The Production of Value

I

WHAT is America’s return from its tremendous industrial operations? All manner of subordinate questions group themselves around this basic one, and most of them rouse narrow or prejudiced answers. Yet until recently no one, not even industrialists themselves, ever conducted an inquiry broad or deep enough to reveal the effects of a single large industry on national life — from the gathering of raw material, through various stages of fabrication, to final consumption and the increase of social wealth.

As editor of Mill and Factory, with the aid of a large staff I have been directing a case study of these problems on a comprehensive scale. The examination has consumed an entire year. Because of its size, variety of product, and wide manufacturing base, the General Motors Corporation was selected for this investigation; but the study has been conducted on an absolutely independent basis. Beyond allowing access to necessary information and opening its plants to inspection, General Motors made no contribution to the investigation and will get the results, like the general public, only through the published findings in Mill and Factory and the ensuing book. Neither directly nor indirectly has the corporation contributed in any other way to the success of this study. Indeed, the survey went far beyond corporate processes into the fields of agriculture, transportation, retail distribution, science and invention, mining and metallurgy, with somewhat lesser attention to finance and government. Data from more than a hundred thousand sources were investigated, collected, and compared. The conclusions are significant because they penetrate to the root of the social contributions of business to American life.

Contrary to the general impression that profit is the principal result of industrial production, the study proves that the principal and inevitable result is the creation and distribution of increased value. This is true because increased value is invariably created and distributed before profit can be recovered. Increased value is a constant; profit is a variable which may or may not occur, depending upon factors not under the control of industrial production. Increased value is often created when no profit can follow, and many functions of industry are carried through regardless of direct or immediate profit possibilities.

Since profits are not the primary and constant result of American industry under free enterprise, it is a misnomer to call our economic system a ‘profit system.’ Rather, since creation and distribution of increased value are its outstanding characteristics, our way of economic life should be called a ‘value system,’ to distinguish it from the monopolistic and semi-monopolistic plans under which foreign economies are managed.

The significance of the ‘value system’ began to emerge as we classified and identified industrial results. They fall into three major classes: physical products (such as the automobile, the electric refrigerator, or the Diesel locomotive); financial rewards (such as wages, taxes, and dividends); and social values which stem from improved use of materials or services, of which we have been able to identify thirty-five different categories. I consider these social values primary and fundamental, because they are constant rather than fluctuating, because they are inevitably produced prior to the physical or financial results, and because they endure as imperishable endowments long after goods have worn out and money has been dissipated. Even when production of the other two types declines to extremely low levels, the creation and the distribution of social values continue. It is this steady dynamic which sustains the high standards of American living and elevates them above those of other nations. From the evidence gathered, it appears that this value flow can be stopped only by excessive regulation and regimentation which harden the arteries of industry.

The social products of industry are both tangible and intangible, and of such wide variety that, for lack of comprehensive analysis and appraisal hitherto, they are not fully appreciated. Their creation follows general laws, most clearly revealed in manufacturing, which I have reduced to axiomatic form. Illustrated with case examples from our findings, these readily understood axioms form the conclusions of our long research. Their general acceptance would provide a basis for mutual understanding between many diverse groups interested in industry and its problems.

Although social products of industry possess high cash value, they are evolved and distributed without charge as a byproduct of industrial processes. If this source should be shut off, the standard of living would fall, unless equal values were provided otherwise, the only substitute source being government subsidy, resulting in greater public debt. Even under ideal administration, wrhich is never realized in practice, there exists a deadly limiting factor of government promotion of social values. Government cannot move technologically faster than the ability of its public to understand and to appreciate tangible additions.

The public can grasp completely the utility of a highway or bridge, but if government were to finance what Charles F. Kettering is doing — ’to find out why the grass is green’ —the public would have plenty to say about waste and extravagance in governmental expenditures. No doubt the inventor of the selfstarter would be trusted further than most men, yet we prefer to leave to private means a fundamental research which may result in more uses for farm products and assist in originating new types of goods as socially valuable as those helped on their way by the selfstarter. The individual takes the risk, while, if the search succeeds, society recovers the lion’s share of value.

