Front Page Titles (by Subject) CHAPTER 27: MANAGEMENT - Economics, vol. 1: Economic Principles
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CHAPTER 27: MANAGEMENT - Frank A. Fetter, Economics, vol. 1: Economic Principles 
Economics, vol. 1: Economic Principles, (New York: The Century Co., 1915).
Part of: Economics, 2 vols.
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§ 1. The function of management. § 2. Direction of simple and interrelated groups. § 3. Selection of managed and of managers. § 4. Division of labor in management. § 5. A large commercial policy. § 6. Obtaining of capital. § 7. Profit-seeking borrowers and the rate of interest. § 8. Buying materials and labor. § 9. Various policies to upbuild the personnel. § 10. Management of technical processes. § 11. Management of men. § 12. The right proportioning of the factors. § 13. Adjustment of production to changing conditions.
§ 1. The function of management. The owner of a fund of purchasing power can not leave it to invest itself. The primary function of enterprise is the choice of a business in which to invest; the next, and essentially last function, is to provide competent management. Every act of labor and every use of goods calls for some decision and direction. This is management, which is one of the forms and aspects of labor, quite easily distinguishable from mere physical action. In the simplest kinds of individual production the amount and quality of the goods obtained depends on intelligent choice often far more than on physical force. Even for the solitary worker the choice of the right time, kind, place, and method of work is most important. The first thing Robinson Crusoe did was to go to the ship and to save as much as possible of the cargo before it was dashed to pieces by the waves. If he had begun first to till the soil to provide a future supply of food it would have shown foresight, but very poor judgment. Every moment of delay in recovering the cargo of the wrecked vessel cost him many useful materials. The humblest farmer has a great range of choice and a need of good judgment in fixing the time to sow, to reap, to do each simple task. There is the same need to-day for small producers of all kinds, whether shopkeepers or blacksmiths, to make wise choice of time in the use of their own labor. There is also a wide range of choice in the distributing and combining of labor, agents, and materials. A limited supply of agents can be used to secure a variety of goods, more or less desirable. There is a choice in ways and methods by which a thing may be done. There are many wrong ways, there is but one best way, at any stage of industrial progress. While most work is done in customary ways and little independent judgment is required, yet in every kind of industry new problems constantly arise and call for the exercise of choice as to methods. Moral qualities are continually called for, such as control of impulse and the giving up of the comfort of the moment. The wisdom of our fathers is embodied in a multitude of proverbs that suggest the wise course. Men must “make hay while the sun shines,” and “plow deep while sluggards sleep.” But virtue fails less often from lack of knowledge than from lack of will. As men differ in judgment, character, and will-power, their products differ, even in the simplest circumstances. The ability to choose and to do wisely is an element in personal skill in every economic activity. This quality in the man is managing ability, and the action of directing economic activity is business management.
§ 2. Direction of simple and of interrelated groups. When men work in an associated group, the direction of effort becomes relatively more important. The first and simplest advantage of association is working in unison. Men unite their muscular efforts for a single task, and accomplish what is impossible to them working singly. There must, however, be a foreman to call out “heave ho,” or to lead the song, or to set the stroke for the oarsmen. When many are working together, good judgment in the selection of time and way yields larger results and a mistake wastes more materials and agents than when each works for himself. If association is to yield its advantages, it must go further than working in unison at a single task; there must be division of labor, hence harmony of effort, hence agreement and direction within the industry. While the gain of well-directed association is large, the waste of ill-directed effort is greater when specialization has taken place, than with isolated workers. Most communal societies have failed because of the lack of a good head. The few exceptional successes have been due to the presence of a man of superior ability, such as George Rapp of the Harmonist Community, who, had he lived in this day, could have easily become the head of a great business corporation.
