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 COÍRDINATORS.--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.)