II

Our analysis uncovers no proof of the contention that capital and labor are the only basic elements of economic life, and that continuing warfare between them is inevitable. Labor’s gains from industrial production appear permanent, while those of capital arc subject to social controls to ensure that they will be only temporary.

Economic life contains too many overlapping and complex elements to justify its compression in a strait-jacket on which capital and labor pull strings in their own interest. As we followed industrial effects down to the grass roots, we were unable to discover any enterprise which did not at some vital point rest on the individual initiative of the small operator or owner. This finding, in no wise new, indicates that what Abraham Lincoln said1 of the capitallabor division is still substantially true:

A large majority [of citizens] belong to neither class — neither work for others nor have others working for them. . . . Men — with their families, wives, sons and daughters

— work for themselves on their farms, in their houses and in their shops, taking the whole product to themselves and asking no favors of capital on the one hand, nor of hired laborers or slaves on the other. It is not forgotten that a considerable number of persons mingle their own labor with capital

— that is, they labor with their own hands and also buy or hire others to labor for them; but this is only a mixed and not a distinct class. . . . There is not, of necessity, any such thing as the free hired laborer being fixed to that condition of life. Many independent men everywhere in these States, a few years back in their lives, were hired laborers. The prudent penniless beginner in the world labors for wages awhile, saves a surplus with which to buy tools or land for himself, then labors on his own account another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system, which opens the way to all — gives hope to all and consequent energy and progress and improvement of condition to all. No men living are more worthy to be trusted than those who toil up from poverty; none less inclined to take or touch aught which they have not honestly earned. Let them beware of surrendering a political power which they already possess, and which, if surrendered, will surely be used to close the door of advancement against such as they and to fix new disabilities and burdens upon them, till all of liberty shall be lost.

Development of social values may be compared to farming. Ideas are the seed, capital the plough; factories, machinery, and raw materials represent the land, wages and taxes the certain harvest. There may or may not be profits. Many enterprises never earn profits, yet none are spared wages and taxes. When profits occur, there is no certainty that they will be repeated. In prosperity the taxgatherer taxes an extra cut without refunding in adversity. Even in good years profits are not always available for dividends, because often they are tied up in equities such as buildings and inventories, accounts receivable, and other non-liquid assets. Before profits arise, expenditures in research, product design, building construction, plant equipment, tooling, engineering, maintenance, workers’ education, safety, raw materials, management organization, advertising, sales organization, and scores of other important primary functions of industry have distributed capital so widely that the profits which remain are merely an adequate insurance of the future continuation of the enterprise and an incentive to increased production. When no profits occur, the profits of previous years must be used to perpetuate production of increased values.

In spite of patent laws and technical secrets, advance steps in utilizing goods and services cannot be successfully monopolized. Ingenuity and imitation provide effective substitutes. When Oldsmobile built the first practical automobile, that success released far more than endless Oldsmobiles; it also introduced many other types of vehicles built by scores of competitors. Competition ensures the progressive refinement and continuous creation of value which are to-day the principal characteristics of industry. The values so created are absorbed by labor, consumers, government, science, agriculture, manufacturing, and trade, even though those affected may be not fully aware of their share.

For example, take one category in agriculture — cotton farmers. Every automobile contains fifty-five pounds of cotton, and enough additional cotton has been used during manufacture to bring the total cotton consumption per car to nearly one hundred pounds. General Motors alone supports indirectly more than 150,000 cotton-producing families. By purchasing 1,000,000 tons of coal a year, this single industry furnishes steady work to nearly 1200 coal miners, and in addition the electric power and light it buys come from coal mined by nearly 900 more. These miners are slightly outnumbered by electrical workers who maintain General Motors service for the public utility companies providing the corporation with power and light. In all, 4300 workers in coal and electricity are maintained indirectly by General Motors’ purchases. This one corporate treasury is drawn upon directly or indirectly by more than 6,000,000 persons, between one sixth and one seventh of the nation’s gainfully employed population.

