Peter Sinclair

Chapter 7 – Small-scale production

This chapter presents an analysis of small-scale production. The overwhelming majority of business units are extremely small; many are one-man businesses and many more employ only a handful of workers. Over a wide span of industry, the typical situation is one of what is described as oligopoly, that is, domination of the market by a small group of sellers. In spite of this concentration in large units, the fact remains that there are small firms in most trades and that in some trades it is the large firm that is rare. The process of growth takes time. This is true partly because of imperfections in competition that give shelter to an existing concern and allow it to carry on in spite of comparative inefficiency and partly because a large firm cannot grow without a great deal of effort, involving planned additions to its resources and their reorganization in a new administrative framework. Thus, many small firms are able to survive for a time because the bigger firms suffer from indigestion if they try to gobble them up too quickly. It takes time for big firms to expand that helps the small firms in another way. The managerial obstacle to growth is, in the last resort, a personal one.

Localization of industry

This chapter discusses the localization of industry. Geographical specialization can be looked at from two different angles. The influence of labor costs on the location of industry within a country is generally limited. It might seem unlikely, unless the country is large, that there should be wide differences in rates of pay or in labor efficiency between different areas. First, there are the natural advantages of the area. These include its amenities—its possession of suitable sites and a suitable climate. The natural advantages of an area include also its access to sources of power and to raw materials and markets; these determine the savings in power and transport costs that it can offer. The natural advantages of an area in any given industry are generally reinforced by acquired advantages. Transport facilities are provided or improved. Roads, railways, docks, and harbors are built. Commercial services of all kinds such as banking, warehousing, accounting, and so on become available. Labor becomes familiar with the technique of the industry and a high standard of workmanship is developed.

Production, consumption and trade

This chapter discusses production, consumption, and trade. Economic theorists exclude from production all services that yield nothing tangible and they measure the growth of production by an index composed entirely of physical products like coal and steel. Nor are the Soviet economists without some claim to orthodoxy because they derive their practice from the usage of the classical economists including Karl Marx and Adam Smith. Production, to sum up, is simply the creation of utility, that is, of the power to satisfy human wants. Consumption is the using up of utility when one comes to satisfy ones wants. When one produces goods, one builds up a store of wealth upon which one can draw. But, one does not produce or consume goods at all. Production is organized in units that vary widely in size and complexity. The simplest type of unit is the establishment, which is the work-place of a single worker or a group of workers under common direction.

The national income11Readers may find this a difficult chapter to which they should return after completing Part V.

This chapter provides an overview of the national income. There are three groups of economic agent who contribute to expenditure in a closed economy. There are households, producers, and the government. The supply of money, let us suppose, is a unique, readily definable variable controlled by the government and pre-set at a particular value in money terms. The demand for money varies positively with the price level and with income. But the demand for money varies negatively with the rates of interest available on alternative assets. The higher the yield available on building society deposits or government bonds, for instance, the stronger the incentive would be to cut down on balances of relatively unremunerative money. The demand for money and supply of money are always equal as a result of sufficient flexibility of interest rates or other variables; and, lastly, there is only one kind of asset in addition to money with a unique rate of interest upon it. In the Keynesian view, aggregate supply is rather elastic and typically a good deal more elastic to the price level than aggregate demand unaccompanied by a sufficient rise in labor productivity. Hence, the Keynesian policy prescriptions fighting inflation with incomes policy, constraining the growth of money wage rates, sustaining the growth of output by expansionary policies of demand management.

The mechanism of international adjustment

This chapter provides an overview on the mechanism of international adjustment. The balance of payments may become unfavorable because of pressures on it from inside or outside the country. It drives up the price of imported goods, including foodstuffs and raw materials and spreads to domestic costs of production as money wages chase the cost of living upwards, so that both material and wage costs are inflated. Just as inflation spreads from one part of a country to another, so it can very easily spread from one country to another. Pressure on the exchanges may arise for one of three reasons: it may be due to a large volume of purchases of imports or sales of exports, there may be a change in the terms on which imports and exports are exchanged and therefore, in the average price of imports in relation to the average price of exports and even when current transactions are stable in value, there may be a transfer of capital across the exchanges because of heavier borrowing from, or lending to, foreigners.

