting a large central accounting system, with homogeneous ramifications, such as will give a competent conspectus of the pecuniary situation of the enterprise at any given time.
The great, at the present stage of development perhaps the greatest, opportunity for saving by consolidation, in the common run of cases, is afforded by the ubiquitous and in a sense excessive presence of business enterprise in the economic system. It is in doing away with unnecessary business transactions and industrially futile ma-
(48) -noeuvring on the part of independent firms that the promoter of combinations finds his most telling opportunity. So that it is scarcely an over-statement to say that probably the largest, assuredly the securest and most unquestionable, service rendered by the great modern captains of industry is this curtailment of the business to be done, this sweeping retirement of business men as a class from the service and the definitive cancelment of opportunities for private enterprise.
So long as related industrial units are under different business managements, they are, by the nature of the case, at cross-purposes, and business consolidation remedies this untoward feature of the industrial system by eliminating the pecuniary element from the interstices of the system as far as may be. The interstitial adjustments of the industrial system at large are in this way withdrawn from the discretion of rival business men, and the work of pecuniary management previously involved is in large part dispensed with, with the result that there is a saving of work and an avoidance of that systematic mutual hindrance that characterizes the competitive management of industry. To the community at large the work of pecuniary management, it appears, is less serviceable the more there is of it. The heroic role of the captain of industry is that of a deliverer from an excess of business manage-
(49) -ment. It is a casting out of business men by the chief of business men.
The theory of business enterprise sketched above applies to such business as is occupied with the interstitial adjustments of the system of industries. This work of keeping and of disturbing the interstitial adjustments does not look immediately to the output of goods as its source of gain, but to the alterations of values involved in disturbances of the balance, and to the achievement of a more favorable business situation for some of the enterprises engaged. This work lies in the middle, between commercial enterprise proper, on the one hand, and industrial enterprise in the stricter sense, on the other hand. It is directed to the acquisition of gain through taking advantage of those conjunctures of business that arise out of the concatenation of processes in the industrial system.
In a similar manner commercial business may be said to be occupied with conjunctures that arise out of the circumstances of the industrial system at large, but not originating in the mechanical exigencies of the industrial processes. The conjunctures of commercial business proper are in the main fortuitous, in so far that they are
(50) commonly not initiated by the business men engaged in these commercial pursuits. Commercial business, simply as such, does not aim to guide the course of industry.
On the other hand, the large business enterprise spoken of above initiates changes in industrial organization and seeks its gain in large part through such alterations of value levels as take place on its own initiative. These alterations of the value levels, of course, have their effect upon the output of goods and upon the material welfare of the community; but the effect which they have in this way is only incidental to the quest of profits.
But apart from this remoter and larger guidance of the course of industry, the business men also, and more persistently and pervasively, exercise a guidance over the course of industry in detail. The production of goods and services is carried on for gain, and the output of goods is controlled by business men with a view to gain. Commonly, in ordinary routine business, the gains come from this output of goods and services. By the sale of the output the business man in industry "realizes" his gains. To "realize" means to convert salable goods into money values. The sale is the last step in the process and the end of the business man's endeavor. When he has
(51) disposed of the output, and so has converted his holdings of consumable articles into money values, his gains are as nearly secure and definitive as the circumstances of modern life admit. It is in terms of price that he keeps his accounts, and in the same terms he computes his output of products. The vital point of production with him is the vendibility of the output, its convertibility into money values, not its serviceability for the needs of mankind. A modicum of serviceability, for some purpose or other, the output must have if it is to be salable. But it does not follow that the highest serviceability gives the largest gains to the business man in terms of money, nor does it follow that the output need in all cases have other than a factitious serviceability. There is, on the one hand, such a possibility as overstocking the market with any given line of goods, to the detriment of the business man concerned, but not necessarily to the immediate disadvantage of the body of consumers. And there are, on the other hand, certain lines of industry, such as many advertising enterprises, the output of which may be highly effective for its purpose but of quite equivocal use to the community. Many well-known and prosperous enterprises which advertise and sell patent medicines and other proprietary articles might be cited in proof.
