The Company between the preindustrial era and the First Industrial Revolution (2014)Apunte Inglés
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Part II: the Company between the preindustrial era and the
First Industrial Revolution
4 Preindustrial manufacturing
The factory system of the XVII and XIX centuries realigned the political economy of Europe, but this didn’t
begin with the Industrial Revolution. Long before British factories arose, businessmen were slowly
changing and developing new combinations of capital, labor and land.
Preindustrial Europe: general features All European countries were different but had some points in common. Primary sector represented some 80-90% of GDP. Mobility was very low as most of the population were farmers and their family cultivating the same land for generations. Urbanization was very low, only some cities (Paris, London, Naples...) were relatively big.
Those economies were not static, they varied through time. Europe’s population increased from 57M to 132M people from 1.500 to XVII century. Population growth was around 0.2% in this era and GDP growth was around 0.35%, much lower than after the IR.
Although there were some improvements in agricultural techniques the production of food increased slowly, along with the population. Purchasing power was in hand of very few, the owners of the land and industries.
Preindustrial economies were heavily susceptible to fluctuations due to the importance of agriculture. And population growth also changed much because of wars, famines, diseases… After XV century new techniques allowed some farmers to have corn surpluses, limited to areas with good weather.
From 1500 onwards demand of good began to increase, economies started to be more dynamic because of new techniques on agriculture, we can speak of a first “Agricultural Revolution”. This higher demand encouraged long-distance trade, also helped with improvement on legal contracts and financial innovation such as banknotes.
All this only happened near cities, while the peripheries remained static and vulnerable to economic collapses.
Manufacturing typologies The putting-out system It is important to differentiate between activities located in the countryside and in urban areas.
The nature of the countryside was influenced by nature itself. Peasants lived in small households with sporadic contact with the markets, but mainly self-consuming and self-producing their needs. When an extra income was needed (almost always) they dedicated time to manufactures.
The presence of this cheap, docile, flexible workingforce encouraged manufacturers to push their operations to the countryside. They did that with the putting-out system, based on a hierarchical but flexible arquitecture. There was a “master”, owner of the raw materials, who coordinated the network of cottage workers who performed phases of the production in their homes.
This system was efficient because of both it’s flexibility and it’s use of cheap labor force. This decentralized system allowed the merchant to have cheap, easy-to-maintain fixed capital. In textiles, for example, workers used and owned their hand-operated wooden looms, and they were asked to work or not depending on the demand fluctuations.
There were some hidden costs in this system such as agency and transaction costs. No control of quality and of efficiency and no incentives to improve technology. This system would have delayed or even prevented more advanced techniques associated with the factory system.
Craft production in the countryside and urban settings Craft production played a lesser role than the putting-out system. It was characterized by a high level of sophistication. It employed skilled laborers in industries with high value added. Examples of that were metal workers, cobblers, gunsmiths, tanners… These industries were located near the source of raw material and where cheap energy (wind, water, coal…) was available.
High-value-added activities were mostly located in towns and villages. They existed along the tertiary sector and represented a significant portion of society’s production and income. A master owned the “shop” and guided their workers (apprentices) through the processes of production.
In cities, the crafting system was limited to high value-added production (gold, jewelry, hats, shoes…). The master owned the fixed capital and materials and paid their workforce on a piece-wage basis. Their main customers were powerful people such as aristocracy, the king or the army.
The master and the shop were typically part of a bigger organization, the guild, a union of masters within the same sector. Guilds determined the quality and quantity of the goods produced in a city. They also controlled every aspect of the business inside the city, including promotion of apprentices to master status and prices.
Guilds were quasi enterprises that organized labor and capital. The guild provided these craft producers with some protection and stability in an economy with huge fluctuations on income.
These advantages where overshadowed by several disadvantages. Like a monopoly they maintained high prices, they discouraged innovation with control in production methodology. The factory system was a threat as it eluded guild control by moving outside city walls, where guilds couldn’t control supply neither prices. The guild system was abolished almost everywhere in Europe by the end of the XVIII century.