Whether those workers who supply General Motors indirectly with essential goods and services fare as well in real wages as those employed by this corporation is an open question. No purchaser can control the wage schedules of a supplier, and even the influence of example is lost when the ultimate source is far removed, as in the case of farm products. It is clearly impossible, for instance, for industrial production to lift the wages of cotton farmers — there are too many other depressing factors. The scale can be steadied, however, by increasing the automotive use of cotton and giving cotton raisers better transportation. Indeed, it appears that the chief social dividend which many cotton producers have received of late years consists of more motorcar for their hardearned dollars.

III

When factory workers ask, ‘What do I get out of modern production?’ the answer is comparatively easy. Industrial labor receives impressive values in addition to wages, which represent merely a financial result. What labor can buy with wages is a better measure than dollars of value received, but by no means a complete one, because many social values are remote from personal purchase.

First, modern production creates new things for workers to make. In the corporation studied, these include primary or original products such as the automobile and the two-cycle Diesel engine, and secondary or subsidiary products such as the self-starter, multi-beam headlights, automatic transmissions, the allsteel top, and other additional parts or accessories added to the automobile. These products may result from refinements of manufacturing technique, suggestions by users and by outside inventors, or development by company research. Each new device creates a demand for labor of hand and brain not only in the originating plant but also in other plants which meet the challenge, and in those supplying raw materials and machinery.

It is equally true that modern production creates new tools and machinery for workers to use. To-day General Motors uses more than 3000 different kinds of machines which did not exist before 1908, when the business was founded. These machines are social products in that they have escaped the circumstances and purposes of their origin and have traveled far, both in geography and in variety of application. As a result, a workman skilled in handling these machines has a broad market for his time through the sheer fact that their excellence has won wide acceptance.

New and highly paid special trades have been developed. Of course the reader has heard of electric welding, but he probably is unaware of the opportunity afforded skilled men through the four hundred types of repair welding offered by three thousand well-equipped automotive repair shops, to say nothing of factory welding. And few outside of industry have heard of other recently developed industrial arts — electric etching, clay sculpture, gear shaving, X-ray operating, inter-factory telautographing, and thousands of other avenues of employment developed in recent years. A single division of General Motors, devoted to silversmithing and fine body hardware, now employs 60 per cent more workers than it did at the 1929 peak, and it is interesting to note that they work on 787 different items involving hand craftsmanship.

Consider, for example, the single phase of product engineering. In General Motors this activity now comprises more than five hundred principal functions. Through these channels shop workers often begin a rise to high positions, because of their familiarity with products and methods. In typical divisions nearly every principal executive attained his position only after years of shop experience. Favoritism and nepotism defeat themselves when techniques change rapidly, while merit surges to the top. It is only where processes become static that the democratic way of advancement is ever threatened, and no sign of that is revealed in this study.

Advertising has made automobile users aware of improvements in cost and performance, but they seldom realize that automobile production creates values which flow to consumers through other channels. Carpets, wallpaper, upholstered chairs, and homebuilding materials are better and cheaper because quantity production for automotive requirements lowered costs and improved methods. Overflow of value from one industry to another, from one consuming group to another, is now so commonplace that only rare instances arouse notice. Our survey found this principle working through thousands of perfectly normal relationships.

To test the effect of big business upon small business, special studies were made of two hundred kinds of manufacturing, thirty-four branches of retail and wholesale trade, and many other types of business enterprises. It is evident that bigness in automobile manufacture tends to raise the number of small enterprises supplying the final producer with parts and materials, also to raise their standards both in quality of merchandise and in ethical procedure. Of the 15,000 firms from whom General Motors buys its principal supplies, 1147 were particularly studied. As a result of General Motors’ requirements they have developed products which are now widely distributed both to other industrial users and to household consumers.

