Chapter 8 EXCHANGING THE PRODUCTS OF INDUSTRY

74. RELATION OF THE DIVISION OF LABOR TO EXCHANGE.-In the self- sufficing stage that existed in industry a few hundred years ago, there was generally little necessity for the exchange of products. Each family produced most of the commodities which it needed, and depended relatively little upon the products of persons outside the family circle.

But the complex division of labor which developed out of the Industrial Revolution has made the exchange of products increasingly important. To-day the typical workman concentrates upon one particular kind of work, and is content to exchange a share of his earnings for the numerous goods and services which he cannot supply for himself. Exchange thus increases the total output of the community or nation by permitting individuals to specialize in those commodities which they can produce most effectively.

75. RELATION OF TRANSPORTATION AND COMMUNICATION TO EXCHANGE.- Exchange is largely dependent upon transportation and communication. In the United States, for example, not only do the individuals of a particular community specialize in various types of work, but the different sections of the country are devoted to the production of those commodities for which they are best suited. Thus it is largely true that New England is best suited to manufacturing, the South to the growing of cotton, and certain parts of the West to the production of lumber and foodstuffs. The suitability of a region to a particular class of products is due, partly to location, partly to the nature of the soil and the climate, and partly to the inclination and training of the people. But whatever its causes, this territorial division of labor could not be carried out without an efficient system of transportation and communication. Communication by mail, telephone, and telegraph is necessary to allow producers and consumers in different parts of the country to keep in touch with one another. Transportation by land and water is necessary if the surplus products of one section are to be exchanged for the surplus products of other sections.

76. TYPES OF CO?RDINATORS.-Those who perform the work of co?rdination in industry are commonly referred to indiscriminately as business men, middlemen, or entrepreneurs. [Footnote: the term "entrepreneur" is awkward and little known, but no more satisfactory term is available.] The meaning of these three terms is distinguished with difficulty, but to avoid confusion later on the essential character of each should be pointed out here. The term business man is very wide, and is commonly inclusive of all who actively engage in any sort of business. The primary function of the middleman is to act as a connecting link between various industrial enterprises. The entrepreneur, on the other hand, is primarily an individual who co?rdinates land, labor, and capital with the intention of initiating and conducting a business enterprise. In so far as he acts as a connecting link between other industrial agents, the entrepreneur is a middleman, but the middleman is usually thought of as an individual who connects up existing businesses, rather than initiating a new enterprise. To the functions of the entrepreneur we shall return in the next chapter; here it is the middleman proper who is our chief concern.

77. IMPORTANCE OF THE MIDDLEMAN.-The chief stages of shoe manufacture may serve to illustrate the great importance of the middleman in exchange. The middleman, anticipating a demand for beef and hides, connects the cattle grower with the live-stock market. Still later it is a middleman who offers raw hides to the tanner, and who sees that the wholesale leather merchant comes into business contact with the tanner. The banker or broker who connects the entrepreneur with the money with which to set up a shoe factory may be called a middleman, as may the individual who aids the entrepreneur in getting the required amounts of land and labor with which to start manufacturing. When, under the direction of the entrepreneur, the shoe has been manufactured, it is often a middleman who connects the shoe wholesaler with the finished product. The jobber who buys large quantities of shoes from the wholesaler and sells them to the retailer in small lots is a middleman. The advertising man whose description and pictorial representation of the shoe causes the consumer to buy it of the retailer is also a middleman.

78. NOT ALL MIDDLEMEN ARE SOCIALLY NECESSARY.-By co?rdinating the work of these various individuals, many of whom are themselves middlemen, the middlemen whom we have been describing allow the community to secure the full benefit of the division of labor and of exchange. Where there exist just enough middlemen to co?rdinate with maximum efficiency the various industrial agents of a community, the community gains. When, on the other hand, there are more middlemen at work than are really needed to perform the work of industrial co?rdination, the community loses. This loss is a double one: first, the working energy of the superfluous middlemen is wasted, or at least is applied uneconomically; second, middlemen are paid, directly or indirectly, out of the product which they handle, so that the handling of a commodity by an unnecessarily large number of middlemen means higher prices for the ultimate consumers of that commodity. [Footnote: The existence of superfluous middlemen constitutes a grave problem, to which more and more attention is being given. Various aspects of this problem are discussed in Chapters XII and XXV.]

79. BARTER.-We have seen what the middleman does; it remains to point out how, or by means of what mechanism, he performs his functions. When savages, and civilized peoples living under primitive conditions, wish to exchange their surplus goods, they generally resort to barter, i.e., they exchange one commodity directly for another. Where the division of labor has been so little developed that the goods to be exchanged are relatively few, this may work very well, but in modern industry barter would be inexpedient, if not impossible. The farmer who had a surplus of cattle and desired a piano might have great difficulty in finding a man who had a surplus piano and who also desired cattle. Even though the farmer liked the piano in question, and even though the owner of the piano were pleased with the farmer's cattle, it might be impossible to measure the value of the piano in units of cattle.

80. NATURE AND FUNCTION OF MONEY.-To facilitate exchange civilized peoples make an extensive use of money. Money may be defined as anything that passes freely from hand to hand as a medium of exchange. [Footnote: The terms "money" and "capital" are often used interchangeably. Strictly speaking, however, money is a form of capital. Moreover, it is only one form of capital] In modern times gold, silver, nickel, and copper coins have been the most familiar forms, though paper currency is also an important form of money. There is nothing mysterious about money: it is simply a means of facilitating exchange by saving time and by guaranteeing accuracy in measuring the relative values of commodities.

