Theory of industrial organization

Property as a theory of industrial organization: A society might pay a just reward to its members and still remain essentially unfree. Nothing is easier than to persuade men to exchange power for material comfort. The rights of property  must, therefore, to be well founded involve a theory of industrial organization not less than a theory of reward.

It must be a theory which aims at the release of personality in the industrial sphere as release for it has been sought in the sphere of politics. That does not mean the abrogation of discipline. But it does mean that industry shall be informed by a purpose relevant to the general well-being, and that the issue of orders shall be informed by that purpose. Well-being involves not merely the product itself, but also the methods by which that product is attained.

Property in industry means capital to be hired, and a discussion of its rights is a discussion of the powers which should belong to those Who loan it on hire. Here, at the outset, we are met by a limit involved by our view of remuneration. No man, it has been argued, is entitled to wealth he has not earned.

No man, therefore, will have capital to hire that is not the result of his personal effort. Hereditary business enterprise, in which the son takes over when the father feels ripe for retirement, and that without a nice scrutiny of competence, has no relation to a concept of justice.

Industry, in fact, must be made a profession. It needs to be informed by a principle of public service. It must not be merely a body of persons who are turning out goods for profit.  It must be a body of persons who perform certain functions at some standard of competent performance even while, in that performance, they protect their members from undue competition from outside. They may be successful, and success will possibly imply riches but their success, like that of the good lawyer or the skillful doctor, must be built upon an ability to enrich the public in enriching themselves.

That element of service is integral to the idea of a profession, it is not yet integral to the idea of business enterprise. We do not hold a boot-manufacturer to the use of such qualities of leather as will make good boots. We do not inquire if a clothier has used shoddy material in the suits he sells. We allow the establishment of rings and monopolies of which the purpose is to cheat the public without regard to its need. But we do not allow the judge to debase the coinage of justice.

We exact from the medical man certain standards of professional conduct. Their criterion of right is not the financial gain which may accrue, but the end their profession is to serve. And we ask that they subordinate their personal interest to the achievement of that end.

Let us freely grant that our success is, at best, very relative. Let us grant, also, that the line between the worst aspects of a profession and the best aspects of an industry cannot be easily drawn. School mastering, for instance, is a profession, but there are teachers who would degrade any occupation. The law is a profession and there are lawyers whose conduct is perpetual denial of their vocation.

So, also,there are business men whose ideal is to make their profit only by service to the public. It yet remains in general true that monetary gain is the object of an industry, while it is only a partial object with the professional man. For, with the latter, monetary gain is subordinate to rules conceived in terms of function, and the purpose of function is social service.

If industry is to be professionalized, certain changes immediately become necessary. Broadly, these are divisible into three large categories.

(I) There must be an alteration of the character of the owner of wealth into a person to whom a fixed dividend is paid for the use of his wealth. He must cease, that is, to control the business in which the property he owns is invested. Exactly as the owner of government stock is not given, as such, the advantage of a budget surplus, and does not, as the owner of government stock, influence the policy of the ministry in office, so, similarly, the owner of industrial capital would be paid the market price, and no more, for the service rendered by the loan of his capital. He would not be, as he now generally is, the residuary legatee of industry, profiting by the special ability of management, or a rise in price, or the special privilege a monopoly can enforce.

(II) There must be an alteration in the character of the control exercised in industry. Just as the rules of a profession are made, subject to the will of society, by those engaged therein, so must the rules of industry be made by the working force of industry.

Those rules, doubtless, cannot be made in quite the same way. Industry will, inevitably, remain more hierarchical in structure than a profession, say, like the law. But once the function less owner of capital is removed, an industry becomes an intelligible entity, and rules can be drawn up for its governance upon the basis of the functions performed by each element therein.

We can, that is to say, make the relationship between a manager and a machine-tender an intelligible one, because each has a function to perform but once the element of ownership is introduced the possibility of harmony is absent. And, surely, there is no more reason for offering industrial capital more than its fair market-price than there is for. offering a wage to labour that is more than the industry can bear.

