Efficiency

Go where you will in America; ask whomever you meet, “What of man’s quest of comfort?” and they will say: “Make a large factory to flourish where only a small factory flourished before; that is the way to comfort.”

For in industrialized America everybody has finally come to believe that a high standard of living is impossible without mass production, without mass distribution and without mass consumption.

And now when everybody has finally come to believe, the very foundations of our factory civilization are becoming less and less secure.

Something inherent and ineradicable; something which tends to offset the low costs of factory production; something which interferes with the contribution of the factory to material well being; something which reveals that a factory civilization cannot be the end of mankind’s quest of comfort, is making itself visible.

This thing we must now seek.

•

Why did the factory come into being? How did the factory come to its present-day dominance of all the activities of mankind? What is likely to be the effect of the innumerable efforts now under way to regulate and socialize it?

Some of these questions have been much discussed from certain aspects. They have, however, been too much discussed in connection with burning controversies between capital and labor and between capitalism and socialism. There has been too little discussion based upon objective studies of the factory itself, and the factory system of production, distribution, and consumption.

We have been very much like two groups of men heatedly discussing the question of how rapidly automobiles should be driven. One group, fixing its attention upon such matters as the condition of the highways and the safety of pedestrians, insists that no automobile ought to be permitted to travel at a speed in excess of ten miles per hour. The other group, fixing its attention upon other matters altogether, such as the great boon which presumably flows from any increase in the speed of transportation, insists that the automobile should be compelled to travel at the highest rate of speed at which it can be driven. But both approaches to the question look too much to factors outside of the automobile itself. An objective approach to the question would first of all involve a study of the optimum speed at which the automobile should travel —the speed which would enable it to deliver the maximum of service at the minimum of cost—and then it would consider what changes would have to be made in the highways and in the rules regulating traffic so as to make it possible for the automobile to travel at that speed with maximum safety.

So we must approach this matter of understanding the factory system. It is useless to describe the factory, factory products, factory workers, and all the consequences which flow from the factory system until we study the economic force which brought the factory and the factory system into being and which has ever since been at work sustaining and promoting it. The factory is not a phenomenon of nature like a mountain or a river. It is an artifice of man. It is as distinctly an artificial creation as the mountain or river is distinctly a natural creation. To understand the inner significance of the factory, we must therefore take account of the motives which actuated man in producing it and which are responsible for its spread all over the world.

Having considered these preliminary questions we must then ask ourselves: What types of products lend themselves to factory production? What is the size to which the factory of necessity tends to develop? What are the methods by which factories have to be managed and controlled? These questions must be answered objectively: by a study of the factory itself and the system which is necessary if it is to function most perfectly as a factory. Only in this way will it be possible to distinguish between what is accidental and what is inherent in the factory.

Child labor, for instance, is certainly a social calamity which seemingly the factory inflicts upon mankind. But it is in reality a calamity which has its origin in the unregulated private ownership of the factory and the factory system. It can be ended at any time, either by adequate legal regulation with continued private ownership, or by the abolition of private ownership and the substitution of state ownership. It is no more an inherent attribute than smoke or smell, underpayment or unemployment and similar present day evils, all of which can be eradicated by mere changes in factory organization, operation or ownership.

Finally we must try to answer certain questions which have to do with the future of the factory and of factory civilization.

The whole world is being industrialized. The process of industrialization which took over fifty years in Japan could now be executed in about one-fifth of that time. Within a decade Italy and Russia, India and China, Mexico and Latin America may be so industrialized that exportation of many of the commodities which other nations are now supplying them will practically cease. Industries in all countries will then be forced to look only to their domestic markets for outlets for their production.

Will the intense rivalry which will then develop between factories striving to sell enough to keep their machines operating to capacity reduce prices to levels involving long periods of operation at a loss? Will the competition between the factories produce an excess of losses over profits in industry as a whole? Will the competitive demoralization which today exists in the coal industry and the textile industry and the food industry spread to all industries? Will some form of cooperative control be necessary in order to insure continuance of production? Will socialism be the ultimate solution of the problem of producing the things mankind needs and desires when private industry will cease producing them because it cannot do so at a profit?

•

I am firmly convinced that this objective study of the factory and the factory system for which I am pleading will make it clear that the industrialized nations will ultimately be driven to the socialization of production and distribution. The magnitude of the social problems which are being created by industrialization; the need for outlets for factory products; the public demand for social control of the factory, will force socialization upon the nations.

When the present period of corporate ownership reaches its point of optimum development; when ownership of stocks and bonds shall be nationwide; when management shall have increasingly been turned over to industrial engineers; when the captains of industry will find it less and less possible to keep the huge enterprises which they direct from wiping out profits in competitive struggles for orders for their plants, there will develop a general acquiescence in some form of social liquidation of private ownership of the factory.

There are already plenty of straws to show which way the wind is blowing. Today, at the very time when the United States Chamber of Commerce solemnly issues pronunciamentos in favor of less and less interference by government in business, American industry itself is actually engaged in building legal and statutory foundations for consolidation, for monopoly, and for government regulation. Evidently there is something inherent in the factory—in a system of production which gets larger and larger all the time, which tends to consolidation, regulation, socialization; some force of which business men generally are not cognizant and to which they continue to voice hostility even after they have accepted it in practice.