Let us see how money actually aids in the exchange, say, of cattle and pianos. The farmer disposes of his cattle to a middleman, receiving in return money, the authenticity of which is guaranteed by the government's stamp upon its face. There is no difficulty in making change, for money can be so minutely divided as to measure the value of an article rather exactly. The farmer does not fear that he could not use the money received for the cattle, for money is generally accepted in exchange for any commodity. The farmer now offers the money to the piano-owner, who is probably a middleman. Again the fact that money is finely divisible allows an accurate money measure of the value of the piano. The owner of the piano, if he is satisfied with the amount of money offered, does not hesitate to accept the farmer's money, since he, too, realizes that he can use the money to purchase the things that he in turn desires.

81. VALUE AND PRICE.-We have used the term "value" several times; as part of our preparation for the study of the great problem of industrial reform, we must understand precisely what is meant by the term.

Suppose, for the sake of clearness, that we speak of a market as a definite place where goods are bought and sold. Individuals take or send their surplus products to the market for sale; individuals desiring to buy commodities likewise resort to the market. In the market commodities are said to have value, that is to say, they have power in exchange. The power of a commodity in exchange is measured in money, and the amount of money for which a commodity will exchange is called its price. Price is thus a measure, in terms of money, of the value of a commodity.

The value of a commodity in the market is dependent, partly upon its utility, or want-satisfying power; and partly upon its scarcity. In other words, the value of a commodity depends partly upon the intensity with which it is desired by persons able and willing to purchase it, and partly upon its available supply. Price is set as the result of the interaction of the forces of supply and demand, this interaction commonly taking the form of a bargaining process between prospective sellers and prospective buyers.

QUESTIONS ON THE TEXT

1. Explain clearly the relation between the division of labor and exchange.

2. To what extent is exchange dependent upon transportation and communication?

3. Name three types of co?rdinators, and distinguish between them.

4. Illustrate the functions of the middleman with reference to the shoe industry.

5. Where there exist in a community more middlemen than are really needed, what double loss results?

6. What is barter?

7. Why is barter not extensively used in modern industry?

8. Define money.

9. What is the primary function of money?

10. Give an illustration of the service performed by money.

11. Define value. Distinguish between value and price.

12. Upon what two factors is value dependent?

13. How is price set or determined?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter viii.

Or all of the following:

2. Adams, Description of Industry, chapter viii.

3. Carver, Elementary Economics, chapters xix, xx, xxi, xxii, and xxiv.

4. Hayward, Money, What It Is and How to Use It, chapter viii.

5. Smith, Wealth of Nations, Book 1, chapters iii and iv.

QUESTIONS ON THE REQUIRED READINGS

1. Name some commodities which at one time or another have been used as money. (Carver, pages 215-216.)

2. Why were precious metals first coined? (Smith, chapter iv.)

3. What is meant by the phrase "Time is money"? (Carver, page 183.)

4. What is the function of the bank check? (Hayward, pages 58-60.)

5. Explain the meaning of scarcity. (Carver, page 203.)

6. What are the characteristics of a modern market? (Adams, pages 139- 148.)

7. What is meant by the "higgling of the market"? (Adams, page 139.)

8. What is the "first law of the market"? (Carver, page 201.)

9. What are the four industrial agencies on which the organization and practice of the modern market depend? (Adams, pages 148-152.)

10. What is meant by the "widening of the market"? (Carver, page 171.)

11. Explain the statement that "the division of labor is limited by the extent of the market." (Smith, chapter iii.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. In the production of what commodities do the people of your section tend to specialize? To what extent is this specialization due to the nature of the soil and climate? To geographical location? To the training of the people?

2. What becomes of the surplus products of your section? Trace these products as nearly as possible to the ultimate consumer.

3. List the articles of food which appear on your dinner table and attempt to discover the source of each.

4. To what extent does the exchange of products in your section take place by means of canals, inland waterways, ocean-going vessels, motor truck, horse teams, railroads?

5. To what extent are the telephone and telegraph used to facilitate exchange in your section?

6. Visit a near-by market and study the operations there, with reference to the facts discussed in this chapter.

7. List and classify the middlemen of your community.

II

8. Internal trade and transportation in the United States a century ago. (Bogart and Thompson, Readings in the Economic History of the United States, pages 240-251.)

9. Transportation and communication in the United States since 1860. (Bogart, Economic History of the United States, chapters xxiv and xxv.)

10. Early forms of money. (Bullock, Selected Readings in Economics, pages 387-399.)

11. Forms of money at the present time. (Adams, Description of Industry, chapter x.)

12. Why coinage is necessary. (Bullock, Selected Readings in Economics, pages 399-400.)

13. The minting of coins. (Lessons in Community and National Life, Series C, pages 177-185.)

14. Paper money. (Lessons in Community and National Life, Series C, pages 185-192.)

15. Functions of money. (Adams, Description of Industry, chapter x.)

16. The commercial bank. (Lessons in Community and National Life, Series A, pages 187-192.)

17. An English fair in the eighteenth century. (Bullock, Selected Readings in Economics, pages 325-333.)

18. The development of business organization. (Marshall and Lyon, Our Economic Organization, chapters ix and x.)