We can only make industrial relationships creative by making the exercise of authority arise naturally out of function. If we strive, as we now strive, to introduce an element deprived of exactly that meaning which gives purpose to function, we are striving, as it were, to persuade the French peasant of the Ancien Régime that a nobility which has privileges without duties, is really essential to his well-being and should receive the major part of his produce. But the peasant, slow as he is, soon ceases to believe us.

(III) We must also give, larger room than we have done in the past for the social element in the industrial equation. That means, I take it, three things. It means, in the first place, the socialized production of those elements in the common welfare which are integral to the well-being of the community. By socialization I do not necessarily mean nationalization, though that is, of course, one of its forms. I mean the production of certain essential commodities, of which electric power is a fair example, by methods which do not leave them at the disposal of private profit.

The technique may involve co-operative production, or consumer’s co-operation, or such a form of control as that suggested by the Coal Commission of 1919 for the mining industry. Whatever the method, the chief point in it is that the profits therein earned will benefit the community and not the private undertaker. It means, in the second place, both in socialized industries and in industries retained under private management the introduction of a constitution.

There must be standard hours and standard rates of pay. There must be the replacement of autocratic managerial control (as in the hiring and dismissal of employs) by methods of a more democratic character. The introduction of changes in machine technology and piece-rates must be removed from the sphere of arbitrary will to the sphere of representative government.

Promotion, the selection of a foreman, for instance, must be built not upon the whim of a manager, but upon some approved combination of competence, with the approval of those the particular foreman is to control. It means, thirdly, throughout, the field of industry insistence upon qualification and publicity.

Exactly, that is to say, as a man must offer proofs of competence before he is admitted to the bar or to medical practice, before he can become the manager of a mine, or the master of a ship, so must he offer similar proofs before he becomes head of a factory or a department store. We must make an end of chance and nepotism in business enterprise if it is to attain the dignity of a profession.

Nor is publicity less urgent. What we are gradually learning in the present economic order is that secrecy in matters like costs of production and rates of profit is a fatal bar to a public spirit in industry.  The claim of the business man to manage his own enterprise in his own way is a claim to disregard new knowledge and public opinion.

Exactly as we are driven to demand of colliery companies and coal merchants, of cotton-sewing companies and building-rings, the publication of their costs, so, if we are to professionalize industry, we must have means of measuring the efficiency of those who are practitioners in it. That is not only necessary for the public. It is necessary also for the workers whose livelihood may be jeopardized by the futility of their employer.

It is necessary also to prevent those skillful manipulations by which industrial enterprises are floated at values where the bearing of a fair rate of profit is impossible in just terms. The enforcement of that publicity, and the utilization of its results, will mean the construction of new industrial institutions. But only the scientific organization of production, anti its judgment upon a scientific basis, will enable us to make industry answer the purpose of social life.

It should be noted that so to regard industry, mm the angle at which the rights of property cease to become rights of control, involves a transformation that will be accomplished in very various ways. There are industries, of which the building trade is a notable example, in which the owner is a manager as well as the proprietor of capital. To limit his rights in that first capacity is not to dispossess him in the second.

He can, as the builders themselves saw, in their memorable report of 1919 be utilized in the direction of his industry as transformed just because he has retained the capacity of a direct worker in it. That is not, however, the position in other industries. There, as in-coal, for instance, and iron and shipbuilding, organization, particularly in recent years, has taken a very different form. The categories of owner and manager rarely fuse.

The owner is a financial figure not concerned with technical operations, but either passively receiving a dividend, or arranging for the receipt of a dividend for himself and other persons. He is there for profit and for no other purpose. He cannot help to manage the operations of the industry because, like the average coal-owner to day, he has devolved those operations upon a certificated manager and knows nothing about them.

He cannot share his power with the workers, from operative to director, in the industry because there is, in fact, nothing to share. The others can combine to provide service. He is there not to give but to receive. There cannot be joint control with him because he is morally unrelated to the conduct of the enterprise.