When various industrial groups are associated, direction becomes still more important and the need grows for high ability to manage and direct the great units of industry. In the single group it is an internal harmony alone that is needed. The work of a dozen men must be so arranged that each is in his fitting place. But as this group comes into contact with others, the relationship becomes twofold, and there must be both internal and external harmony. Outlook upon business conditions and commercial ability become necessary. The more complex the economic organization of society, the greater the chance of mistake and the more injurious are the mistakes to a wide range of interests. Large amounts of wealth and labor can be rapidly lost through lack of wise direction of an associated group.
§ 3. Selection of managed and of managers. Ever since the beginning of human society some degree of organization of industry has existed. In every community by some method, however crude, a practical way has been found of determining who shall organize and manage the factors of production, and who shall work under direction. Economic organization has always been more or less connected with and affected by political organization, and in many ages has had a distinctly political character through the institutions of slavery, serfdom, caste, and heredity in politics. But in modern times, under conditions of political freedom, this classifying of men so that those less capable of managing industry come under the direction of those who on the whole are more capable, has grown more and more economic and competitive. This selection is often unsatisfactorily done no doubt, through the quips of chance and through many influences of personal favor and political injustice. In most cases, however, the selection is of a very exact and effective sort. The need of organizing industrial forces is so great that any method that works at all is better than no method. The man who shovels dirt must do it at the right time and place if, in this complex society, it is to count for something and give the effort value. If he can not choose well for himself, he comes under direction. The average man can not decide nearly as well here as he could on a desert island where and when to put in his spade. There it would be to raise food for the current year; here it may be to dig a canal or a tunnel whose uses will not become actual for many years. The more distant the end sought, the more difficult is the choice. To every worker, according to his personal skill, is left some degree of choice in the method of his work, but in a large part of industry the range of choice is very narrow. The man with the shovel and the man with the hoe come under direction.
Likewise there is a constant process of selecting and advancing the efficient managers. There is, to be sure, an element of chance in this selection. The process in general is a rude one. Accidents and unforeseen changes, industrial crises, failure of health at a critical moment, fraud and crime, may defeat men of ability and they may never regain their foothold. Men that have worked their way up from the ranks bequeath their business positions to their sons and grandsons. Lack of experience may lead to disaster a naturally able but youthful heir, too suddenly burdened with the responsibilities of a business. On the other hand, men of limited ability may inherit fortunes and preserve them by caution, without much energy or ability. Often they retain the investment while delegating the management to more capable hands. It is not always true, even in America, that “it is but three generations from shirt-sleeves to shirt-sleeves,” altho many fortunes slip away from the sons of rich fathers. In general, success in retaining either the control or the active management of a business is an evidence of considerable ability. By loss of fortune unwisely risked, through unforeseen changes in methods, and after manifold blunders, the less capable drop out. Thus, by the ceaseless working of competition, the higher places are taken by those fairly capable of filling them, and the efficiency of the management of business as a whole is maintained or increased.
§ 4. Division of labor in management. The management of industry does not usually show itself in entirely simple forms. The directing power in an establishment is not always exercised by one person, but usually by a number of persons. When there is a single owner, he most often is the manager. (See Chapter 26.) There is a virtue in this union of financial responsibility with practical control that favors its survival despite various limitations. But men are constantly failing in health, advancing in years, or becoming unfitted to meet new conditions after acquiring fixed habits of business. Partnerships often are formed by an older man taking into the business a younger man who might assume duties of active management. Yet the frequent difficulty of partnerships is an old story. “We went into partnership. I supplied the money and he supplied the experience. When we quit he had the money and I had the experience.”
Some minor functions of direction must be given to foremen when there are even a few employees; in larger establishments the men are constantly being tested and promoted to higher positions, becoming partners, or, in a corporation, officials. The “indoor man” and the “outdoor man” are clearly marked types. Many a man succeeds admirably in minor tasks of direction, but has his limitations whether due to natural endowment or to defects of education. A man may have just the qualities fitting him to manage a small gang of men whom he can see, know, and direct personally, but be unable to succeed where some power of imagination and some ability at constructive planning is required. A good departmental head may be a poor general manager.