In the older days, when handicraft was the rule
(52) of the industrial system, the personal contact between the producer and his customer was somewhat close and lasting. Under these circumstances the factor of personal esteem and disesteem had a considerable play in controlling the purveyors of goods and services. This factor of personal contact counted in two divergent ways: (1) producers were careful of their reputation for workmanship, even apart from the gains which such a reputation might bring; and (2) a degree of irritation and ill-will would arise in many cases, leading to petty trade quarrels and discriminations on other grounds than the gains to be got, at the same time that the detail character of dealings between producer and consumer admitted a degree of petty knavery and huckstering that is no longer practicable in the current large-scale business dealings. Of these two divergent effects resulting from close personal relations between producer and consumer; the former seems on the whole to have been of preponderant consequence. Under the system of handicraft and neighborhood industry, the adage that "Honesty is the best policy" seems on the whole to have been accepted and to have been true. This adage has come down from the days before the machine's regime and before modern business enterprise.
Under modern circumstances, where industry is carried on on a large scale, the discretionary head of an industrial enterprise is commonly removed
(53) from all personal contact with the body of customers for whom the industrial process under his control purveys goods or services. The mitigating effect which personal contact may have in dealings between man and man is therefore in great measure eliminated. The whole takes on something of an impersonal character. One can with an easier conscience and with less of a sense of meanness take advantage of the necessities of people whom one knows of only as an indiscriminate aggregate of consumers. Particularly is this true when, as frequently happens in the modern situation, this body of consumers belongs in the main to another, inferior class, so that personal contact and cognizance of them is not only not contemplated, but is in a sense impossible. Equity, in excess of the formal modicum specified by law, does not so readily assert its claims where the relations between the parties are remote and impersonal as where one is dealing with one's necessitous neighbors who live on the same social plane. Under these circumstances the adage cited above loses much of its axiomatic force. Business management has a chance to proceed on a temperate and sagacious calculation of profit and loss, untroubled by sentimental considerations of human kindness or irritation or of honesty.
The broad principle which guides producers and merchants, large and small, in fixing the prices at
(54) which they offer their wares and services is what is known in the language of the railroads as "charging what the traffic will bear." Where a given enterprise has a strict monopoly of the supply of a given article or of a given class of services this principle applies in the unqualified form in which it has been understood among those who discuss railway charges. But where the monopoly is less strict, where there are competitors, there the competition that has to be met is one of the factors to be taken account of in determining what the traffic will bear; competition may even become the most serious factor in the case if the enterprise in question has little or none of the character of a monopoly. But it is very doubtful if there are any successful business ventures within the range of the modern industries from which the monopoly element is wholly absent. They are, at any rate, few and not of great magnitude. And the endeavor of all such enterprises that look to a permanent continuance of their business is to establish as much of a monopoly as may be.
(55) Such a monopoly position may be a legally established one, or one due to location or the control of natural resources, or it may be a monopoly of a less definite character resting on custom and prestige (good-will). This latter class of monopolies are not commonly classed as such; although in character and degree the advantage which they give is very much the same as that due to a differential advantage in location or in the command of resources. The end sought by the systematic advertising of the larger business concerns is such a monopoly of custom and prestige. This form of monopoly is sometimes of great value, and is frequently sold under the name of good-will, trademarks, brands, etc. Instances are known where such monopolies of custom, prestige, prejudice, have been sold at prices running up into the millions.
The great end of consistent advertising is to establish such differential monopolies resting on popular conviction. And the advertiser is successful in this endeavor to establish a profitable popular conviction, somewhat in proportion as he correctly apprehends the manner in which a popular conviction on any given topic is built up. The
(56) cost, as well as the pecuniary value and the magnitude, of this organized fabrication of popular
(57) convictions is indicated by such statements as that the proprietors of a certain well-known household remedy, reputed among medical authorities to be of entirely dubious value, have for a series of years found their profits in spending several million dollars annually in advertisements. This case is by no means unique.