All that he is entitled to ask for is the payment of that interest that is his due. If his practical intervention in the conduct of the enterprise is necessary to the provision of the product, he is then, like the mine-manager, a technician who can be absorbed in its transformation. If he is merely a profit-maker, so long as he receives his profit his presence and control are, in point of fact, otiose.

Here, perhaps, it is worth while to point out that the classical defense of the capitalist undertaker rests upon an important confusion between theory and practice. The pivot of that defense was the fact that the division of labor becomes anarchy unless, somewhere in the scale, there was a factor which secured the integration of economic forces to some particular ends.

The world is a chaos of wants, and every sort of enterprise is competing for the resources to satisfy those wants. The function of the entrepreneur is to control the distribution of those resources. He co-ordinates. the mechanism of production.He measures his response by the delicate movements of market-demand.

Without him, there would be unutterable confusion, since the more highly differentiated the society, the more urgent is his activity. What he earns is therefore a necessary cost of production, since it is implied in the nature of economic organization. To dismiss him as function less is, therefore, it is argued, to mistake altogether the world in which we live.

But even the most hardened defender of the present order does not present this defense as more than a rough approximation to the ideal. He admits that response is only made adequate to wants when the conditions provide for adequate response. In an ideal world of price-relations profit and social value would be proportionate.

In an ideal world all resources, including labor, would be infinitely mobile. If they are not so proportionate and so mobile, that is not his fault. He is doing his best against difficult obstacles. To impede his operations is to prevent the performance of a task which must be provided for in some way.

That is indubitable. The point of the criticism I have here made is that if provided for as new industry must remain the instrument of gain instead of service. For what is of the essence of the present system is the fact of the unequal position in the struggle to secure response to want. Mainly, that unequal position is the result of the class-structure of society. It is due to the fact that most people are not in a position to make their wants a source of effective demand. Where, therefore, rich and poor strive for satisfaction, the superior economic power of the former compels the entrepreneur to adjust the system to the needs of the rich. The price-system responds, therefore, not to true utilities, but to the utilities represented by the power of money income.

And since each additional “dose” of money income is a differential advantage in securing satisfaction, the entrepreneur is not supplying an economy conceived in terms of welfare, but an economy conceived in terms of the power of classes to press for response to their wants. And the inadequacy of this system is intensified by its individualism. For the presence of competition, and the secrecy which surrounds competition, leads to constant miscalculation through the risks and doubts of the market. Practically, the theses of this defense would be valid only in a society without classes, in which the demands of consumers were effectively equal.

This is not the case. And the result of inequality is to intensify the special power of the class with property as against the class upon the margins of subsistence. For the “pull” upon the economic system by the former continually weights its effectiveness against the poor. Property becomes the more secure because the more its demands are supplied the wider are the avenues of profit. There is a growth of the investing class as distinct from the owner of capital who is a manager as well. The center of industrial operations becomes financial. The object is simply the maximum profit, since that is the purpose of financial ,control.

The entrepreneur then becomes more and more the salaried official of a company. The notion of function disappears from the direction of industrial enterprise. That ultimately, is the real root of the disharmony between capital and labor. The divorce between ownership and work directly related to the purpose of a given industry means that there is then no basis upon which adequate relations between capital and labor admit of organization.

Wherever, therefore, function less property is the controlling factor in industrial production, the abolition of its rights is the necessary path to justice. The abolition will be no easy matter, and there is no direct highroad to its accomplishment. Those who have suggested action by the proletariat to that end, a refusal, for instance, any longer to maintain the system, forget that men must live, and that only a peasantry growing its own food is in a position to continue its abstention for any length of time.

It might of course, come from political revolution which would destroy overnight the rights of ownership as feudal rights were abolished at a stroke by the States-General in 1789. It would be futile to suggest that political revolution is impossible.

We can only say that it is, at best, a costly and dubious adventure which may end only in fixing the fetters of the present system more firmly upon those who suffer by it, that it may even, by its magnitude, destroy the whole fabric of civilization.

For the weapons at the disposal of a modern jacquerie are more destructive, above all, more permanently destructive than at any previous time. We are only entitled to employ revolutionary instruments when methods of persuasion are challenged by violence. For the resources of civilization should only be abandoned in the last resort.