§ 5. A large commercial policy. The highest function of the management, that which properly is performed by the chief of the organization, is to form the general commercial policy of the enterprise. Every active investment is made in some generally predetermined line—it is merchandise, agriculture, manufacture, transportation, etc., and more specifically is wholesale stationery, general farming, iron making, teaming, etc. From the moment the general investment is made the management begins to exercise the power delegated by the enterpriser, investing and reinvesting, shaping and reshaping the business in accordance with a continuous policy. In a degree varying with the kind and size of the business, demand must be anticipated. The trend of changing fashion, in engineering as well as in dress, the shifting of demand for products, must be foreseen and prepared for not too rashly or too cautiously. The process in every kind of undertaking, that of buying and selling, as well as that of manufacturing, requires time. Materials and labor are to be embarked in directions from which they can not be recalled. The widening or narrowing of the scope of the enterprise (as to variety of goods, extent of the market sought, etc.) and the enlargement or reduction of the size of the plant, are decisions wisely made only by a mind with a large business outlook. The larger the investment and the more complex and distant the factors, the greater is the difference of loss or of gain made by the manager’s judgment. The man who has the ability to do this exceptionally well in the largest business merits the title of a “captain of industry.” He is not a mere employee of investors, but a prominent personality, whom investors follow, eager to assume the financial risk under such leadership.1
A special type of manager is the promoter, who makes a plan of enterprise and tries to interest men of capital to invest in it actively. The promotion may be either of a new enterprise of a competitive nature, or of a combination to create a monopoly out of existing enterprises. The latter is the case of promotion most frequently spoken of, and it may be discussed with the trust problem. The promoter as such is a manager in the initial stage of the enterprise only. He is the moving spirit who offers his services to the investors, who are to perform the enterprise function.
§ 6. Obtaining of capital. The conduct of any business may be thought of as consisting of three parts, or processes: (1) buying, (2) alteration (i.e., recombination, elaboration, change in form, place, and time), (3) selling. These are continuous until the last sale is made and the whole business is ended. Buying and selling make up nearly all of mercantile business, alteration being subordinate; whereas alteration is the most striking feature of manufacturing, in which buying and selling appear (often mistakenly) to be quite unimportant.
Almost every business to-day requires from time to time additions of capital, temporary or permanent. Frequent use must be made of credit. The confidence and support of lenders, whether banks, trust companies, individual shareholders, or investors in bonds, must be secured by the management. Good judgment of the money market often is as vital as judgment of the market for the particular product. In some of the largest corporate enterprises this quality becomes the most essential, so that financial “influence,” consisting of personal or official relations with large financial institutions, comes to outweigh in importance most other qualities of management. This is in part the explanation both of the growth and of the evil of “interlocking directorates.” A similar power to get special privileges and opportunities from national, state, and city legislatures, in the form of favoring tariffs or of public franchises, is important for the success of some business enterprises, and this often fosters an evil conspiracy between bad politics and big business.
§ 7. Profit-seeking borrowers and the rate of interest. The enterpriser (and his agent, the manager) is essentially a profit-seeking (so-called productive) borrower. He does not borrow in order to enjoy more in the present in exchange for the future. He borrows to earn more in the present, to spend when he pleases, which may or may not be now. The money which he borrows to invest in business he uses to get better machinery or a larger stock, with which to secure a better or a larger product. The product finally being sold at a profit, the enterpriser is at a point where he can spend without encroaching upon his capital. The consumer of the product pays (or is expected to pay) the interest included in the price, and the final consumer’s payment for enjoyment must be deemed the logical source of the money interest. The business loan is made in view of the rate of interest, of the market-price of the goods in which the loan will be reinvested, and of the probable chances for earning profits in the business.
