The Production of Wealth

THE TRIANGLE OF INDUSTRY

By F. C. CRAWFORD, President, Thompson Products Company

Delivered at the National Association of Manufacturers 45th Annual Convention, Waldorf-Astoria, N. Y.,December 13, 1940

Vital Speeches of the Day, Vol. VII, pp. 250-252

I—Introduction

(1) We all seek to preserve the American way of free enterprise. (2) To preserve free enterprise, the American people must understand it and its accomplishments. (3) Theindustrialist has an obligation to tell the story to his own workmen, and he must tell it in a simple and graphic manner. (4) All agree that everyone desires a higher material standard of living. This is a point of common agreementfrom which to start our story. (5) A higher material standard of living can come only from industry—industry in the broad sense, including the production, distribution and servicing of goods. The social and political worlds can contribute nothing to the material standard of living. Food, clothing and shelter come only from industry.

II—The Story of the Triangle of Industry

(1) Elements of Triangle: Picture in your mind, industry as a large triangle. At the top corner place the American MARKET—130,000,000 American people—all of us, everybody that has any requirements at all for food, clothing, shelter. This Market is inexhaustible. Any saturation point is inconceivable. The demands of Market upon industry are: More products, better products lower prices—the natural human demands of any good buyer.

At the lower left-hand corner put Capital—labor of the past that has been saved. To our amazement we find the same 130,000,000 people in this corner. Every person with a life insurance policy, or savings accounts, or who owns anything at all, is CAPITAL. The natural human demands of Capital are: Reasonable security and greater return.

At the lower right-hand corner place LABOR—all of us—the same 130,000,000 Americans. The demands of Labor are: Higher wages and shorter hours. These are natural human demands.

Now look at our triangle. The first thing we observe is that there is no force in it except ordinary, everyday human nature. The three forces are, apparently, irreconcilable. Market wants more for less money. Labor wants more money for less work. Capital wants security and more return.

In the industrial triangle there is a fourth element—MANAGEMENT. Imagine Management as a figure in the center of the Triangle. Management finds itself in an awful spot. It must reconcile the conflicting but natural human demands of the three corners. Imagine a rope around the neck of Management and the end in the hands of Market. Whenever Market buys, it yanks the rope, demanding more for less money. Capital holds a rope attached to Management's leg and pulls it as as it demands security and return. Labor holds a rope attached to Managements right leg and pulls it constantly, demanding more money for less work.

For self-preservation Management must find a way to reconcile the conflicting demands from corners of the Triangle. To him the science of business is just the study of human reactions.

Many people follow my picture this far. Many think at this point that someone tosses in a fixed amount of money and the triangle becomes a poker game, in which if one shall win, another must lose. This is not true. The triangle of industry is a device for producing wealth—creating something that did not exist before.

(2) Umbrella Factory—First Day: Let us take a simple example:—An umbrella factory with one workman named "Joe." Joe can make one umbrella in one hour and receives a dollar's pay for his hour's work. The manager takes the umbrella to the great American market. He must sell it for at least one dollar in order to be able to pay Joe's wage. After some difficulty, because of this high price, he succeeds in selling the umbrella; returns and pays the dollar to Joe. There is nothing left for Capital. What are the reactions at the end of the first day?

Market is dissatisfied and cries, "The price is too high. No more orders unless you reduce the price." Joe is dissatisfied. He wants a raise. Capital is dissatisfied. It has had no return. It threatens to change management. Management is on the spot. Its job is at stake.

Management, to succeed, must find a way to satisfy the demands of the three corners. In seeking ways to accomplish this, Management studies production problems. It observes that Joe stands at his bench. He turns his lathe by hand, which tires him. Time is lost handling materials.

Management decides to improve the methods of production. It secures additional capital and installs a stool for Joe to sit on, a conveyor to bring the work to him, electric power to operate his machine. These are labor-saving devices that make Joe's work easier and less tiring.