Upon this point, let me quote Mr. Paul M. Mazur, one of the partners in the banking firm of Lehman Brothers, New York:

Consolidation . . . offers the solution of other problems of American industry. In many cases the existence of uncontrolled competitive effort has made profit for some American industries impossible. For nearly five years the textile situation has presented a most un alluring picture. Here and there textile corporations have been successful, but, by and large, the entire industry lias presented most depressing profit figures to its owners. Decrease of sales and inefficient management have contributed in important measure to the unhappy situation. But the existence of a large number of highly individualized corporate units and the resulting competition have been the fundamental causes of the lean years during which the textile business has starved upon half rations. The need for keeping the wheels and looms of mills running has encouraged the sale of goods at unprofitable prices. And any bulge in demand that might have been momentarily created has been inundated with a tremendous supply that resulted from the desire of each mill to get its full share of the apparently available sales market. The selling custom of the industry also added to the problem of the mill. The plan whereby the whole sales responsibility is turned over to an independent sales agency—called commission merchant or f actor—grew originally out of the necessity of financing the production of the mills, but it has transferred the ownership of the sales market for the products of the mill from the producer to the commission agent.

The necessity of controlling production and eliminating the guerilla warfare that results from unlimited competition actually screams for consolidation within the textile industry in America. Moreover, the wisdom of the producer’s possessing unquestioned title to his own sales agency and his own sales market can only prompt the inclusion of the function of sales among the processes of the new consolidated units which are inevitable in the industry. The problem is already serious—almost tragic in New England—and it will become more serious as Europe begins to pay its annual interest charges in the textile values which she is so well fitted to create.

With mergers the textile business of America may be able to prosper; without mergers, its hope of rehabilitation is desperate indeed.

The textile situation is merely the most aggravated case of competitive disease in American industry. As time goes on and the demand for volume continues, the road of consolidation will be more and more frequently trod. Such a road will carry industry to competitive safety, even to the security of monopoly, unless the Sherman Law and the Clayton Act present effective barriers to the development of mergers.⁴

Recognition of these facts is not confined to industrialized America. In industrialized Germany students of this question are saying that the epoch of the freedom of German industry and commerce is rapidly and inevitably drawing to a close. A new era is dawning which fulfills Marxist prophecies of Government control. This was the gist of a recent article by Dr. E. Schmalenbach, a professor at the University of Cologne, whose knowledge of economics was considered by the Government so extensive that he was made chairman of the commission entrusted in 1927 with the investigation of the Ruhr mining situation.

“The predictions of the founder of Marxism are being fulfilled before our eyes, but the present industrial leaders will protest if they are told that they are the executors of Marx’s testament,” Dr. Schmalenbach wrote.

While the industrialists are not trying to bring about economic restraint, he adds, they are tools in the hands of evolution. Continued improvement in labor-saving machines is largely responsible for the unavoidable change, aided and abetted by the growing intensity of capitalism in making human hands more and more superfluous. The costs of production have been increasing constantly, and the time must come when they are so high as no longer to balance consumption.

German industry and commerce are now at the crossroads, and nineteenth-century freedom is about to be lost and replaced by restraint at the hands of the Government, he said. The transition will come within a period of a few years only. Objections by trusts and cartels to supervision will not prevent or even retard the change of the entire economic system, but their resistance will actually accelerate the process of change.

Dr. Schmalenbach finds no cause for public worry about the operation of the new system even though it involves the abandonment of the present largely free competitive system. Monopolies will soon be assisted to maintain themselves in supreme power. He illustrates this contention by using the coal industry of Europe as an example. Possession of coal mines under the old system is a curse instead of a blessing for England, Germany, France, and Belgium since competition forces them to bear heavy losses through selling at prices below the cost of production to countries having no coal. This practice under the new system would be discontinued and selling would be done at prices fixed to protect against loss.

Directors of large cartels and monopolies, the Professor con-tends, show the same lack of comprehensive outlook as did the German Princes at the time of the founding of the German Empire.

He concludes:

The Bismarck who could drill patriotism into them has not yet been found. The “new system of restraint” will quickly show its superiority to the present system. I am convinced that in the near future we shall reach a condition under which large corporations will receive their monopolies from the State, which, at the same time, will compel them, by strict supervision, to live up to their duties. This development cannot be prevented by the present warfare against State control.⁵

The consolidations of which American business men like Mr. Mazur speak so hopefully, and the monopolistic evolution which economists like Professor Schmalenbach consider inevitable, may ultimately end in socialization, as Karl Marx predicted. For it is improbable that the consuming public would long submit to exploitation by uncontrolled private monopoly. The industrialized nations might not turn to communism, but the very least form of socialization which they would adopt would involve public regulation. “Private” business would be subject to regulation much as are railroads, street cars, electric and gas companies and other privately owned public utilities today.

Strangely enough both the business men and the economists pleading the cause of the huge armies of investors, and the reformers and socialists pleading the cause of the consuming public are in agreement about the desirability of developing the factory system, the desirability of integrating industry, the desirability of utilizing the powers of the government in order to promote the production and distribution of factory products. Both believe in mass production, in mass distribution, in mass consumption. Socialization, if it ever arrives, as Russia tends to show, will mean a change of directors, but not of direction. We may substitute commissars for capitalists, but we will be continuing along the same line of serialized, standardized, socialized production, distribution and consumption.

I do not believe that socialization is unavoidable. It may come, but if it does come, it will not be because the state has no alternative except to take over the management of the Frankensteins which our captains of industry have been creating. When it does come, it will be because the herd-minded masses will again do what they have so often done in the past, follow the leadership of quantity-minded men who deliberately reject the alternatives which quality-minded men evolve.

