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CHAPTER XXIV

PRINCIPLES AND PROBLEMS OF MANAGEMENT

The economics of a previous period classified the factors of production under three headings,-land, labor, and capital. The economic developments of recent years have brought to the front a fourth factor, management Management is in one sense a subdivision of labor. It is labor of a primarily intellectual kind, concerned with the direction, supervision and control of ordinary skilled and unskilled workmen. The remuneration of management is a salary, but in all essential respects, the salary is determined in exactly the same manner as wages. In fact, the remuneration may be included in the economic phrase, “wages-of-management." Different grades of management exist and marginal productivity determines the different rates of salaries for the respective grades. Since these problems have already been discussed in chapters dealing with wages as a share in distribution, there is no need to discuss at this point the forces governing the distribution of salaries.

Although for purposes of distribution theory, management is merely a subdivision of labor, nevertheless for other purposes management is to be viewed as an independent factor in production. The task of management is intimately related to land, labor, and capital, yet is something apart from any of them. Management exists primarily for the purpose of bringing into balance all of the multitudinous forces which play a part in the success or failure of the modern business concern. Management is responsible for bringing order out of a chaos of scattered elements. Management functions by unifying, correlating, organizing and administering the sum total of economic factors which comprise a modern business establishment. Land, labor, and capital are, none of them, taken singly, capable of complete self-management, but they depend upon a body of administrators and governors who are especially qualified for the managerial supervision of all the activities of the business concern. The significance of the modern function of management is comprehensively appraised in the following statement by Louis Brandeis: “The coming of the science of management, in this century, marks an advance comparable only to that made by the coming of the machine in the last.” 1

In some cases, large property owners have proved competent to direct and manage their own properties; in most cases, groups of property owners have hired salaried managers, whose ability, character and 1 Business a Profession, pp. xlvii, 2-3.

experience especially fitted them to perform the functions of management.

The Size of Management. The problems of management are in great measure a reflection of the size of modern business establishments. Everybody knows that business combinations and large establishments are typical of the present economic system. This popular impression overlooks, however, the important fact that small business establishments are not by any means a thing of the past. Statistics for 1919 show that in the United States there were in that year no less than 141,742 manufacturing establishments which employed less than six wage earners each. A manufacturing establishment employing not to exceed one hundred wage earners would not appeal to the average imagination as a large enterprise; but it needs to be remembered that in 1919 there were 235,464 establishments no larger than that. The small establishment is not dead and gone. These smaller establishments comprise 95 per cent of all manufacturing concerns in America. On the other hand, the relatively few large establishments represent such vast fields of manufacturing enterprise that they employ the great bulk of the wage earners of the country. The remaining 5 per cent of establishments employ fully 70 per cent of the wage earners. Another comparison of figures indicates more strikingly the scope of the large business units. The 2 per cent of the establishments of the country which are the largest employ more wage earners than the 95 per cent of smallest establishments. Moreover, over nine-tenths of the annual product comes from plants which individually turn out each year goods valued at more than $100,000. Nearly three-fifths of the annual product comes from plants whose individual output each year exceeds a value of $1,000,000. In 1919, 3.6 per cent of the establishments employed 56.9 per cent of the wage earners and turned out 68.7 per cent of the product. Hence, the great bulk of wage earners are employed in establishments which hire hundreds or thousands of workers, and the main portion of the national product is made in establishments whose annual output has to be figured in hundreds of thousands or millions of dollars. The little establishments flourish, and in total numbers of individual plants show impressive figures; but when they are measured by the work which they do, by the workers they employ, by the value of their output, they are seen to be a minor part of the productive equipment of the nation. The major industrial activity of the country is the activity of big business, and for a clear conception of the true state of the economic organization, it is imperative that the facts about the relative size of business establishments should be kept well in mind.2

The main trends toward business concentration have been comparatively recent. Industry during the Civil War period was conducted by small establishments for the most part. Since that time, in thirteen leading lines of industry, the number of wage earners in the average plant has increased seven times over, the value of the output of each plant nineteen times, and the amount of capital thirty-nine times. This industrial evolution in the direction of concentration began to attract attention during the eighties of the last century. The trust movement came into notoriety during the next decade, and as the trust fell under the ban of the law, the late nineties and the first years of the new century witnessed the development of holding companies and consolidations of one sort and another. Combinations came swiftly during periods of prosperity, but were rarely formed during years of panic or depression. The great era of consolidation in this country was the fifteen years preceding the depression of 1903. That depression slowed up the combination movement, and from 1903 down to the opening of the European War, the business consolidations were less extensive. The war period gave new impetus to combination in many lines. It is essential to remember that the business combinations of the present day are the creation of the last thirty years of economic history, and that most of the fundamental consolidations were pretty definitely determined during the first half of that thirty-year period.