Evidently the price of these goods, to control which is the real object of the loan, is a general market-price reflection of their earning power. It is merely the sum of the expected prices they will yield, capitalized at the prevailing rate of time-premium. But earning power in whose hands? Not in everybody’s, for the price of the factors can be recovered in the price of the product only when they are applied to certain uses. Whoever buys anything to use and sell again, is venturing his judgment that he can make at least as much in the future as the market-price reflects, and possibly more. The borrower expects either to make these particular goods earn incomes larger than those on the basis of which they have been capitalized, or to transfer them to an economy where goods are capitalized at a higher rate than he is paying. The income yielded by these goods, if the borrower’s expectation is fulfilled, is but the difference between present and future prices that has been wrapped up in their capitalization. As time elapses and the incomes emerge in wisely chosen investments, the borrower has a surplus large enough to pay the contract interest. It appears, therefore, that the motive of the borrower is to get control of future incomes, at prices that already involve, in their capitalization, a discount of the future uses, as he sees them, somewhat greater than the interest he contracts to pay.
§ 8. Buying materials and labor. The large classes of goods which are to be bought are equipment, materials, and labor. In the main the prices of these things are determined by impersonal forces and can be only slightly modified by a particular buyer. This is especially true in the case of many staple goods. The manager can but look upon the price of these materials as fixed, and seek to combine them as economically as possible into other products. But there are many special patterns and qualities which have no true market-price. By close attention, good judgment, skilful bargaining, one man may be able to buy slightly cheaper than his competitors, and thus have an advantage over them at the outset. When he does this, it is usually by searching out a better market in which to buy, buying at a better time, and judging better than his competitors the quality of the goods.
Failure to have merchandise in stock when called for, and every needed material in stock to fill orders in manufacture, is an occasion of great loss. On the other hand, keeping more than is needed is a useless cost. The ability to buy cheap depends largely on being able to use a large quantity, sparing the seller in this way certain usual costs, and reducing the costs of transportation by economies in large shipments. But buying more than can be used within a short time causes costs for storing, insuring, etc., loss by deterioration, and loss of interest on the investment. Finding the golden mean—just enough and not too much—is one of the arts of business management, and requires a good organization of the purchasing department, and constant watchfulness both in mercantile and in manufacturing business.
Not the least important factor to be bought is labor of every grade. The more successful business men are not found usually paying less than their competitors for the various grades of workers. Success is due rather to utilizing the services so as to make them more effective. The chief executive of a large business must have a knowledge of men, ability to judge of human nature, to select his subordinates, and to animate them with his own purposes and plans. Andrew Carnegie has said that an appropriate epitaph for himself would be, “He was a man who knew how to surround himself with men abler than he was himself.” This seems too modest; but in a sense it is not, because he claims for himself, and justly, the highest of all industrial qualities. A great administrator in political or industrial affairs can dispense with everything else rather than with this, the supreme, quality of the great executive.
§ 9. Various policies to upbuild the personnel. Different policies for developing the personnel of an organization are followed in different enterprises. In some there is “inbreeding,” always promoting from those in the establishment; in others this policy is followed in the case of all minor places, but higher positions are filled by getting “new blood” from outside; in others, the best man is chosen wherever he may be found. There are advantages in each plan and corresponding disadvantages. In general a small organization needs to look outside for new blood, and a large organization can more safely fill its higher positions from its own staff.
Favoritism in appointments very quickly causes the degeneration of the management of any organization. The inferiority of public industry must be largely attributed to political favoritism, involving the spoils system with its usual accompaniment, insecurity of tenure. Every government, national, state, city, and county, has a good many business matters to attend to. In Germany, where the municipal governments have been such models of efficiency, the policy in engaging managerial ability is much like that of good corporate business in America. The mayor is a professional business manager, who prepares for the work as he would for medicine or for engineering. A city employs a mayor who has had experience and has shown success in the administration of a smaller city in any part of the empire. A beginning has been made in America in calling men from other states, to serve as municipal experts or to be heads of some state enterprises, commissions, and institutions (such as public school system, state university, prisons, philanthropies, etc.), and this use of the merit system is extending in the national service of health, forestry, irrigation, etc. This policy must develop if the public service is to become efficient.
