Front Page Titles (by Subject) Chapter X: MARGINAL PRIVATE AND SOCIAL NET PRODUCTS IN RELATION TO INDUSTRIAL FORMS - The Economics of Welfare
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Chapter X: MARGINAL PRIVATE AND SOCIAL NET PRODUCTS IN RELATION TO INDUSTRIAL FORMS - Arthur Cecil Pigou, The Economics of Welfare 
The Economics of Welfare (4th ed.) (London: Macmillan, 1932).
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MARGINAL PRIVATE AND SOCIAL NET PRODUCTS IN RELATION TO INDUSTRIAL FORMS
§ 1. IN the preceding chapter we were engaged in a study of the differences between the marginal social net product and the marginal private net product of resources devoted to various occupations or industries. It is now necessary to conduct an analogous inquiry about resources devoted to various forms of economic organisation within the several occupations or industries. Marshall long ago observed: "As a general rule the law of substitution—which is nothing more than a special and limited application of the law of the survival of the fittest—tends to make one method of industrial organisation supplant another when it offers a direct and immediate service at a lower price. The indirect and ultimate services, which either will render, have, as a general rule, little or no weight in the balance."1 These indirect services constitute the difference between the social net product and the private net product of a unit of resources invested in any form of economic organisation. Our present task is to distinguish the principal fields in which they play an important part.
§ 2. One very important indirect service is rendered by the general economic organisation of a country in so far as, in addition to fulfilling its function as an instrument of production, it also acts, in greater or less degree, as a training ground of business capacities. In order that it may do this effectively, the size of business units must be so graded that persons possessed of good native endowments can learn the principles of enterprise in some small and simple concern, and thereafter can gradually move upwards, as their capacity improves with practice, to larger and more difficult posts. The point may be put in this way. When the separate steps in the agricultural or industrial ladder are large, it is difficult for a man adapted, if adequate practice is obtained, for life at one stage, but standing by some accident at another stage, to move to his proper place. Thus—to take a hypothetical example—if agriculture or industry were worked exclusively in large units consisting of one or two large entrepreneurs assisted by a number of mere labourers, any capacity for management and direction that might be born among people in the labouring class would have no opportunity for use or development. Many persons endowed with native capacity would thus be compelled to be watchers only and not doers. But, as Jevons has well taught, it is doing, and not watching, that trains. "A few specimens probed thoroughly," he wrote, "teach more than thousands glanced at through a glass case. The whole British Museum accordingly will not teach a youth as much as he will learn by collecting a few fossils or a few minerals, in situ if possible, and taking them home to examine and read and think about."2 The point was put even more forcibly by Marshall in his address to the Co-operative Society in 1885: "It is a better training in seamanship to sail a fishing-boat than to watch a three-masted ship, the tops of whose masts alone appear above the horizon."3 Thus it would seem that, in the absence of a proper ladder, a great deal of the business capacity born among the working classes must run to waste. If, however, industry or agriculture is organised by way of units of many different sizes, a workman possessing mental power beyond what is normal to his class can, without great difficulty, himself become the entrepreneur of a small establishment, and gradually advance, educating his powers the while, higher up the ladder that is provided for him.
§ 3. This train of thought suggests that, in a community organised on the general lines of a modern industrial State, associations of workers combined together in small co-partnership workshops constitute an industrial form, investment in which is likely to yield a marginal social net product considerably in excess of the marginal private net product. For such workshops provide the first stage of the ladder that is needed to lift upwards the great fund of capacity for management that is almost certainly lying latent among the manual labouring classes. They furnish, as it were, a first school in which this capacity can be developed, and, in so doing, contribute for the service of the community, not merely boots and shoes, but well-trained, competent men, by whose work the national dividend will afterwards be augmented. Much the same thing holds good of the analogous workers' businesses in agriculture. Gardens and small allotments near their cottages for workmen in regular employment elsewhere, large allotments for workmen occasionally taking odd jobs elsewhere, and small holdings for those who devote themselves entirely to work on those holdings, provide in combination a complete ladder from the status of labourer to that of independent farmer. This ladder yields a product of human capacity over and above its immediate product of crops. That element of social net product, however, does not accrue to those persons by whom the size of agricultural holdings is regulated, and is not included in the marginal private net product of the resources invested in them. This is enough to establish a prima facie case for the "artificial encouragement," by State action or by private philanthropy, of Workers' Associations and of various grades of allotments and small holdings. Such encouragement is given to Workers' Associations, in England by the support of Retail Co-operative Societies, and in France and Italy by the grant of special facilities for tendering on Government work. The movement for developing allotments and small holdings has also, in this country, received governmental help.