I am opposed to the whole tendency toward making the individual a cog in huge factory systems of production and distribution, quite without regard to whether the systems are to be individually, corporately or governmentally owned.

Complete socialization would be the final step in the process of making man the servant of his own machines, the first step of which was taken when factories were first erected.

The improvements in the status of the workers for which socialists hope, if society through officials of some kind takes the place of the present owners of industry, will not solve the problem of the quest of comfort. For socialists consider man too much merely as one of the elements in the processes of production and distribution and do not sufficiently consider how men individually should live if mankind generally is to enjoy the good life.

•

The modern factory with its application of power to the operation of heavy and expensive machinery came into existence during the latter part of the eighteenth century. Individual desire for profits, for huge profits, for profits which make present day factory profits relatively insignificant, was responsible for its birth.

The first factories were established at a time when nearly all “boughten” products were slowly fabricated by individual craftsmen. The factory products were naturally sold either at the prevailing high prices or at prices only a little lower than those of craft-made products. The combination of power-driven machinery and factory methods cut the cost of making goods to fractions of the cost upon which the prevailing level of prices was based. Manufacturers could undersell the craftsmen and still make themselves rich in a comparatively short lime. Profits that now seem fabulons were made because the public was accustomed to the high “handicraft” level of prices. High profits continued until production of craft-made products virtually ceased; until factory-made goods took possession of the market, and until competition between rival manufacturers brought prices down to a level which gave consumers part of the lower costs of factory production. During this period, manufacturing fortunes had time to become firmly established factors in world economics and the process of investing and reinvesting manufacturing profits in still additional factories had time to enlist the cupidity of an army of quantity-minded men.

The foundations for modern mass-production, mass-distribution, and mass-consumption were laid.

The factory-made fortunes introduced into the economy of the world a type of capital different in many respects from any which had up to that time been evolved. First of all, this capital was infinitely more mobile. Even the fixed capital of the manufacturer was more mobile than the fixed capital, if one may call it that, which formed most of the wealth of the upper classes before the industrial revolution. Pre-factory wealth consisted mainly of land and houses, of all forms of capital the most immobile. Land, which was the principal source of income of the wealthy, was practically fixed in quantity. It increased in value only with the increase in population. This was a very slow process because, until comparatively recent times, wars and plagues regularly decimated the population. Livestock and agricultural products, jewelry, precious metals, furnishings and other forms of pre industrial wealth, were all things which could at that time be accumulated only slowly.

With the coming of the factory all this was changed. The factory revealed the golden secret of rapid capital turn-over. The profits from the factory accumulated in the form of cash, bills and accounts receivable, and stocks of goods, all of them forms of wealth which were exceedingly mobile. Even profits in the form of additions to plant and equipment, while less mobile than the other forms of factory wealth, were still not so immobile as land.

The unending stream of factory-created profits was invested in more and more factories.

Facilities for banking and trading were stimulated into feverish growth.

Joint stock companies and limited liability companies began to take the place of individual and partnership forms of factory ownership.

The instrumentalities for speculation were developed and made ready for the period of expansion which began with the coming of the canal and the railroad and which has continued without respite since that time.

•

Sir Richard Arkwright, the father of the cotton-spinning industry, and perhaps even father of the modern system of factory production and distribution, furnishes an example of the rapidity with which fortunes were accumulated through the organization, operation, and marketing of the products of the factory. He was the youngest of thirteen children of very poor parents. The parents had Little enough to give to any of their children either of education or of other more substantial advantages, and by the time this was distributed among so large a brood, each was the recipient, so far as fortune was concerned, of about as near to nothing as is conceivable. He began life as a barber. Dealing in human hair and dyeing it by a process of his own enabled him to accumulate a little wealth. In 1767 he gave up this business and began his real career, first as an exploiter of inventions dealing with spinning, and after the manufacture of yarn was firmly established, as a speculator and trader in the yarn markets. Less than twenty years later he was the head of businesses representing a capital in excess of 200,000 pounds. He had become many times a millionaire by modern standards. Nothing in the previous history of mankind had been discovered which made it possible to create peacefully such a fortune in so short a period of time. The only way in which wealth had previously been accumulated rapidly was by seizure and conquest, or by currying the favor of those who were already wealthy and powerful. Before the factory these were the only alternatives available to power-seeking men who objected to the slow process of acquiring riches by inheritance or by minute accretions in land values as population increased.

Arkwright lived to be showered with honors and attention. A grateful British king knighted him. He died enormously wealthy, the progenitor of the modern captain of industry, the man who showed Britain what could be accomplished by a nation led by men like himself. Historians tend to neglect the men who followed in his footsteps; but economists cannot afford to do so. Their lives furnish demonstration after demonstration of the proposition that factories came into being in the beginning, and continue to this day to be established because individuals like Arkwright see in each new field of production enormous opportunities for profit—the opportunity to sell a factory product at a high profit to a public still used to a non-factory level of prices, or willing to pay a high price for a new product because of the higher prices or greater disadvantages of the product which it displaces.

•

These high profits explain the present day dominance of our economic life by the factory system of production, distribution and consumption. Enormous sums accumulate in the hands of relatively wealthy factory owners. That they should invest these sums in the erection of more factories, in the production of the raw materials they need for them, and the development of systems of transportation for both the raw materials and the finished products, is only natural. For they cannot consume these sums in good living, no matter how ostentatiously they may spend money. They do not know enough about art, science and history to use them to really beautify the earth.