The balance of payments

This chapter provides an overview on the balance of payments. Each country has its own money, which is not freely accepted abroad, but must be changed into foreign money at a rate that may be either fixed or variable. The rate of exchange, whether fixed or variable, is a price; and like any other price, it must be such as to balance supply and demand. If the balance of payments is tipped against a country, there will be increased pressure to buy foreign exchange and if the rate of exchange is free to vary, the price of foreign moneys will rise, that is, the currency of the country will depreciate. If the balance of payments is favourable to the country, there will be increased pressure to sell foreign exchange, and this pressure will tend to raise the value of the countrys currency. There are three balances in common use that merit explanation: the balance of trade, the balance of payments on current account, and the balance on current and long-term capital account. When there is a deficit in the balance of payments two problems arise. The first is to settle the deficit and the second is to get rid of it. If the process of adjustment to an external deficit is hard and prolonged, countries will have more need of reserves than when they are confident that they will be able to get rid of a deficit quickly.

Interest and profit

This chapter provides an overview on interest and profit. Interest is the price paid for the hire of loan-capital; more briefly, it is the price of a loan. The immediate reason why interest is paid is that loan-capital is scarce. The amount of money that people are willing to lend every year falls far short of the amount that would be borrowed if no interest were charged. The only possible reason for the scarcity of loan-capital is the scarcity of savings. Savings depend upon the following reasons: the rate of interest, social institutions, income, wealth and thrift. The government has also, on occasion, made an important contribution to the savings of the country. It may do so, for example, by accumulating a budget surplus, rates of tax being so fixed as to leave an excess of revenue over current outgoings. Included in government savings will be any expenditure out of revenue that adds to, or improves, the capital stock of the country and any payments that will be treated by the recipients as capital. The rate of profit, therefore, is intimately connected with what one is called development. A business contributes to development by pioneering new methods and new products. Development, therefore, is one of the chief forces maintaining the rate of profit and is itself one of the chief sources out of which profit is paid.

What economics is about

This chapter provides an overview of what economics is about. Economics is not a subject that can be learned, like mathematics, as a series of propositions that follow from one another with the neatness of a Chinese box. It is much more like medicine, compounded of imperfect knowledge, worldly wisdom, obscure jargon, and scientific analysis. An economist may be confident, for example, that he knows what is causing inflation and yet may feel that this does not entitle him to say what, if anything, should be done to stop it. Some economists go so far as to argue that policy is not their affair and that they should content themselves with outlining the probable consequences of particular policies without coming down in favor of any of them. Economics is of value in allowing to judge and frame policies in the light of full knowledge of how the economic system works.

The growth of business units

This chapter provides an overview of the growth of business units. A firm may seek to expand from two fairly distinct motives. It may be attracted by the prospect of lower costs of production or by the prospect of higher prices. The monopoly motive is generally most prominent when a firm grows by combination, while the economy motive is generally the dominant one in growth by extension. Monopoly gains are always an incentive to expansion; savings in costs can often be made simultaneously, so that the first motive is reinforced by the second. The first motive to expansion is the prospect of reductions in cost because of economies of scale. These economies, however, are looked at from the point of view not of growth but of size. The angle from which they are approached is not the actual processes by which firms expand, but the comparative efficiency of large and small firms. However, expansion is often arrested because the attraction of economies of scale is offset by obstacles to growth.

Supply: cost and price

This chapter provides an overview of the factors that determine the supply of a commodity. Cost controls supply in two ways. It controls the volume of output that each firm finds it profitable to produce and it controls the number of firms that can carry on at a profit. If the cost of producing a commodity rises, other things remaining the same, the supply tends to contract for two reasons—first, because each firm will cease to manufacture units of output that no longer pay their way and, second, because some firms will find it necessary, or advantageous, to abandon production of the commodity altogether. The marginal cost controls the supply of the commodity. It equals the change in the total costs of production when output is changed by a tiny amount, divided by that change in output. The marginal cost of a commodity is defined when the marginal costs of producing it are equal across all firms doing so. The behavior of prices and costs differs from one market to another and what is true in one market is not true in another.