2 See Statistical Abstract of the United States, Annual.

Caution is necessary in making sweeping references to industry “as a whole." Part of industry may be moving in one direction while the rest is moving in another direction. The Bureau of the Census, from a study of developments in eighteen industries between 1899 and 1919, reaches the following conclusion: “The records of these eighteen industries have indicated wide differences in the nature of industrial development. Certain industries—those manufacturing salt, beet sugar, leather, woolen goods, automobiles, iron and steel, and coke—have shown notable increases in average size of establishments. Other industries, such as

. slaughtering and meat packing, artificial ice, cotton goods, and boot and shoe manufacture, have maintained a more nearly constant level in size of establishments, and the silk, lumber, carriage and wagon, and shipbuilding industries have recorded tendencies to decrease in average size of establishments.” 4

A large number of industries show a definite tendency to small scale production. The Census Bureau records in this list the following branches of production : 5

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Artificial flowers

Grindstones
Belting leather

Lard, not in meat packing
Canning and preserving oysters

Mirrors
Clothing, women's

Nets and seines
Copper, tin, sheet-iron work

Paving materials
Corsets

Rules, ivory and wood
Cotton lace

Smelting and refining, lead
Fire works

Wall paper, not in mills
Gold and silver, leaf and foil

3 See A. Dewing's Financial Policy of Corporations, IV, 33-41; Ripley's Trusts, Pools and Corporations, Introduction; 1. Lippincott's Economic Development of the United States, Chapter XXI; C. E. Van Hise's Concentration and Control, pp. 35-59; J. W. Jenks, The Trust Problem, Chapter I. 4 The Integration of Industrial Operation, 1920, Census Monograph, III,

p.

84.

p. 74

5 Ibid.,

The actual amount of industrial concentration in the United States has been estimated by the Census Bureau. The method of making the estimate involves the use of “central office groups” as the unit of calculation. A central office group exists where two or more industrial establishments are operated from a single central office. The degree of concentration of such groups in the field of manufacturing is indicated by the following table:

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The extremes of concentration are found in chemical manufactures and railroad repair shops. The extremes of decentralization are found in paper and printing. The degree of concentration clearly varies widely from industry to industry.

Over two-thirds, or 68.8 per cent, of the central office establishments, are limited to one single line of industry. For the most part, this means that these establishments are horizontal combinations. Nearly one-third, or 31.2 per cent, of the central office establishments operated two or more lines of production. In general, this group of concerns represent integration, or vertical combination. Of the ten most complex groups, one has establishments in thirteen different industries, three have establishments in twelve different industries, two have establishments in eleven different industries, and four have establishments in ten different industries. The most complex integrated industries are lumber and its manufactures, iron and steel and their products, and vehicles of land transportation. Seventy per cent of the raw material used in saw mills

6 The deviations from average are shown by the following table: Number of Establishments

Per Cent of All CenOperated

tral Offices 1 to 2

61.3 3 to 5

26.9 6 to 10

7.3 11 to 15

2.0 16 to 25

1.4 26 to 50

0.8 Over 50

0.3

is produced by the owners of the mills ; 23 per cent of the raw material used in paper mills is produced by the owners of the mills; 46.8 per cent of the cane sugar used in refineries is grown on plantations controlled by the refiners.

The central office groups contain 7.8 per cent of all establishments, employ one-third the wage earners, and turn out one-third the product.

The estimates here given afford a picture of the degree of concentration in modern American business. On the one hand, we find hordes of small individual enterprises turning out in the aggregate a relatively small product; on the other hand, we find a relatively few large enterprises turning out the bulk of the product. But differences appear between industries, and care must therefore be observed in making generalizations about “industry as a whole." Individual differences as well as mass tendencies must be recognized.

Classification of Types of Management.-The various sizes and kinds of business concerns have brought into operation widely varying types of management. On broad lines of classification, the three outstanding types are the individual, the partnership, and the corporation.

In the individual type, the owner and the manager are usually one and the same person. The individual carries on the business with his own brains, largely with his own money, and upon his own responsibility. For the most part, this type of management is suited to relatively small enterprises. Agriculture is largely under the individual type of management, and a substantial portion of retail trade is conducted by individual merchants. But in manufacturing, less than 6 per cent of the total national product is made under the individual type of management. The individual managers usually have small plants, and the lines of manufacture where the small individual management survives in largest numbers are such as baking, clothing, printing, dairy products, blacksmithing, and the like. Individual management normally has the advantage of the direct, personal, immediate attention of the man whose whole fortune is at stake. It rests upon highly commendable qualities of character such as thrift, initiative, honesty, responsibility, and by providing an opportunity for men to make good in business in a small way, it often brings men of ability to the attention of larger establishments. Small business is in many ways a training ground for and a stepping stone toward promotions into the more difficult managerial positions of larger business units. From an economic point of view, it is of the utmost importance that the big business concern should not develop in such a fashion as to block the way for men who desire to set up businesses of their own. The hundreds of thousands of small individual managers deserve as much freedom of opportunity to make good as can possibly be given them, and the practices of big concerns cannot be allowed to choke out reasonable opportunities for small ones to get ahead by efficiency, foresight, and good judgment. The small business man in his individual plant has a part to play in economic life which, in

7 See Woodrow Wilson, The New Freedom.

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