Private business is not immune to the disease of favoritism, which in some of the railroads and of the industrial corporations is a serious hindrance to efficient operation. It is said that in some parts of the country getting even a minor position on a railroad depends upon having a “pull” with an official; directors provide their poor relations jobs as brakemen and conductors. The efficiency of American railroads in general, however, is doubtless due in large part to the wide open market for talent in management. A good shop foreman or a good master mechanic in any part of the country may hope to get a better position either on that road or on another. And to make a success as a division-superintendent or as president on a small road is to become a possible candidate for a larger superintendency, or for a vice-presidency or for the presidency of one of the larger systems.
§ 10. Management of technical processes. The factors bought—equipment, materials and labor—are to be skilfully and economically combined to secure a product worth more than it cost. Indeed, the very buying of them in certain quantities and of certain qualities implies and requires a decision more or less exact, as to how they will be used. For the performance of this task of combining the factors the management must have, somewhere in the personnel, adequate technical knowledge of methods, processes, and materials, and experience in the art of applying the knowledge. In small undertakings, the owner-manager must personally embody these qualities, but in more complex organizations the chief executive may do without all but the broadest knowledge and ability to judge of the results of different processes, and to compare different plans. The technical knowledge of details must be supplied by numerous specialists, working under his direction—engineers, draftsmen, pattern-makers, chemists, mechanics, efficiency-experts, cost-accountants, etc.
§ 11. Management of men. The management must, with whatever aid it can get, choose the general processes to be used, the kind of machinery, the order and arrangement of it, the kinds of material, etc., and the various technical processes, chemical and mechanical, by which these are to be manipulated. Not less important, the management must choose and direct the corps of workers. Workmen must be selected with a due degree of skill, but not of a grade of skill, and therefore of wage, higher than is needed for the task. In a small business a manager’s tact in handling men is one of the most important qualities, and, as the organization grows, foremen with managing tact must be hired. In one, it is a genial manner that wins the affection of the men; a sense of humor and ability to turn a joke smooths many a difficulty and is said to have obviated many a strike. In another, a dignified but sympathetic attitude toward the men is equally effective. Not infrequently after a new superintendent, experienced and capable in mechanical matters, has taken charge of a large shop, the use of materials increases, the output falls off, and a strike follows. The explanation in such cases usually is that the new manager mistakes a smooth working, efficient organization for a slow moving one. It does not rattle and creak as he thinks it ought, and he begins to prod and irritate the men. The reverse may happen, when a new manager coming into a difficult situation replaces discord with harmony, increases wages per man but reduces greatly the cost per piece, and then has a continual struggle to convince his superiors in authority that he is not making it too easy for the men at the expense of the company. Of late it has been more and more clearly recognized that emphasis had been laid too exclusively upon the manipulation of machinery and material as a means of attaining efficiency in production. The rapid growth of large industry under corporations, separating the men from those in authority, has helped to bring this about. It is now seen that the management of the human material is just as much a part of technical efficiency as is engineering science or skill in the technical arts.
§ 12. The right proportioning of the factors. The right proportioning and skilful substitution of the factors is a delicate technical task for the management. The enterpriser must constantly study the question whether the application of another unit of any one factor at the price will, following the principle of proportionality, add to value of the product as much or more than the cost. This calculation is made for every one of the minor factors entering into the business, and for the business as a whole. The proper proportion varies at different prices, or costs. If wages rise, “it pays” to get machinery; if wages fall, it pays to let some of the machinery deteriorate and to do more by hand-labor. Likewise there is constant substitution of the various materials. The right proportions change constantly with inventions. A model factory is so proportioned that the buildings hold the right number of machines, with the right amount of space for the workmen, and the right amount of power. If there is more of a single factor than the ideal proportion, it is an unnecessary cost. Even the model factory begins to be out of date almost as soon as the walls are dry, and the method now is to build as nearly as possible on the unit system, so that new parts may be added without the loss of harmony and proportion.