They can only invest them and re-invest them.

So capital is always accumulating in their hands, just as it is accumulating in their banks, in their business corporations, their insurance companies and even in their endowments and foundations.

Ingenious, cunning, ruthless, with appetites whetted by gargantuan visions, they are encouraged by the existence of all this capital to develop new industries. The capital accumulated in textiles makes it easier to make fortunes in railroads, and in turn to make fortunes in brewing and distilling; in iron and steel; in meat-packing and flour-milling, and today in automobiles, in movies and in radio.

Every advance in science is seized upon to extend the factory system. Those first to operate successfully factories which take advantage of new scientific developments win the greatest profits. Nearly every new factory product and new factory process creates at least one great fortune when it is new. Kerosene produced the Rockefeller fortune; refined sugar the Havemeyer fortune; reapers produced the McCormick fortune; cash registers the Patterson fortune; cameras the Eastman fortune and automobiles the Ford fortune.

Bonanza profits on new products, fortunately for the public, stimulate the building of factories in the new fields. As soon as production in a new field is sufficiently developed to insure profits, the factories in it tend to multiply often at geometric progressions. The time in which the mass production of a new product can be pushed past the experimental stage has persistently been shortened. What took decades to accomplish in the case of the steam railroad has taken a single generation in the case of the automobile. Mass production, which had to develop by trial and error methods in the early days of the factory, can today be applied to making any product as soon as the market for a product proves large enough to justify the necessary investment in automatic machinery.

The radio vacuum tube and the radio receiver industry, as soon as the products themselves were developed, sprang into mass production. So great was the capital inflow into the industry and so efficient the machinery and techniques used in the factories, that within a few years the volume of production frequently exceeded the absorption capacity of the market.

•

The world is rapidly becoming one vast factory. The frontier of the agricultural civilizations of the past was marked by the clearings of the pioneer settlers. Where the pioneer was there was the agricultural frontier. The frontier of our modern industrial civilizations is marked by belching smokestacks. Where the factory is and the region where no factories have yet been erected begins, there is the industrial frontier. Farther and farther into the “backward” regions of the earth goes that frontier.

If we assume that the first distinctly industrial community was Manchester, in which Arkwright established the factory production of yarn, then the first industrial frontier was in that tight little island that contains England. By 1850, the industrialists had dotted England with factories. Then the factories began to appear across the channel in Europe and simultaneously across the Atlantic in North America. Now only Asia and Africa and part of South America and Australia remain to be industrialized—the last frontiers which the factory will have to conquer before the whole world will have been industrialized.

Sometimes I see the factory as a reincarnation of the fabled Wandering Jew. Where the Wandering Jew directed his footsteps, there came the Black Plague. Restlessly the Wandering Jew pushed on into every region of the globe. Behind him he left regions writhing in miseries as to the source of which the sufferers were ignorant.

So it has been with the factory.

Wherever the factory establishes itself, there it introduces its special form of ugliness.

Restlessly the factory pushes on into every region of the globe. One after another the non-industrial cultures and civilizations go down before it. Highly developed civilizations like those of the Japanese and the East Indians succumb to it precisely as do the primitive cultures of the South Sea Islanders or the African negroes. Into each region it introduces distresses and discomforts as to the source of which the populace is largely ignorant.

•

In every country where the factory has been established long enough; in every nation in which the factory has precipitated those grave social problems which we shall later consider in some detail, efforts to socialize the factory—to make it subservient to society—inevitably develop. These efforts, although rarely inspired directly by socialism, are yet vindications of Marx, Engels, and Lassalle. For socialization and functionalization of the factory are predicated upon the basic idea that the uncontrolled private ownership of the means of production and distribution is responsible for practically all of the social maladies of the world.

If every individual were willing to sacrifice freedom and initiative in the economic field, society might succeed—as the socialists believe—in eliminating every trace of exploitation from the factory system. But the elimination of exploitation by the abolition of private ownership of production and distribution does not reach the root of the trouble. The factory’s ineradicable attributes would still remain to plague mankind. Socialization or functionalization of the factory will never produce the utopia for which so many idealists are working. Socialization must fail as a remedy because it does not treat with the real disease which the factory system has inflicted upon mankind.

Socialization must fail because it contains no balm for efficiency-scourged mankind.

For the efficiency that is the quintessence of factory civilization is the real disease which the factory has inflicted upon mankind.

And efficiency would remain to rob mankind of comfort no matter what form management and ownership of the factory might take.

The factory must be efficient. It can survive only by becoming more and more efficient.

It has to be efficient under private management and ownership. It would have to be efficient even if private management and ownership were changed to public.

Mankind’s comfort would have to be sacrificed on the altar of the great god efficiency under socialism precisely as it has to be under capitalism because the factory system ceases to be economic unless it is efficient enough to absorb the institutional burden which is its inescapable concomitant.

•

What is the nature of this institutional burden? And what is its significance?

With domestic production–indeed with almost any non-factory system of production—the price which is paid, or if you prefer, the sacrifice which is made in order to satisfy the individual’s desire for any commodity, may be resolved into three costs: the cost of the labor necessary in fabricating the commodity; the cost of the materials used; and the incidental expenses not directly classifiable under either of these two heads. These three costs are analogous to what are usually called the direct material cost, the direct labor cost, and the shop expense of the factory, the three comprising the manufacturing cost of a factory product.

With factory production these three costs are, of course, much lower than with domestic production.