But we have to keep in mind that the guild system was only a fraction of the preindustrial Europe, it had a limited impact on the economy as a whole.
Compared with the putting-out system, guilds were more inclined to constraint output. Because of guilds rules they couldn’t increment units of labor to increase total production (a master only could have a determined number of apprentices (workers) and they didn’t allow more masters in the city to prevent competition. They insulated (aïllar) themselves from fluctuations on demand by producing only for the wealthiest part of the population.
“Big Business” before the Industrial Revolution Large-scale enterprises existed before the Industrial Revolution, they were called “Manufactories”. And so some scholars say that the factory system cannot be explained because of the technological shifts of the st 1 Industrial Revolution. Many of the large preindustrial plants developed complex systems of reporting and accounting to manage their production processes.
But these large preindustrial were not the rule but the exception. Moreover, the majority of the workers of the plan worked at home, instead of “in” the plant. A particular example was the woolen factory of Linz, with 26.000 workers in 1770, but only 750 in the town of Linz.
In other manufactories the concentration of workers was bigger because it was required. In shipbuilding, mining, some of the textile processes (dyeing or calico printing)… The plants/mines/dockyards were partially owned by the merchant.
There was also a symbiosis of systems of production, were big manufactories created semi-finished goods which were later sold to cottage workers (within the putting-out system) It was important that most of these preindustrial large firms enjoyed a monopolistic position. The Crown granted patents or rights of production to stimulate the production of certain types of goods. This was motivated by various reasons; strategic reasons (such as the production of ships and weapons), to limit the purchase of high value-added products from abroad (produce at home so that you don’t depend on foreign production), etc.
Summarizing, large plants and centralized production were the exception. Most often, the central organization complemented a much more diffuse putting-out system.
5 Enterprises and entrepreneurs of the First Industrial Revolution The First Industrial Revolution gave business leadership to Great Britain (GB) and launched the world’s first long-term change in population dynamics. From 1820 to 1870 GB’s population growth was 0.79 compared to Westerns Europe (WE) 0.69. Gross National Product increase was 1.26 for GB and 0.96 for WE. Later on WE economies caught up.
This Europe prosperity created a gap between them and the rest of the world. Compared with contemporary growths those increases may not seem much, but compared but the pre-industrial economies those numbers are quite impressive.
The British exception The growth of GB after the Napoleonic Wars is especially outstanding by the way it took place. The main st “wealth of the nation” was for 1 manufacturing instead of agriculture. GB rapidly expanded the macrosector of high-value added products. Labor force employed in agriculture in 1760 was 50.3% in GB, compared with 66% in WE. By 1840 GB had 25% of labor employed in primary sector, WE had around 50%.
This changed by the end of XIX century in many countries, but the peripheral Europe (Mediterranean, Scandinavian…) still had agriculture as the main source of employment.
Thanks to an unprecedented degree of openness of the world economy several countries became leading exporters in manufacturing. The beginning of the XX century 70% of total output was exported in countries like GB, Switzerland and Germany and around 60% in France. Peripheral Europe had only around 20-25% of manufactured goods being exported.
st For 1 time some European countries could specialize their production in manufacturing some goods, and were able to import other products from other countries or regions.
Structural change and the British competitive advantage The structural changes that changed European countries were rooted in transitions in industries and at the microlevel of firms In manufacturing, new technologies were especially important in GB’s core industries. Water power was being supplemented increasingly by the steam engine, a powerful example of a general-purpose st technology. For the 1 time non-animated energy could be easily transported (coal) and this reduced location costs.
In textiles technological innovations were very important, efficiency tripled between 1775 and 1800. Other sector such as iron, steel and coal had a similar behavior. Real output of those products increased steadily in the XVIII century.
Britain had a strong commercial sector and a cultural climate favorable to science, innovation, experimentation… This created a positive framework for entrepreneurs to innovate and make profits.