The alternative is a slower process, but in all probability a more fruitful one. It is to transform the structure of such industries in buying out, by legislative enactment, the rights of owners. They would then have the right to a dividend but they would surrender alike profits and control.

These would then pass, in part to the workers, from manual laborer to research scientist, in the industry in part, as is essential, to the community. It is not necessary here to discuss how those rights would, when transformed, be distributed.

There is not, I think, any one form of industrial organization suited to all industries alike. Nor need We discuss here the order in which such transformation should take place. A wise community will proceed piecemeal and by stages, in order that it may learn by experience.

The outstanding points of need are simple enough, however complex be their application. We must, first, buy out the existing owners of property rights. These must then be institutionalized into some system which represents the needs of each particular industry. By these means we can infuse the process of production with that sense of responsibility it now lacks.

We can make the community as a whole a partner in that process. We can erect machinery which not only leaves the workers free to produce, but also permits the users of services to criticize and to have their criticisms translated into the working of the process. These things are impossible under the present system because its subordination to the motive of financial gain does not leave room for the ideal of service to express itself.

Three further remarks may be made. Extinction of rights by the payment of compensation seems to leave in full vigour a class of function less owners. That is true and in strict logic it is unjustifiable. But the life of a community must be adjusted to its experience and not to a strict logic.

The sudden extinction of these legal rights would, if unaccompanied by compensation, probably result in an assault upon the government making the attempt. Men will sooner, as Machiavelli said, forgive the death of their relatives than the confiscation of their property.

Nothing is so likely to poison the spirit of the body politic than the sudden disappointment of financial expectation. And, after all, the community has its compensations. In the system here outlined, payments to the existing owner would not pass to his descendants he would, at the most be the recipient of an annuity terminable at death.

Nor, secondly, need it be supposed that the charges for such extinction are an unduly heavy burden. If Great Britain had bought out its coal owners in 1913, it would have earned the purchase-price for the mines of 1920. No investment is ever lost that maintains  good-will ,and in the transference to a new system, the more good-will we have, the greater is the augury of its success.

Nor, secondly, does what has been here outlined involve the rigorous formula of control by a government department. The arguments usually laid down against the post office or the telephone service are entirely inapplicable, for the simple reason that the structure proposed is not built to that, or any other, uniform pattern.

What is proposed is the making of a constitution for industries in which the autocracy built upon rights of function less ownership prevents the expression of social purpose. Government control may be a necessary stage through which industries must pass to a more flexible form of operation. But, as will be seen later, the possibilities of variety are larger than the opponents of collectivism are prepared to imagine.

Experiment is here as likely and as legitimate as it is in the realm of political organization. It will, of course, make endless mistakes. It will, inevitably, require a higher degree of efficiency and public spirit than has been characteristic oi the present order. But there is no birth without pain and those who would confront the prospect of a better life must not turn aside because there are dangers on the road.

Above all, thirdly, it is important to remember that the present system is breaking down. It has ceased to attract the allegiance of the workers. They find no happiness in it. They give to their effort neither their mind nor their energy. Their inability to share in control makes them feel that the conduct of industry is a thing in which they have no part. Their sense is deep that the product is unjustly distributed between themselves and their masters.

They resent, as in the coal industry, what they regard as the inefficiency with which the management is conducted. None of the proposed remedies-scientific management, a bonus-system on output, co-partnership, profit-sharing-has anything but an infinitesimal success.

The roots of loyalty are gone. The system has ceased to act as a source of moral possibility, and not the most ingenious devices which tinker with its appearances can re-create its inspiration. The profit making motive has lost the old magic which still glows in the pages of men like McCulloch arid Nassau Senior. The growth of education has completed the disillusion of experience.

The modern worker is outraged by the inhumanity and the hypocrisy of the existing order. He does not believe in its professions. He notes its declining success. He sees how the growth of trade unionism has resulted in an advance towards the inner fortress of the capitalist citadel. He has become concerned with the overthrow of foundations.