Factory production makes it possible to effect savings on the cost of material by purchasing in large quantities, by eliminating waste and by utilizing by-products. It makes revolutionary savings on the cost of labor possible through the division of labor and the use of labor-saving machinery. Finally, it makes almost equally large savings possible in the shop or factory expenses. These factory expenses—the non-productive labor of firemen, engineers, oilers, etc., the materials such as coal, oil, materials for repairs which are not directly chargeable against any unit of product, and of course the rent, taxes, insurance, depreciation, etc.—are distributed over the large number of units of the products made by the factory, and are therefore materially smaller than the incidental expense per unit under domestic production.

•

But these savings are somewhat offset by three new factory costs which have no real counterparts under domestic production: the transportation costs on materials and supplies; the general office expenses of the manufacturer, and the profits which have to be added if the manufacturer is to be compensated for his effort and enterprise.

The factory’s transportation costs on materials and supplies are hardly compatible with any expenses incurred in domestic production. With domestic production consumption takes place at the point of production. But with large scale production it is almost impossible to find both a sufficient supply of raw materials and a sufficient market for all that is produced at the place where the factory is located. Transportation of both the raw materials and the finished products is often necessary. Transportation of one or the other is almost inevitable.

The factory’s general expenses are new and hardly comparable to any of the costs involved in domestic production because advertising and selling expenses, credit costs, and accounting and other office expenses have their reason for being only because the factory has to sell what it produces.

And for the same reason the manufacturer’s profit is hardly comparable to anything existing under domestic production. The elaborate structure of interest on bonds and bank loans; dividends on stock, and the various forms which remuneration for risks and management take, are non-existent under a system of non-factory production where the capital investment—no factory machinery being used—is negligible.

But if these three costs were the only costs constituting the institutional burden of the factory system, efficiency would not present so menacing an aspect. These three new factory costs are only a part of the full institutional burden. Some of the more important of the other costs are wholesaling transportation and warehousing costs, wholesaling expenses, wholesaling profits, retailing transportation and warehousing costs, retailing expenses, retailing profits.

Factory production must be efficient enough to carry the burden of all these distribution costs because, with a volume of production in excess of the demands of the market in its immediate neighborhood, some such costly system of distribution is necessary. It must be efficient enough to carry the burden of all transportation costs and distributors’ expenses and profits in addition to the costs of its own which are usually lumped together under the term “overhead.”

Let the factory fail to absorb these costs and it becomes impossible for it to supply consumers as economically as they can produce for themselves or buy from a custom maker. Mankind would then find a revival of domestic and custom production worth while.

The following diagram which compares the costs in a system of non-factory production with the costs in a system of factory production presents the situation graphically:

For in industrialized America everybody has finally come to believe that a high standard of living is impossible without mass production, without mass distribution and without mass consumption.

And now when everybody has finally come to believe, the very foundations of our factory civilization are becoming less and less secure.

This thing we must now seek.

•

Finally we must try to answer certain questions which have to do with the future of the factory and of factory civilization.

•

Upon this point, let me quote Mr. Paul M. Mazur, one of the partners in the banking firm of Lehman Brothers, New York:

With mergers the textile business of America may be able to prosper; without mergers, its hope of rehabilitation is desperate indeed.

Directors of large cartels and monopolies, the Professor con-tends, show the same lack of comprehensive outlook as did the German Princes at the time of the founding of the German Empire.

He concludes:

Complete socialization would be the final step in the process of making man the servant of his own machines, the first step of which was taken when factories were first erected.

•

The foundations for modern mass-production, mass-distribution, and mass-consumption were laid.

The unending stream of factory-created profits was invested in more and more factories.

Facilities for banking and trading were stimulated into feverish growth.

Joint stock companies and limited liability companies began to take the place of individual and partnership forms of factory ownership.

•

They can only invest them and re-invest them.

So capital is always accumulating in their hands, just as it is accumulating in their banks, in their business corporations, their insurance companies and even in their endowments and foundations.

•

So it has been with the factory.

Wherever the factory establishes itself, there it introduces its special form of ugliness.

•

Socialization must fail because it contains no balm for efficiency-scourged mankind.

For the efficiency that is the quintessence of factory civilization is the real disease which the factory has inflicted upon mankind.

And efficiency would remain to rob mankind of comfort no matter what form management and ownership of the factory might take.

The factory must be efficient. It can survive only by becoming more and more efficient.

It has to be efficient under private management and ownership. It would have to be efficient even if private management and ownership were changed to public.

Mankind’s comfort would have to be sacrificed on the altar of the great god efficiency under socialism precisely as it has to be under capitalism because the factory system ceases to be economic unless it is efficient enough to absorb the institutional burden which is its inescapable concomitant.

•

What is the nature of this institutional burden? And what is its significance?

With factory production these three costs are, of course, much lower than with domestic production.

•

But these savings are somewhat offset by three new factory costs which have no real counterparts under domestic production: the transportation costs on materials and supplies; the general office expenses of the manufacturer, and the profits which have to be added if the manufacturer is to be compensated for his effort and enterprise.

The following diagram which compares the costs in a system of non-factory production with the costs in a system of factory production presents the situation graphically:

The diagram makes graphic the fact that what the consumers of factory products are supposed to gain through the lowering of the direct cost of manufacturing—through lower costs of material, labor and direct factory expense—they tend to lose in what I have called the institutional burden of the factory system.