It has been said, no doubt in good faith and certainly with some reason, that advertising as currently carried on gives the body of consumers valuable information and guidance as to the ways and means whereby their wants can be satisfied and their purchasing power can be best utilized. To the extent to which this holds true, advertising is a service to the community. But there is a large reservation to be made on this head. Advertising is competitive; the greater part of it aims to divert purchases, etc., from one channel to another channel of the same general class. And to the extent to which the efforts of advertising in all its branches are spent on this competitive disturbance of trade, they are, on the whole, of
(58) slight if any immediate service to the community. Such advertising, however, is indispensable to most branches of modern industry; but the necessity of most of the advertising is not due to its serving the needs of the community nor to any aggregate advantage accruing to the concerts which advertise, but to the fact that a business concern which falls short in advertising fails to get its share of trade. Each concert must advertise, chiefly because the others do. The aggregate expenditure that could advantageously be put into advertising in the absence of competition would undoubtedly be but an inconsiderable fraction of what is actually incurred, and necessarily incurred under existing circumstances.
Not all advertising is wholly competitive, or at least it is not always obviously so. In proportion as an enterprise has secured a monopoly position, its advertising loses the air of competitive selling and takes on the character of information designed to increase the use of its output independently. But such an increase implies a redistribution of consumption on the part of the customers. So that the element of competitive selling is after all not absent in these cases, but takes the form of competition between different classes of wares
(59) instead of competitive selling of different brands of the same class of wares.
Attention is here called to this matter of advertising and the necessity of it in modern competitive business for the light which it throws on "cost of production" in the modern system, where the process of production is under the control of business men and is carried on for business ends. Competitive advertising is an unavoidable item in the aggregate costs of industry. It does not add to the serviceability of the output, except it be incidentally and unintentionally. What it aims at is the sale of the output, and it is for this purpose that it is useful. It gives vendibility, which is useful to the seller, but has no utility to the last buyer. Its ubiquitous presence in the costs of any business enterprise that has to do with the production of goods for the market enforces the statement that the "cost of production" of commodities under the modern business system is cost incurred with a view to vendibility, not with a view to serviceability of the goods for human use.
There is, of course, much else that goes into the cost of competitive selling, besides the expenses of advertising, although advertising may be the largest and most unequivocal item to be set down to that account. A great part of the work done by merchants and their staff of employees, both wholesale and retail, as well as by sales-agents not
(60) exclusively connected with any one mercantile house, belongs under the same head. Just how large a share of the costs of the distribution of goods fairly belongs under the rubric of competitive selling can of course not be made out. It is largest, on the whole, in the case of consumable goods marketed in finished form for the consumer, but there is more or less of it throughout. The goods turned out on a large scale by the modern industrial processes, on the whole, carry a larger portion of such competitive costs than the goods still produced by the old-fashioned detail methods of handicraft and household industry; although this distinction does not hold hard and fast. In some extreme cases the cost of competitive selling may amount to more than ninety per cent. of the total cost of the goods when they reach the consumer. In other lines of business, commonly occupied with the production of staple goods, this constituent of cost may perhaps fall below ten per cent of the total. Where the average, for the price of finished goods delivered to the consumers, may lie would be a hazardous guess.
It is evident that the gains which accrue from this business of competitive selling and buying bear
(61) no determinable relation to the services which the work in question may render the community. If a comparison may be hazarded between two unknown and indeterminate quantities, it may perhaps be said that the gains from competitive selling bear something more of a stable relation to the service rendered than do the gains derived from speculative transactions or from the financiering operations of the great captains of industry. It seems at least safe to say that the converse will not hold true. Gains and services seem more widely out of touch in the case of the large-scale financiering work. Not that the work of the large business men in reorganizing and consolidating the industrial process is of slight consequence; but as a general proposition, the amount of the business man's gains from any given transaction of this latter class bear no traceable relation to any benefit which the community may derive from the transaction.