§ 13. Adjustment of production to changing conditions. In the adjustment of processes to changing market conditions, many opportunities for business judgment are presented.2 The agents employed in any industry range from the more valuable down to the less valuable grades in a more or less regular series. As the place of agents on the scale of efficiency is constantly shifting, the various agents represent all grades. One depreciates, possibly is restored later and takes a high place, and again depreciates, until finally it is thrown out of use. One loom embodies the latest improvements and corresponds to the most fertile field; another can still be made to yield a little income; the use of a third results in certain loss. A great mass of unused agents lie just below the margin of utilization in every industry. Some of these are permanently abandoned; some will be taken back into use when business conditions improve. When the iron industry is dull, many forges are out of blast; but when iron is again in demand, there is a gradual taking up of the abandoned forges, factories, and machines as they are brought within the margin of profitable utilization. Many agents not actually earning an income, may do so through a change in business conditions. Great quantities of the poorer grades of wealth, even of those things that are relatively fixed in quantity, lie unused. Great areas on the edge of civilization still await the pioneer, the prospector, and the miner.
Here is a source of wealth and a field for enterprise, to take these unused things or things imperfectly used, and convert them into effective agents. A rise in the value of any agent at once causes an attempt to duplicate it or to find a substitute for it; this attempt, if successful, puts a check upon, or sets a limit to, the rise. In this search for new devices the man who can see most quickly and clearly has a key to wealth, and he is helping to meet the wants of his fellows in society. Some inventions suddenly increase the efficiency of some grades of goods to such a degree that less efficient ones are thrown out of use, and the margin of utilization is moved to a higher plane than it was on before. Improved types of machinery in the progressive establishments displace the older, less efficient types, which, therefore, more or less completely lose their earning power long before they are physically worn out. The wish of the individual is to raise the efficiency of his own establishment, but in doing that he affects the agents owned and controlled by others. Inventions and improvements gradually become common property, and increase the free goods and free uses not bearing rent and open to every one. One who improves the quality of a machine or the economy of a process may thus unintentionally injure some of the owners of other agents, but the more lasting effect is to increase the efficiency of all agents on the margin of utilization.
[* ]Division of labor and specialization in management may be by some such plan as is here graphically shown. The foreman may receive directions regarding the machines and their operation from an engineer, regarding special chemical processes from an industrial chemist, and regarding other matters from the superintendent of production. A modification of this plan is shown below in fig. 40.
[1 ]Among the men receiving salaries of $100,000 a year or more in the United States in 1914 were the following: Pope Yeatman, expert mining engineer for the Guggenheims; Theodore P. Shonts, civil engineer, president of the Interborough Metropolitan Co., in control of the great rapid transit system of New York City; Theodore N. Vail, president of American Telephone and Telegraph Co. (the Bell telephone); Lewis E. Pierson, banker, president of the Irving Exchange National Bank, New York; Samuel Insull, president of the Commonwealth Edison Company, which controls nearly the whole electric system in Chicago; William M. Wood, president of the American Woolen Company, owning forty mills; and David W. Griffith, manager of the Mutual Film Corporation, of Los Angeles, manufacturers of moving pictures. See articles on $100,000 salaries, in McClure’s, April to October, 1914, by E. M. Woolley.
[* ]This is an attempt in large enterprises to unite the benefits of specialization with directness and unity of responsibility. The president is responsible for the larger policies, and to him are responsible directly such officials as treasurer, chief salesman, chief engineer, and factory manager. By the work of committees and conferences the various functions and departments are brought into coöperation as far as is necessary and practicable, and the eye of the specialist is on every part and process of the business.
[2 ]See, for example, ch. 7, sec. 6; ch. 9, sec. 11-13; ch. 10, sec. 8-9; ch. 11, sec. 11; ch. 12, sec. 7-14; ch. 13, sec. 5, 7; and Part VI passim. The opportunities are so great that some have been inclined to exaggerate their importance, and to see in this meeting of dynamic conditions the only opportunities for profit.