•

With factory production large capital is necessary for plant, machinery and materials. It is secured by borrowing; by forming partnerships; by incorporation. Interest, profits, and dividends are used to pay those who furnish capital. Depreciation and obsolescence of plant and equipment form a major problem; the larger the machinery, the greater is not only the necessity of providing for wear and tear, but of setting up reserves to make it possible to acquire new machines and to use new processes wherever their invention makes the use of older machinery unprofitable.

Overhead is relatively large not only because of these expenses but because of the high cost of superintendence. The larger the factory, the greater the superintendence. Large numbers of workers cannot be directed by the methods which were efficient enough when a master workman was producing, under the handicraft system, surrounded by a group of apprentices. The military system of management, in which all power and authority emanate from one man who keeps control of all details is inexpensive but it is efficient only in the small shop. In the factory, the departmental system develops inevitably. Work is divided into departments each under absolute control of one man who is in turn under the control of a superintendent who gives general instructions and holds the department foremen responsible for results. In the largest factories, combinations of what are known as the functional system and the departmental system of management are used. The work of management is divided so that each supervisor shall have as few functions as possible. There are gang bosses, speed bosses, inspectors, repair bosses, planning department representatives and of course corresponding “office” supervisors: designers, planners, record keepers and cost clerks. Similar additions to the overhead develop in the office of the factory. There are office managers, personnel managers, sales managers, advertising managers and traffic managers. When more than one plant has to be supervised or a number of branch offices must be managed a whole hierarchy of higher supervisors are necessary: above the superintendents of the plants there are engineers, auditors, general managers, treasurers, presidents and finally directors. All tend to absorb the reductions in manufacturing costs which are made possible by the factory machinery and factory methods.

•

If the mass of goods produced by the factory is to be absorbed, mass distribution has to be provided. Time and place utilities have to be created. Distant markets must be secured. The goods must be warehoused at convenient points in anticipation of seasonal demand. Mass consumption must be created through salesmanship and advertising. As a result, approximately two-thirds of what the consumer of today pays for the products of the factory is payment for distributing the product; less than a third is payment for manufacturing it.

I have discussed the distribution question in detail in The Distribution Age, and the part advertising plays in the creation of mass consumption in National Advertising vs. Prosperity. In these two books, I have assembled what seems to me irrefutable evidence that as factories grow larger and larger, as the industrialization becomes more and more complete, distribution costs rise higher and higher. In 1870 only 10% of the working population of the United States was engaged in transporting and distributing the commodities then produced. Ten years later, this increased to 11%. In the next ten years it increased to 14%. By 1900, it was 16%. The average rise during these 30 years was about 1½% per decade. Beginning with 1900, the rate of increase became progressively more rapid. By 1910, it had jumped to 20%. By 1920, fifty years after it was only 10%, it had become 25%. Even if the rate of progression ceases to increase, within the next fifty years there will be one worker engaged in transportation and distribution for every worker engaged in farming or manufacturing.

•

As the factory increases in size—as the contribution of labor to production becomes smaller and that of machinery and power larger—the institutional burden becomes greater and greater. We find almost a natural law governing the growth of factories: the larger the factory, the greater the inverse relationship of the general overhead and distribution costs to labor and material costs. The problems of efficiency of operations and of volume of sales increase in importance, while those of wages and of raw material costs decrease in importance. Indeed, in spite of the intensity of modern competition, a Henry Ford can afford to pay higher wages than prevail in the general labor market and to use the most expensive of raw materials, and still accumulate a gigantic fortune. He can do this because his product is still relatively a new one and his industry still immature. He can secure volume distribution at low cost, and he has the necessary skill to operate a gigantic factory efficiently. As the automobile industry reaches maturity, however, this will become more and more difficult.

In young industries, like the automobile industry, efficiency produces enormous profits.

In old industries, like the textile industry, only the most rigorous efficiency enables the manufacturer to avert bankruptcy. Management in a textile mill is a race between covering the over head and going into bankruptcy.

In new industries, profits are the spur to efficiency.

In old industries, survival is the spur to efficiency.

•

The factory has to be operated with an efficiency proportioned to the institutional burden because only to a limited extent can it raise prices to cover increasing overhead and distribution costs.

The individual factory cannot raise prices beyond a certain limit because of the competition of rival factories.

A whole industry cannot raise prices beyond a certain limit because its products would drive consumers either to the products of other industries or to the production of the goods for themselves.

An individual bakery cannot raise the price of bread, for instance, beyond the neighborhood price without losing its business to rival bakeries. If all the bakeries in the country were consolidated, or bread baking were taken over by society, the price of bread could still not be raised beyond a certain point because consumers would then be driven to baking bread for themselves. When prices are raised to the point fixed by these limits, further margins for overhead and distribution costs can only be secured by increased efficiency in production.

As long as the factory management is efficient and the sales volume adequate, the overhead is covered; interest and dividends are paid; the securities of the corporation rise in value. If the factory management is inefficient, and the overhead is not covered, capital charges are not met. The securities then depreciate in value until the equities they represent are completely dissipated. The corporation operating the factory then fails. Liquidation of its assets turns the factory over to a new corporation.

The new corporation may represent “stronger hands.” The factory is then absorbed and operated as a part of a merger or consolidation of some kind. Occasionally, however, the factory which has been taken over is not operated at all. Production is concentrated in other factories owned by the new corporation. Often, however, the new corporation is not strong enough to in dulge in this drastic method of insuring profits. It may merely represent new capital which acquires the plant and the machinery at a bargain and hopes to operate the factory successfully because its investment is smaller than that of the corporation which failed.