As to the wages paid to the men engaged in the routine of competitive selling, as salesmen, buyers, accountants, and the like, - much the same holds true of them as of the income of the business men who carry on the business on their own initiative.
(62) Their employers pay the wages of these persons, not because their work is productive of benefit to the community, but because it brings a gain to the employers. The point to which the work is directed is profitable sales, and the wages are in some proportion to the efficiency of this work as counted in terms of heightened vendibility. The like holds true for the work and pay of the force of workmen engaged in the industrial processes under business management. It holds, in a measure, of all modern industry that produces for the market, but it holds true, in an eminent degree, of those lines of industry that are more fully under the guidance of modern business methods. These are most closely in touch with the market and are most consistently guided by considerations of vendibility. They are also, on the whole, more commonly carried on by hired labor, and the wages paid are competitively adjusted on grounds of the vendibility of the product. The brute serviceability of the output of these industries may be a large factor in its vendibility, perhaps the largest factor; but the fact remains that the end sought by the business men in control is a profitable sale, and the wages are paid as a means to that end, not to the end that the way of life may be smoother for. the ultimate consumer of the goods produced.
The outcome of this recital, then, is that wherever and in so far as business ends and methods dominate modern industry the relation between the usefulness of the work (for other purposes than pecuniary gain) and the remuneration of it is remote and uncertain to such a degree that no attempt at formulating such a relation is worth while. This is eminently and obviously true of the work and gains of business men, in whatever lines of business they are engaged. This follows as a necessary consequence of the nature of business management.
Work that is, on the whole, useless or detrimental to the community at large may be as gainful to the business man and to the workmen whom he employs as work that contributes substantially to the aggregate livelihood. This seems to be peculiarly true of the bolder flights of business enterprise. In so far as its results are not detrimental to human life at large, such unproductive work directed to securing an income may seem to be
(64) an idle matter in which the rest of the community has no substantial interests. Such is not the case. In so far as the gains of these unproductive occupations are of a substantial character, they come out of the aggregate product of the other occupations in which the various classes of the community engage. The aggregate profits of the business, whatever its character, are drawn from the aggregate output of goods and services; and whatever goes to the maintenance of the profits of those who contribute nothing substantial to the output is, of course, deducted from the income of the others, whose work tells substantially.
There are, therefore, limits to the growth of the industrially parasitic lines of business just spoken of. A disproportionate growth of parasitic industries, such as most advertising and much of the other efforts that go into competitive selling, as well as warlike expenditure and other industries directed to turning out goods for conspicuously wasteful consumption, would lower the effective vitality of the community to such a degree as to jeopardize its chances of advance or even its life. The limits which the circumstances of life impose in this respect are of a selective character, in the last resort. A persistent excess of parasitic and wasteful efforts over productive industry must bring on a decline. But owing to the very high productive efficiency of the modern mechanical industry, the
(65) margin available for wasteful occupations and wasteful expenditures is very great. The requirements of the aggregate livelihood are so far short of the possible output of goods by modern methods as to leave a very wide margin for waste and parasitic income. So that instances of such a decline, due to industrial exhaustion, drawn from the history of any earlier phase of economic life, carry no well-defined lesson as to what a modern industrial community may allow itself in this respect.
While it is in the nature of things unavoidable that the management of industry by modern business methods should involve a large misdirection of effort and a very large waste of goods and services, it is also true that the aims and ideals to which this manner of economic life gives effect act forcibly to offset all this incidental futility. These pecuniary aims and ideals have a very great effect, for instance, in making men work hard and unremittingly, so that on this ground alone the business system probably compensates for any wastes involved in its working. There seems, therefore, to be no tenable ground for thinking that the working of the modern business system involves a curtailment of the community's livelihood. It makes up for its wastefulness by the added strain which it throws upon those engaged in the productive work.