§ 4. The same line of thought, looked at from the other side, suggests that the marginal social net product of activities devoted to bringing about any widespread "trustification" of industry is likely to be smaller than the marginal private net product. For large combinations—this does not apply to those Kartels whose members remain separate and independent on the productive side—by lessening the opportunities for training in the entrepreneur function, tend to prevent the level of business ability from rising as high as it might otherwise do. "The development of a high order of undertaking genius in the few seems to depend upon a wide range of undertaking experience in the many." With the main part of industry organised into million dollar combines, the ladder connecting different stages of managing ability would be gravely damaged. Nor would the opportunity for obtaining positions as managers of departments in a giant concern go far to make up for this; for, apart from the limited degree of independent initiative which the management of a department, as compared with the control of a business, necessarily involves, departments will not vary in size so widely, or reach so low down in the scale, as private businesses may do. In his address to the Royal Economic Society in 1908, Marshall called attention to the educative possibilities of small businesses, illustrating his thesis from the present organisation of the milk trade. He pointed out that, so far as the working of industries by the State—and the same thing, of course, applies to the working of them by large commercial combinations—does away with this sort of educative ladder, the mere proof that it was immediately more economical than private management would not suffice to show that it was more economical on the whole.4 This is the same thing as saying that the marginal social net product is less than the marginal private net product. The practical inference, so far as the present argument goes, is plain. Though in the special emergency of the Great War, when immediate output was absolutely essential and had to be won even though the future suffered, the State might rightly intervene to enforce various forms of combination that would not have come about without it, yet in normal times of peace it should always hesitate before encouraging, and should perhaps in some instances impede, any threatened excess in the growth of giant businesses, whether these are publicly or privately owned. What has been said above, however, obviously does not exhaust the considerations relevant to this problem. Further discussion of it will be found in Chapters XIV. and XXI.
§ 5. Considerations of the same general character as the above are relevant to certain developments in the method and practice of standardised production.5 It has long been known that, by specialisation to a limited number of standard forms, great economy of cost and increase of output can be achieved. This economy, furthermore, is not confined to the point at which standardisation is first applied; for, if one industry agrees to standardise its product, the industries which make machines and tools for making that product are in turn enabled to standardise theirs. The Standards Committee of the Engineering Trade of this country has done much work in drawing up, for screws, nuts, certain motor parts and various other things, standard specifications which have been adopted throughout the engineering industry of the country generally. The experience of the Great War, in which military equipment and munitions had necessarily to be of uniform patterns, brought out more clearly than before the enormous scope for direct economies which, partly by making possible the employment of relatively unskilled labour, standardisation of product is able, in favourable circumstances, to create. The urgent need for immediate large output at a minimum of cost even led to standardisation, under Government authority, of such things as ships and boots. The essence of the matter is that the standardisation of certain products over the whole of an industry, by enabling the firms that make them, and the other firms that make tools for making them, to specialise more closely than would otherwise be possible, leads immediately to an enormously increased output of these products. This increased output we may call, if we will, the private net product of the method of standardisation: If, however, attention is concentrated exclusively upon this, the net advantages of the method will sometimes be greatly exaggerated. For standardisation almost inevitably checks the development of new patterns, new processes and new ideas. It is all very well to make rules for revising periodically the standard specifications. This is not an adequate remedy, because the real danger of standardisation is, not so much that it will prevent the adoption of new things when their superiority has been recognised, but that it will greatly lessen the inducement to manufacturers to devise and try new things. For in normal industry the profit which a man gets out of an improvement is chiefly won in the period when he is ahead of his competitors, before the improvement is adopted generally. With a rigid system of standardisation nobody would be able to be ahead of anybody else or to introduce a new pattern till the whole trade did so. The whole line, in short, must advance together; and this means that no part of it has any great inducement to advance at all. Other things being equal, the marginal social net product of effort devoted towards standardising processes falls short of the marginal private net product, in so far as it indirectly checks inventions and improvements and so lessens productive powers in the future. Obviously the gap thus indicated is not equally wide for all commodities. It is difficult to believe, for example, that the establishment of standard sizes and standard forms for such things as screws and nuts is likely to prevent the development of any important improvement. In these simple things there is little or no room for improvement. But with complex manufactures the position is altogether different. Even in the course of the Great War, when large output was of overwhelming importance, it would have been madness to standardise the production of aeroplanes; the opening for discovery and for the development of better types was so wide. In many other finished manufactures it is impossible to feel any confidence that the final form has already been evolved. There is, therefore, always the danger that, by standardisation, we shall augment enormously the production of the good at the cost of never attaining to the better. In any action that the State may take to foster standardisation for the sake of the immediate and direct stimulus which it gives to output this danger must be carefully borne in mind.