Beyond the circle of immediate supply, we see large-scale manufacturing lifting both the number and the variety of smaller enterprises, even to the extent of becoming increasingly dependent upon the success of small business. Bus transportation, the taxicab industry, auto retailing, and trucking were developed from small beginnings, and, although some units have grown to considerable size, small units still divide the larger part of the trade. Motor trucking operations, for instance, employ 3,100,000 drivers.

Socially valuable contributions by industrial research are now so generally accepted that their importance need not be stressed here. Our study records no less than three thousand motor research activities by this one company. For our present purposes it is enough to realize that when a commercial success develops from corporate research it soon escapes into other fields, as witness the commercial production of barium, developed by the AC Spark Plug Division of General Motors, and the wide application of the cathode ray oscillograph. Here the effort to map sound in order to secure quiet motorcars has benefited the farremoved field of motion pictures. In aerodynamics, metallurgy, chemistry, microphotography, heat transfer, electronics, and chemurgy, modern production creates new values where no values existed before and transfers wastes from losses to productive uses. As a result, cornstalks and sugar-cane wastes are now valuable insulating materials, X-rays are used in standard production methods, cotton can be moulded plastically or used as a lacquer on automobiles, and corn finds a large new market as a base for anti-freeze radiator fluids.

Through industrial research both pure science and education are enriched. Colleges and universities study factory and industrial laboratory methods, and thousands of the present generation of factory workers go to school regularly within the plants for instruction which cannot well be provided elsewhere. All these values, as our study demonstrates, mature in response to an industry’s determination to insure its future. The motive is security rather than profit, and such advantages as flow from it go inevitably to society.

IV

Within one brief article it is impossible to do more than outline the direction and indicate the significance of our findings in this survey. An analogy may serve as a short cut through a jungle of facts.

A society on the move can be compared to an automobile. Those who engage in productive work are part of the car; they carry the load, while the non-producers ride. Among the latter are the aged, the children and the widows, the unemployed and their families, and non-productive government employees. These are upheld by the strong, who are driven by fundamental necessity to survive and move forward. The fuel which propels this great machine is a mixture, not of gasoline and air, but of spending and saving: consumer spending, industrial and business spending, government spending; past savings, prospective savings made available through credit, income from foreign trade. The engine is industry, making and exchanging things and services. The drive shaft is productive employment. The four wheels are (1) rear left: agriculture, forestry, and fishing; (2) rear right: manufacturing and mining; (3) front left: government employees necessary to defense, order, and administration of public services; (4) front right: the service industries, including banking and the professions, science and education.

This composite social automobile, which carries our hopes and ideals as well as our children and parents too old to work, moves ahead either by means of accumulated savings or by means of borrowings which mortgage both future earnings and the properties erected by past toil and thrift.

However the automobile moves, the passengers get a free ride. When it forges ahead on present production and sound investment, the passengers are assured of a comparatively smooth road, which, though it goes uphill and downhill, is always safe and leads in a known direction. When the automobile proceeds on the subsidy route, it leaves the paved road for a trip across uncharted fields. Our survey indicates that progress toward a social Utopia by the established highway is now proceeding at so swift a pace that it is folly to risk a crack-up by trying short cuts.

This effort to isolate and identify the ‘value theory of production’ is the beginning of an important study which will never be completed for the simple reason that industry is always changing in detail. It has been changing even during the months devoted to collating and publishing the results of our survey. Nearly every operation, every mechanical technique, every occupational class, every variety of product manufactured by General Motors Corporation, was examined in detail and followed down to its social bearings, so far as our ability and penetration permitted. Consequently the essential truth of our findings, even though details change, will have high significance for years to come. No doubt similar factual studies of other corporations, business regions, and industrial processes will follow, each serving to clear away misconceptions which bar the way to a clear understanding of industry’s true function and wholesome contribution to society.

  1. The President’s Message, December 8, 1861.