Ludwig von Mises Institute

PART III  THE ALLEGED INEVITABILITY OF SOCIALISM
SECTION II  The Concentration of Capital and the Formation of Monopolies as Preliminary Steps to Socialism

Chapter 23
The Concentration of Establishments

The concentration of establishments comes automatically with the division of labour. In the shoemaker's workshop the production of footwear, formerly carried on in each individual household, is united in one single establishment. The shoemaking village, the shoe-manufactory, becomes the manufacturing centre for a large area. The shoe factory that is organized for the mass-production of footwear represents a still wider union of establishments, and the basic principle of its internal organization is on the one side, division of labour, and, on the other side, concentration of similar work in special departments. In short, the more the work is split up, the more must similar labour processes be concentrated.

Neither from the results of the census undertaken in various countries to verify the doctrine of the concentration of productive units, nor from other statistical evidence of changes in the number of establishments, can we learn all there is to be known about them. For what appears in these enumerations as a unit is always, in a certain sense, a unit of business, not a unit of production. Only in certain cases do these investigations count separately works which, whilst united in locality, are conducted separately inside a single enterprise. The conception of the establishment and its evolution has to be elaborated from a point of view other than that which lies at the basis of trade statistics.

The higher productivity of the division of labour results, above all, from the specialization of processes which it makes possible. The more often a process has to be repeated the more does it pay to install a specially adapted tool. The splitting up of labour goes farther than the specialization of occupations, or at least than the specialization of enterprises. In the shoe factory shoes are produced by various part processes. It is quite conceivable that each part process might take place in a special establishment and in a special enterprise. In fact, there are factories which make only parts of shoes and supply them to the shoe factories. Nevertheless, we usually consider as one productive unit the sum of part processes combined in a single shoe factory which itself produces all the component parts of shoes. If to the shoe factory is joined also a leather factory or a department for producing the boxes in which the shoes are packed, we speak of the union of several productive units for a common enterprise. This is a purely historical distinction which neither the technical circumstances of production nor the peculiarities of business enterprise suffice by themselves to explain.

When we regard as an establishment that totality of process involved in economic activity which businessmen regard as a unity, we must remember that this unit is by no means an indivisible thing. Each productive unit is itself composed of technical processes already horizontally and vertically combined. The concept of an establishment, therefore, is economic, not technical. Its delimitation in individual cases is determined by economic, not by technical, considerations.

The size of the productive unit is determined by the complementary quality of the factors of production. The aim is the optimal combination of these factors, i.e. that combination by which the greatest return can be produced economically. Economic development drives industry to ever greater division of labour, involving at once an increase in the size and a limiting of the scope of the unit of production. The actual size of the unit is the result of the interaction of these two forces.

2 The Optimal Size of Establishments in Primary Production and in Transport

The Law of Proportionality in combining the factors of production was first formulated in connection with agricultural production, as the Law of Diminishing Returns. For a long time its general character was misunderstood, and it was regarded as a law of agricultural technique. It was contrasted with a Law of Increasing Returns, which was thought to be valid for industrial production. These errors have since been corrected.[1]

The Law of the Optimal Combination of the factors of production indicates the most profitable size of the establishment. Net profit is greater according to the degree to which its size permits all factors of production to be employed without residue. In this way alone is to be estimated the superiority which the size of one particular establishment gives it over another establishment—at the given level of productive technique. It was a mistake to think that enlargement of the industrial establishment must always lead to an economy of costs, a mistake of which Marx and his school have been guilty, although occasional remarks betray the fact that he recognized the true state of affairs. For here, too, there is a limit beyond which enlargement of the establishment does not result in a more economical application of the factors of production. In principle, the same may be said of agriculture and mining; the concrete data only differ. It is merely certain peculiarities of the conditions of agricultural production which cause us to regard the Law of Diminishing Returns as primarily affecting land.

The concentration of establishments is primarily concentration in space. As the land suitable to agriculture and forestry extends in space, every effort to enlarge the establishment increases the difficulties that spring from distance. Thus an upper limit is set for the size of the agricultural unit of exploitation. Because agriculture and forestry extend in space it is possible to concentrate the establishment only up to a definite point. It is superfluous to enter into the question—often raised in discussion of this problem—whether large or small scale production is the more economical in agriculture. This has nothing to do with the Law of the Concentration of Establishments. Even supposing large scale production to be superior, one cannot deny that there could be no question of a Law of the Concentration of Establishments in agriculture or forestry. The fact that land is owned on a large scale does not mean that it is worked on a large scale. The great estates are always composed of numerous farms.

This appears even more clearly in a different branch of primary production, mining. Mining enterprise is tied to the place where the ore is found. The establishments are as large as these separate places permit. They can be concentrated only to the degree in which the geographical position of the separate beds of ore make concentration seem profitable. In short, one can see nowhere in primary production any tendency to concentrate productive units. This is equally true of transport.

3 The Optimal Size of Establishments in Manufacturing

The process of manufacture out of raw materials is to a certain extent free from the limitations of space. The working of cotton plantations cannot be concentrated, but the spinning and weaving works may be united. But, here too, it would be rash to derive without further consideration a Law of the Concentration of Establishments from the fact that the larger plant generally proves superior to the smaller.

For in industry too localization is of importance, quite apart from the fact that (other things being equal, i.e. at a given level of the division of labour) the economic superiority of the larger productive unit exists only in so far as the Law of the Optimal Combination of Factors of Production demands it and that consequently no advantage is to be gained by enlarging the establishment beyond the point where the instruments are most efficiently utilized. Each type of production has a natural location, which depends ultimately on the geographical distribution of primary production. The fact that primary production cannot be concentrated must influence the subsequent process of manufacture. The power of this influence varies with the importance attaching to the transport of raw materials and finished products in the separate branches of production.

A Law of the Concentration of Establishments operates therefore only in so far as the division of labour leads to progressive division of production into new branches. This concentration is really nothing more than the reverse side of the division of labour. As a result of the division of labour numerous dissimilar establishments, within which uniformity is the rule, replace numerous similar establishments within which various different processes of production are carried out. It causes the number of similar plants to decrease, whilst the circle of persons, for whose needs they work directly or indirectly, grows. If the production of raw materials was not geographically fixed, a circumstance which acts counter to the process initiated by the division of labour, one single plant only would exist for every branch of production. [2]

[1]Vogelstein, "Die finanzielle Organisation der kapitalistischen Industrie und die Monopolbildungen," Grundriss der Sozialökonomik, Pt. VI (Tübingen, 1914), pp. 203 ff. Weiss, "Abnehmender Ertrag," Handwörterbuch der Staatswissenschaften, 4th ed., Vol. I, pp. 11 ff.

[2]See Alfred Weber, "Industrielle Standortslehre," Grundriss der Sozialiökonomik, Pt. VI (Tübingen, 1914), pp. 54 ff. The remaining factors of localization can be passed over, as the present, or the historically transmitted, distribution of primary production ultimately determines them.