§ 6. Yet again, the analysis here developed is applicable to certain aspects of that method of business organisation that has come to be known as "scientific management." The general characteristics of that system are well known. Elaborate study of the various operations to be performed is undertaken by trained experts, who analyse these operations into their separate elements, and, on the basis of this analysis, coupled with careful observation of the methods actually followed by a number of good workmen, construct, by combination, an ideal method superior to any yet in vogue. The kind of improvement to which this process leads is illustrated by the results of Mr. Gilbraith's investigation of the problem of laying bricks. He "studied the best height for the mortar box and brick pile, and then designed a scaffold, with a table on it, upon which all of the materials are placed, so as to keep the bricks, the mortar, the man, and the wall in their proper relative positions. These scaffolds are adjusted, as the wall grows in height, for all of the bricklayers, by a labourer especially detailed for this purpose, and by this means the bricklayer is saved the exertion of stooping down to the level of his feet for each brick and each trowelful of mortar and then straightening up again. Think of the waste of effort that has gone on through all these years, with each bricklayer lowering his body, weighing, say, 150 pounds, down two feet and raising it up again every time a brick (weighing about 5 pounds) is laid in the wall! And this each bricklayer did about one thousand times a day."6 This device is, however, merely one example of what scientific management endeavours to achieve in general. The central conception involved in it is that of handing over the task of planning methods to trained experts, and then explaining to the workmen in elaborate detail what it is they have to do, including even the pauses and rest periods that they should take between successive operations and movements. "The work of every workman is fully planned out by the management at least one day in advance, and each man receives in most cases complete written instructions, describing in detail the task which he is to accomplish, as well as the means to be used in doing the work. And the work planned in advance in this way constitutes a task which is to be solved, as explained above, not by the workman alone, but in almost all cases by the joint effort of the workman and the management. This task specifies, not only what is to be done, but how it is to be done and the exact time allowed for doing it."7 The work of teaching the workmen how to do it, and of seeing that they properly understand and carry out their instructions, is entrusted to a new class of officials known as "functional foremen." These officials, working in conjunction with the accounting officer, can ascertain at once how far the costs of any particular workman's output exceed the proper costs laid down beforehand, and can then concentrate attention and instruction at any point where there is prima facie reason to hope for improvement.8 Now it is perfectly plain that this type of industrial organisation is likely to yield large immediate economies, and that the careful teaching involved in it must up to a point yield much permanent good. It is a paradox that, "though in the athletic world instructors exist to teach boxers how to balance themselves and use their arms, and cricket professionals are constantly at work improving the efficiency of batsmen and bowlers, and coaches are a necessity to teach a boat's crew collectively and individually how and when to move their bodies and hands, yet in the industrial world the value of teaching operatives how to earn their livelihood is hardly yet recognised."9 Nevertheless, there is real danger lest this new-found science should be pushed too far. Carried to excessive lengths it may, from a long period point of view, defeat its own ends. First, it is not proper to assume that there is only one best method of doing a thing independent of the psychological and physical qualities of the individual doing it. There may be several first-class methods, some more fitted to bring out the best in one man, another more suited to another man.10 Secondly, so far as the operations of the individual workman are reduced to a mechanical plan, the original source from which the directing authority derived its standard methods—namely, a combination of the best points in the varied individual methods of different workmen—would be dried up. Overt suggestions from workpeople for improvements in method would also, perhaps, be rendered less probable. No doubt, this loss could be partly atoned for by the employment of scientific experts specially charged with the task of experimenting in new methods. But, after all, these are available under ordinary systems of works' management and cannot, therefore, be regarded as a peculiar asset of the Taylor system, to be set against its peculiar failings. Nor is it only in respect of specific suggestions and devices that injury may be indirectly wrought by this system. There is grave reason to fear least the general initiative and independent activity of workpeople may be injured by their complete subordination to the detailed control of functional foremen, much as the general initiative of soldiers is injured by the grinding of an over-rigid and mechanical military system. By the removal of opportunities for the exercise of initiative, capacity for initiative may be destroyed, and the quality of the labouring force may in this way be subtly lowered. In so far as this happens, the marginal social net product of resources invested in the development and application of scientific management falls short of the marginal private net product. Unless the State or philanthropy intervenes, there is a danger that this method of industrial organisation may be carried further and applied more widely than the interest of the national dividend—not to speak of the more general interest of society—when viewed as a whole, demands.
[1.] Principles of Economics, p. 597.
[2.] Methods of Social Reform, p. 61.
[3.] Loc. cit. p. 17.
[4.] We may notice that, when, as in such a country as India, the narrowness of the markets and other causes prevent the development of any large-scale industries, the top end of the industrial ladder is cut off, and there is a difficulty, analogous to the difficulty discussed in the text, about the provision of an adequate training-ground for the higher forms of business ability. (Cf. Morison, The Industrial Organisation of an Indian Province, p. 186.)
[5.] In Industry and Trade, Bk. ii., chapters ii. and iii., Marshall, after distinguishing between standards particular to an individual producer and standards that are general to the greater part of an industry, has much interesting discussion of modern developments in standardisation.
[6.] Taylor, The Principles of Scientific Management, p. 78.
[7.] Taylor, The Principles of Scientific Management, p. 39.
[8.] Cf. Emerson, Efficiency, ch. vii. Mr. Dicksee draws some instructive comparisons between these methods and the various forms of drill practised among soldiers. (Business Methods and the War, Lecture 2.)
[9.] Health of Munition Workers Committee, Interim Report, p. 77.
[10.] Cf. Miers, Mind and Work, p. 192.