§2. The Underlying Principles of Modern Industry. When we take a first glance at modern industry with a view to discovering the method of its government, the first fact which strikes us would be startling, if it were not so familiar. It is that the most obvious economic problem which confronts the inhabitants of any country or of the world as a whole does not appear to be submitted to any deliberate or conscious decision at all. That problem is to determine how the limited natural resources of the community, its limited flow of savings, its limited equipment of human brains and hands, is to be allocated between the infinity of different uses in which they are capable of yielding a harvest of enjoyment. In the main this momentous decision is left to the operation of what are somewhat vaguely termed natural forces, acting through the desires and activities of disconnected individuals. The final arbiter is the scattered army of consumers, whose freely expressed preferences and aversions attract and repel the community's resources in this direction and in that. The immediate agent is the more compact but still very heterogeneous company of the leaders of business, who severally decide what shall be produced and in what quantities, in accordance with the evidence that reaches them of the desires of consumers. How Value or Price stands at the centre of this system, or lack of system, acting as finger-post or danger-signal to consumers and producers, and exercising a sway more absolute than that of an oriental emperor or Russian Commissary: how the use of Money in the main oils the wheels of the machine, and in detail often throws it out of gear: the merits and defects of the whole arrangement-these things have been broadly discussed

in the first two volumes of this series. In this volume we shall be concerned in the main with narrower issues-with the nature and composition of that company of immediate agents who direct the processes of business, none of them (in his business capacity at least) visualizing the economic problem of society as a whole, but each working in his own comparatively narrow field. But now and again, even in our study of what is, we shall become aware that various agenciesnotably the powers of Finance and of the State-are sometimes more concerned than would at first sight appear with the major problem of industrial government-the proper allocation of society's resources between different uses and occupations: and when we enter the realm of speculation, we must not shut our eyes to attempts to deal with this larger issue as well as with the secondary matter of the actual conduct of individual branches of businesses.

For the present, however, it is on this secondary matter that we must concentrate our thoughts; and it is a sufficiently complicated one. Even if we confine our view to western countries and modern times, the forms of business organization which have been actually tried, to say nothing of those which have been suggested, are very numerous and diverse. And there is a further difficulty. As in politics so in industry, we may study carefully the external forms of an institution without being much the wiser about its inner nature-about the processes by which decisions are really reached or the hands in which power really lies. An industrial label such as "joint-stock company," to take the most important example, may bear very different meanings in different instances. Moreover, those

who have the most accurate knowledge of the way industry is really governed are often least able or willing to impart their knowledge in words. The result is that we have to deal, and deal to some extent in the dark, not only with great varieties of external organization, but with still greater varieties of industrial practice.

Into this labyrinth we may take one clue, which will serve us in good stead. Most readers will remember being restrained in their youth from the pursuit of desirable courses of action by the quotation of admonitory proverbs: and they may remember further that some of these proverbs had a habit of going about in contradictory pairs, so that action in any direction was made to seem dangerous if not impossible. It is one such pair of contradictory proverbs that furnishes the key to the complexities of modern industry. "Many hands make light work": "Too many cooks spoil the broth." How reconcile the implications of these two aphorisms, each in its way so sensible? The answer is that in modern industry they are not reconciled: and their mutual conflict is the source of the perpetual shifting of the sands of industrial structure. It will be convenient to introduce at once and to use frequently two technical terms, which are used in scientific writing with various shades of meaning, but which we may fairly pin down, for our purposes, to embodying the sense of these two proverbs. The first if the principle of differentiation—the principle that if there is a complex job to be done, it will be done quicker and better if each of us concentrates upon a separate small part of it. The second is the principle of integration-the principle that things get out of hand if too many people

are meddling about with them, and that sometimes, as most of us have on occasion irritably remarked, "If you want a thing properly done you must do it yourself." The greater part of this book will be devoted to analyzing the structure of industry in the light of these two principles, and interpreting its developments in terms of their continual clash.

§ 3. The Antecedents of Modern Capitalism. But there is a preliminary task to be performed. This is one of the departments of economic study which it is most difficult to understand, and least desirable to approach, except through the path of history. Unless we have some idea of how, and in response to what circumstances, the present organization of industry came into being, we shall neither be able to see it clearly nor judge it fairly. It is not indeed necessary, though it would be instructive, to transport ourselves to past civilizations or remote climes, and seek there for parallels or contrasts to our own way of doing things. It will be sufficient for our present purpose to glance at the industrial structure of Western Europe, or indeed of England, in the Middle Ages, and to trace in the briefest outline the stages by which the phenomenon known as modern capitalism grew from those early beginnings.1

In the development then of European industry since the Middle Ages we may follow the economic historians in distinguishing four main stages: but it need hardly be said that in so meagre a summary they must be distinguished with a sharpness of outline which they do

1 For a masterly survey of this subject, the student should turn to Ashley's Economic Organization of England.

not exhibit in the actual course of history, where they shade gradually into one another, and overlap one another often by several centuries.

The first main stage or type of industrial organization is what is called the "family" or "household system." Under it each ordinary family or household provides, with a few inevitable exceptions, for all its own wants-raises its own food, makes its own clothes, provides its own household utensils and so forth. Even here, of course, there is some differentiation-the natural and obvious division of labor between man and woman, between adult and child: Adam delves and Eve spins. But apart from this we have a condition of almost complete industrial integration. Vestiges of this system of course remain to the present day. Certain industrial processes, such as the application of blacking to shoe-leather or the infusion of tea-leaves with hot water, are commonly performed for the consumer either by himself or by those to whom he is bound by ties of affection rather than of commerce, or at the remotest by a domestic servant; and in some parts of the country more complex processes, such as baking and brewing, are performed by each household for itself. But as regards the main field of industry the system is, of course, obsolete.

(2) The next main type of organization is known by various names, of which the "handicraft system" is perhaps the most expressive and comprehensive. It is marked by the general application of the principle of differentiation. A man specializes on some particular line of work-he becomes a wool-worker, or a metalworker, or a stone-worker: he no longer supplies only his own needs or all his own needs, but lives largely by