During Owen’s era, there were many disputes between the village workers and the Edmondstones of the Corehouse estate (across the river), regarding the right of the water between them, and the trespassing of villagers onto the Corehouse estate. The company settled these quarrels by agreeing to pay the Edmondstone’s an annual rent of £200 a year (see entries in Balance Sheets below). Duty paid to Mr C Ross is for the buildings and channel of water in the village is also shown.
Mill expenses for Rent of Water to Miss Edmonston
Rent of Water lead, duty on houses and village
Mill Expenses- for rent of water to Miss Edmonston
Source: Owen Correspondence, Manchester, OC 2100, J.Wright to R.Owen 10 Jan 1853
Letter from Robert Owen to William Allen, 1815
“the comfort, the morals and the happiness of the people, far, very far indeed, exceed that of any other cotton-manufacturing establishment in the kingdom-I might safely say in the world- and from the day I undertook the management of it, to this hour, although I have first and last expended £100,000 on its improvement, it has paid interest of capital and an ample profit.”
New Lanark Cotton Mills The New Lanark Cotton Mills offer an interesting and instructive insight into the functioning of a business enterprise in a capitalist economy. Capitalism is a form of economic, political and social organisation which dates back at least 200 years. Two of its important features are: (1) a legal system enforcing Property Rights and Contracts and (2) a widespread Factory system. The importance of the legal system lies in the fact that it enabled investors and traders to have a form of security guaranteed by the State. Some important features of the Factory system are: (1) Use of Modern Technology; (2) Large scale Production ;(3) Task specialisation and Team work;(4) Wage Payment as remuneration system (5) Business Organisation (6) Marketing.
Setting up and establishing a factory might require some of the following steps: (1) Getting together a team of partners;(2)Choosing a Product;(3) Finding and acquiring Site; (4) Technology; (5) Raw Materials;(6) Power; (7) Work Force & Human Resources; (8) Organisation of Production; (9) Marketing.
This entire process is led by a single goal – that of maximising profits. The case study will primarily focus on the link between human resource management , productivity of the work force and profits of the company. The implications for employment will also be studied.
A necessary condition for profit maximisation is that costs are minimised , given the scale of output. Once the technology has been installed, the major costs of production are power, raw materials, and labour costs. Of these, perhaps the most important is labour costs. Hence any profit maximising strategy must involve producing the required output at the lowest possible labour costs. What does this imply for the wage policy of the business? At first blush, it might seem that the business should pay the lowest wage it can get away with. That is to say, part of any profit maximising strategy should include paying the workforce its opportunity cost only. But what if paying very low wages actually reduces the productivity of the work-force as a whole? It is then not clear that a wage policy of paying the rock bottom wage necessarily minimises labour costs. A more sophisticated wage policy may be required. Furthermore, productivity is also affected by the work ethic and control system that is used to discipline the work force. We shall study all these strategic decisions.
New Lanark provides us with some evidence on the actual functioning of a cotton - producing factory. The previous brief account motivates at least the following questions.
Who were the partners? Were they cohesive?
Why was the site chosen?
What type of technology was used to produce cotton yarn ? Did it change? How much did it cost?
What was the maximum scale of production?
Where and at what prices was the raw material acquired?
What was the source of power and its cost?
How was production organised? Shifts? Teams?
How and at what level were workers remunerated?
Were the workers happy?
What was the productivity of the workforce?
What were the profits of the company?
Where and how was the product marketed?
In examining the evidence we need to think about the appropriate standard of comparison. We will also need to develop a theoretical framework in which to analyse the evidence.
We start with the technology. This obviously places a limit on the productive potential and hence on the profits of the enterprise. Once installed, to change the technology is a often a difficult and expensive operation. Usually, the choice is quite limited by engineering knowledge. From the perspective of economics, technology is something of a black box. We visualise it as follows:
In order to simplify, we concentrate on the major input, viz, labour. Once the technology is known, the relationship between labour input and (cotton) output is fully specified. We call this relationship the Production Function. It specifies the level of output (suitably measured) that can be produced by the given technology for any level of labour input (again suitably measured in say man-hours). It can be depicted as a table, an equation or graphically.
Example I.1: Suppose we denote units of labour (man-hours) by L and units of output (bales of cotton) by Q, then an example of a production describing cotton production might be : Q=10 L. Table I.1 below show exactly the same information as does Figure I.1.
Table and Figure I.1 are to be interpreted in the same way. Thus if the labour input is 4 (man-hours), then the total output produced would be 20 (bales of cotton yarn). If the labour input is 5 (man-hours), then the total output produced would be 22.4 (bales of cotton yarn). Note that it is important to specify the units in which both the input (labour) and the output are measured.
Table I.1 : The Production Function , Q = 10L
Properties of Typical Production Functions
Note from Table I.1 and Figure I.1 that doubling the labour input from 4 to 8 man hours does not double the output. Output increases from 20 bales to 28.3 bales – an increase of only 41% compared to the labour increase of 100%. A production function which has this characteristic is said to display diminishing returns to scale – a doubling of all the inputs leading to less than doubling of the output. This property is reflected not only in the Table but also in the concave shape of the graph in Figure I.1. A simple graphical test is to join any two points on the graph by a straight line. If the straight line lies below the graph, then the production function represented by the graph has diminishing returns. Not all production functions have this property of decreasing or diminishing returns.
Exercise 1.1: (a) Use the production function Q=10 L to extend Table I.1 for L= 12,….20. (b) Sketch the extended Table (i.e. for L=1, 2, … 20) on Graph paper. (c) Join the points on the graph for L=10, Q=31.6 and L=16,Q=40 by a straight line. What do you conclude?
The production function is central to the analysis of the possible strategies of the enterprise. In particular if the real price of a labour unit is known, then the profits for each possible value of L can be determined. Typically, the price of labour is measured in £ per man hour and the price of cotton in £ per bale. These money prices are sometimes called nominal prices. By the real priceof labor, we mean simply the price of one man hour measured not in money but in bales of cotton. Note also that there are many different combinations of the money price of labour and the money price of cotton which yield the same real price of labour.
Example I.2: If the money price of labour is £ 30 per man hour and the price of cotton is £ 15 per bale, then the real price of labour is 30/15 = 2 bales per man hour.
Exercise 1.2: (a) If the money price of labour is £ 15 per man hour and the price of cotton is £ 5 per bale, what is the real price of labour ? (b) If the real price of labour is 2 bales per man hour, and the price of cotton is £30 per bale, what is the money price of labour? (c) What inference about the money price of labour and output price can be made from the fact that the real price of labour has risen?
Knowledge of the production function and the real price of labour is sufficient to determine the firms hiring and production strategies.
Example I.3: Suppose the real price of one labour unit is 2.236 or 5. In other words hiring one man hour costs 2.236 bales of cotton. Then the following profits Table can be determined.
Table I.3: Profits
Note that for this production function and for a price of labour units = 2.236 cotton bales per hour, the profit maximising strategy is to use L=5 man hours , produce and sell Q= 22.4 bales which yields a profit of 11.2 bales. Although, this may involve a considerable excess capacity, there is no reason for the firm to expand.
Exercise 1.3: (a) Recalculate the Profits table above if the real price of labour is 3 bales per hour. What is the optimal strategy? (b) Recalculate the Profits table above if the real price of labour is 1.71 bales per hour. What is the optimal strategy?(c) How is the optimal strategy changing as the real price of labour changes?