It is an ingenious system. Considering it objectively, it produces for mankind with amazing reliability. It will continue to function at least as well as it does today, as long as scientific management devises new wrinkles in efficiency to offset rising overhead and distribution costs.

•

The institutional burden is largely an inherent attribute of the factory system. Mere changes in methods of control and ownership will not eliminate it.

Socialism, for instance, would abolish all the present charges for rent, interest, and profit. Theoretically this would reduce the cost of capital. Theoretically this would eliminate the surplus profits of capitalists. Actually, the saving would be negligible because in taking over all factories not only would the gains of the successful factories be taken over, but all the losses of the unsuccessful ones.

Cooperation, on the other hand, would operate the distribution system in the interest of consumers and the factory system in the interests of the producers and workers. Theoretically the consumers would be insured against exploitation by the “middle-men.” Theoretically the producers and workers would be protected against exploitation by the factory owners, Actually, the protection hoped for could be realized only through the agency of exceptionally able and honest management and not through any elimination of the institutional burden of the factory system itself.

For most of the costs of producing and distributing factory products consist of items which would remain no matter what the form of control or what the kind of ownership. Some economic efforts must be made in order to accumulate capital, and whatever the form these efforts take, consumers must be charged enough to pay the actual cost of accumulating and using the capital. Some economic efforts must be made for meeting depreciation and obsolescence in buildings, machinery, and materials. And again consumers must be made to pay for the actual cost of maintaining and replacing the equipment essential to the factory. And distribution also has tangible and very real economic costs, and consumers must be made to pay these costs if the factory’s products are to be made available when consumers want them and in the places where consumers want to procure them. There are other items in the institutional burden which cannot be escaped by any mere change in control—changes of fashion affecting demand, new methods which make old machinery worthless, and new industries which tend to render the old ones un-economic.

Thus there is no escape from the conclusion that the institutional burden of the factory system as a whole cannot be eliminated by a shift of factory control from individual owners to corporations; from corporations to trusts and from trusts to government departments.

•

The economic obligation to be efficient cannot be evaded by abolishing private ownership of the factory and outlawing private profit. Socialization may actually increase the overhead and so make an even more rigorous efficiency in production necessary.

Overhead expenses, transportation and distribution costs and practically all the costs which comprise the institutional burden of the factory system are not arbitrary inventions of capitalism.

The state owned and operated factory would labor under substantially the same inherent and unavoidable compulsion to be efficient as does the privately owned factory. If it failed in efficiency, it would be unable to furnish the public goods at a cost as low as that provided by the privately owned factory. The truth about the cost of its products could be concealed from the public by making production a state monopoly and thus preventing privately owned factories from making odious price comparisons. Making it impossible for the public to buy from an alternative source of supply would enable the state owned factory to survive, but the factory would nevertheless be an economic failure. It would absorb more labor and more material than similar factories under capitalism and yet furnish the public a smaller quantity of finished goods.

Thus we are driven to conclude that no matter what the form of control and ownership, the compulsion to operate the factory efficiently is inherent and inescapable. It must be operated efficiently or fail as a factory, with individual losses under private ownership; with government losses under public ownership.

Efficiency is, therefore, the quintessence of the factory system. Efficiency determines where factories are located; what equipment is used in them; how large they are to be; what methods and practices are to prevail in their operation. For only if they are efficient can they absorb the functional handicap of the institutional bur den and deliver an economic product to the public.

•

We are indebted to the late Frederick Winslow Taylor, the founder of scientific management, for the first exposition of the principle that factory efficiency is dependent upon the application to factory operations of the laws which govern maximum production from the machinery, the materials and the labor available to the management. Factory efficiency is high or low in accordance with the extent to which the management can make the workers accommodate themselves to the formulæ which the efficiency engineers evolve. It is not, therefore, the native capacity of the workers, much less their personal desires about work, which determines how they work in the efficient factory. It is the factory’s impersonal necessities that determine how the workers must work. And the management must discover its factory’s necessities or fall behind in the competition with those which do.

An illustration from The Principles of Scientific Management gives some idea of what the factory can afford to pay for the development of formulæ that lead to greater efficiency. In the fall of 1880, William Sellers, President of the Midvale Steel Company, asked Taylor to conduct a series of experiments designed to answer two questions which would add greatly to the efficiency of all the company’s machine work. At the time the experiments were begun it was believed that it would not take more than six months to develop the necessary formulæ. As a matter of fact, the experiments were carried on, with occasional interruptions, for 26 years and from $150,000 to $200,000 was spent in making them.

Taylor was asked by Sellers to provide the company with a set of rules that would enable the managers of the factories to answer two questions:

First, at what cutting speeds should the machinists operate the various metal cutting machines at which they work;

Second, what feeds should they use in their machines?

“They sound so simple,” said Taylor, “that they would appear to call for merely the trained judgment of any good mechanic. In fact, after working 26 years, it has been found that the answer in every case involves the solution of an intricate mathematical problem, in which the effect of twelve independent variables must be determined.”

•

Once such formulæ have been found, they impose themselves upon all factories.

The Midvale Steel Company discovers a new and more efficient method of production. It cuts its costs and lowers its prices; enlarges its sales and increases its profits.

In order to meet the Midvale Steel Company’s competition, competing steel companies must adopt the new methods. They must become equally efficient or they must reconcile themselves to more or less speedy failure.

Both the owners of the factories and the factory workers find themselves forced to conform to the necessities of a Frankenstein, the inevitability of which both accept, precisely as both owners and slaves once accepted the inevitability of slavery.