Patents also added an incentive for invention and innovation.
By 1851 Britain was undoubtedly the most advanced nation in the world. Great Britain had a large comparative advantage, they exported manufactures and imported raw materials and food that could be st produced cheaper elsewhere. Exports increased steadily and during the 1 half of XIX century manufactures were 90% of exports. Main products to export were textiles and metal/machinery (half of British exports).
From macro to micro: entrepreneurs and enterprises Countries with more fragmented social structures (Britain, the Netherlands, Germany…) offered the most favorable environments to entrepreneurial activities. Social values and culture also mattered; social acceptance of entrepreneurship and nationalism encouraged it. For most, entrepreneurship was a way to move upward in society status, something new in Europe at that time.
Those artisans and masters who transformed their shops into factories and enlarged their range of business from local to regional, national or international scale were the British “entrepreneurial crowd”.
New entrepreneurs were also shopkeepers and merchants. They vertically integrated their firms to control the most important phases of production, for example, a clothes shop owner who also controlled the production of clothes.
Many noblemen and landowners also found business opportunities and some of them became the pioneers on initiatives that required a large amount of initial capital (building roads or canals, for example) Moreover, Watt and others could patent their inventions and the help of investors allowed them to transform their inventions into important innovations.
The company of the First Industrial Revolution: ownership, control, and management The factory of the First Industrial Revolution was relatively small, with a few dozens employees. This small size of the factories meant that ownership and control of the company normally remained on the hands of the founders and their family, as not much capital was required.
These organizations could adapt rapidly to new systems of manufacturing. The bureaucratic structures were new, but simple. The entrepreneur was responsible for almost all the crucial company functions, from strategic decisions to day-to-day management. Even if sometimes they hired a “foremen” to organize timetables, working hours, ensure proper use of machinery… The company of the FIR: characteristics of the production process The new technologies employed generated few scale effects. In the textiles, for example, innovation clustered around single stages, without changing the whole process from raw material to finished goods.
This created bottlenecks in other stages, encouraging innovation over the long term.
There wasn’t coordination through stages, and similar factories working in the same stages clumped together in certain favorable areas, but this prevented vertical integration among them.
Those little factories couldn’t influence price levels, they operated in an environment with constant flows of information and knowledge.
The “industrial districts” had a “collective strength” where knowledge circulated freely as it was hard to maintain a technological improve in secret. Those districts could be found everywhere in Europe, and most of them emerged from manufacture activities previous to the Industrial Revolution.
Trade and Markets Changes in production forced a redefinition of the distribution and marketing functions. To manage relationships with the market it was necessary to have a network of agents to push sales beyond local markets. This created higher specialization and an increase in transaction costs and agency problems, because now family and close relatives were not enough for the scale required by the factory system.
Specialization in trade also appeared, “big” merchants acted as mediators in long-distance transactions. There existed high information asymmetries and relations with merchants could be difficult. Merchants saw producers as mere suppliers and they enjoyed a big degree of bargaining power over producers.
This situation amplified tensions between merchants and manufacturers. One outcome of this was a tendency to the vertical integration, but this needed a huge investment from the manufacturer to develop long-distance distribution networks.
Finance Artisans, merchants, nobles and engineers faced challenges when they wanted to create new firms or expand their existing ones.
They first had to find the necessary capital to finance daily activities, and they also needed a reasonable amount of capital to buy fixed assets. This was a big barrier for entrepreneurship. They tended to use personal wealth, capital of family and close friends and some local credits to finance such an investment. Local reputation also played an important role in order to get loans from banks and other individuals. Frequently entrepreneurs had activities in agriculture, industry and commerce, this was a form of risk diversification and arose because of the high uncertainty of the activities of entrepreneurs.
On a local level, small credits were very important, proximity was essential as it provided the lender information about the entrepreneur. Before the birth of modern financial institutions devoted to finance large-scale manufacturing, small banks played a very important role.