And there is no escape from this inevitability of efficiency by an abandonment of private ownership. There is only one escape: that is by an abandonment of an further development of the factory. This would stabilize efficiency at the standard which prevails today. But it is an escape in some respects worse than the evil to be remedied.

Efficiency, more efficiency, still more efficiency—this is what the factory itself imposes upon mankind, not only with regard to production, as in the instance just cited, but also in every detail of factory operations, beginning with the purchase of raw materials, the management of labor, accounting, credit, and finance, and ending with marketing, selling, and advertising. Taylor summarizes it as:

Science, not rule of thumb. Harmony, not discord.

Cooperation, not individualism.

Maximum output, in place of restricted output.

The development of each man to his greatest efficiency and prosperity.⁷

•

Cooperation and not individualism is implicit in the factory system. As efficiency increases, cooperation will therefore increase. With maximum efficiency the goal, cooperation will not be dispensed with once it is attained within individual factories. Cooperation inside factories will be followed by cooperation between factories, and finally, by cooperation between all the factors in production and distribution. Efficiency thus imposes upon the factory-dominated world a process of integration, centralization and finally, if uncontrolled private monopoly is not to be permitted to exploit the public, some form of socialization.

Added impetus is being given to this tendency, especially in- the older industries, by the threatening aspect of over industrialization. Under our present economic regime factories, as we have seen, tend to proliferate at a constantly accelerating rate. They would probably increase similarly under any other regime in which policy was in the hands of a quantity-minded class of managers and rulers. But under present day conditions, the immediate consequence of over-industrialization to the individual factory owner, and therefore to the workers and those dependent upon the operation of the factory for a market for raw materials and supplies, is a reduction of net income.

With more factories than are really needed seeking to market their products, and to operate at least at such a proportion of their total capacity as will enable them to meet overhead expenses, prices frequently fall below the cost of production.

Industries in which this state of affairs has become chronic many branches of the textile industry and certain branches of the food industry—are social and economic menaces. What they produce is sold at low “distress” prices to the public, but the communities in which the factories are located suffer from the unemployment and underpayment of labor, and from the loss of profits and the bankruptcies of the owners of the factories. These factory towns become economic plague spots, in which consuming-power for the products of other industries is at a very low point because the residents have not income enough to buy and to consume a normal volume of commodities.

Confronted by the problem of stabilizing profits and stabilizing production, American manufacturers in spite of their boasted individualism are beginning to turn to cooperation and governmental assistance for salvation.

They are trying to solve the problem by raising prices. Prices are raised by controlling production; monopolizing raw materials; licensing patents; stimulating consumption, (usually by lessening consumption of the products of rival industries), and by cooperative price-fixing.

They are trying to solve the problem by reducing costs—by using more and more automatic machinery, by working longer hours, and by lowering wages.

And now they are beginning to try to solve the problem by enlisting the assistance of the government. The tendency in this direction is becoming plainer all the time. The oil industry furnishes an excellent illustration of it. A report of the Committee of Eleven of the American Petroleum Institute in 1925 showed that the industry at that time was unaware of the existence of any serious problem. Their report stated that the industry was confident of its ability to secure “prices that will provide a return to producers, refiners, and distributors commensurate with the risk involved and the capital invested.” The total domestic output of oil, however, was only 763,743,000 barrels that year—slightly more than the average production of the four years 1923-26 inclusive. The year 1927, however, produced an output of 905, 800,000 barrels.

The industry began to discover a problem. Lower prices for petroleum and its products; increased expense for storage facilities; diminished profits and outright losses could not be ignored. Prices of leading oil stocks moved to new low levels in the face of a rise in the price of stocks generally. Even the stocks of the Standard Oil of New Jersey and Standard Oil of New York were being affected.

A Committee of Nine was formed, consisting of three representatives of the oil industry, three of the mineral section of the American Bar Association, and three of the Federal Government. This committee brought in a report radically different from that of the Committee of Eleven. It was plain to this committee that the industry had to save itself by cooperative development of oil pools by “voluntary” agreement. In order to secure the necessary “voluntary” agreements, the government was to remove any unnecessary obstacles—that, is, suspend the enforcement of the Sherman Anti-Trust Law—and in addition to bring to bear whatever pressure it “reasonably” could exert. As a step in this direction, the State and Federal antitrust laws were to be amended so as to remove unequivocally from their purview voluntary agreements looking to the restriction of output and the cooperative development and production of oil.

If this sort of cooperation in the oil industry succeeds in re storing profits, is it not plain that expansion will again set in, profits will again disappear, and still more cooperation will be needed to save the industry, and so on ad infinitum? ⁸

If in spite of help from such “voluntary” cooperation the industry ultimately ceases to furnish possibilities of profits, then the owners of the industry will naturally strive to “unload” it on the government, and if the government proves reluctant about taking over the losing venture, the public’s need of the products of the industry will force it to take it over.

These various efforts of American manufacturers to escape from the effects of over-industrialization, carefully concealed from the public, run counter to existing law, to existing folkways and to existing economic philosophy. They involve conventional business men and conventional economists in a maze of logical contradictions—natural consequences of the conflict between business necessity and existing statutes, customs and philosophies.

Ultimately economic necessity will prevail.

New laws, new customs, new economic theories—which permit of greater cooperation, greater integration, greater efficiency will take the place of those which prevail today.

But efficiency will remain—to whip and drive and scourge the victims of this civilization.

Next Section | The Factory Itself