(3) Umbrella Factory—Second Day—How Wealth Is Increased: When Joe comes to work the second day, he is surprised at the improvements. Reluctantly he agrees to try them out. His work runs along much more easily and smoothly. To his amazement, at the end of an hour he has made two umbrellas with no more effort than it took to make one the day before. Management says, "Joe, I think we have discovered the great secret of how wealth is produced! You wait here and I'll go to market with these two umbrellas."

Management meets the demand for lower prices and offers the two umbrellas to the great American Market at 75¢ each. Yesterday's disgruntled buyer appears and is pleased with the bargain price. He buys both umbrellas and goes away, a happy customer. His demand has been satisfied in the 25¢ saving on his purchases.

Management returns to Joe and says, "Joe, we've discovered the great secret! We have $1.50 today where we had only $1 yesterday. We have produced an increase in wealth. I can give you a 25 per cent raise and pay you $1.25 per hour." Joe is happy—his demand has been satisfied.

Then Management reports to Capital that 25¢ remains in the cash drawer from which a dividend may be paid. Capital's demand is satisfied. All three apparently irreconcilable demands have been temporarily satisfied and successful Management has preserved its own job.

A dollar and a half has appeared where only one dollar existed before. Wealth has been created. The public can now use cheap umbrellas. Their standard of living has been raised by the amount of the saving in the purchasing price. Joe goes home happy, his standard of living having risen by 25 per cent. Capital is happy and is ready to buy more tools to make more umbrellas at lower price with higher wages.

(4) Joe's Day: At this point it is interesting to follow Joe through a complete day. From eight o'clock to three he makes umbrellas at his bench. He is aware that he belongs to the Labor group. He wants more money for less work. He wonders why the boss doesn't raise his selling prices and cut out dividends so that wages can go up again.

At three o'clock he goes home with pay envelope. With his wife he goes to town shopping. He is now a part of the great American Market. He entirely forgets that he was Labor that morning. He wants to buy an umbrella. He is a tough buyer demanding lower prices.

At 4:30 he stops to pay his life insurance premium. He now Capital and tough about it. Why don't they pay him bigger dividends on his insurance? Is his money safe? He forgets that he was Labor in the morning, Market in the afternoon and that he—the same Joe—is now Capital.

It should be noted that Joe profited at each corner of the triangle, because wealth was produced on our second factory day. As Labor he received 25¢ raise. As Markethe received 25 per cent saving through reduced price. As Capital he received larger dividends because industry is now earning profits.

Joe is the American People. Each day the American people go around the Triangle of Industry. So long as the production of wealth increases, their reward is to be found at each corner—in rising wages, lower prices and in increasing dividends. Thus the standard of living rises.

III—Conclusions

(1) Capitalism—Not a System: First and most important: This industrial system—free enterprise—is not a system at all. It is simple everyday human nature expressing itself in a land of freedom. Observe the great American market demanding more pieces at lower prices. Observe labor demanding more money and less hours. Observe Capital demanding security and return. All are natural human demands. Sweep free enterprise all away, let people alone, give them freedom, and the same thing will come back.

(2) The Driving Force of Industry: The persistency of these natural demands of human nature (selfishness) is the driving force of industry prodding management to devise ways to increase the production of wealth.

(3) Industry Produces Wealth: Industry is not a poker game with a fixed amount of money where one player can profit to the extent of another's losses. It is a device for producing Wealth. All may gain by it.

(4) Paradox of Industry: When new wealth is created, even though the customer pays less for goods per unit, there is more to divide between capital and labor. This is the seeming paradox of industry.

(5) Distributes Wealth: It is a device which tends to balance itself, thereby distributing wealth fairly. If one corner pulls too hard, the other corners will eventually pull their way and balance it up. Too-high wages mean too-high cost and no orders, etc. It always has and always will be this way.

(6) Not a Charity: Note that Industry's sole object is to produce the goods which are the basis of our standard of living. Industry is not a charitable institution or a Sunday School. It is a healthy tug-of-war right from the start.

(7) Increased Production Is Purchasing Power: High Wages are a result (not a cause) of increased Production of Wealth. The same is true of low prices and high returnon Capital. Therefore, increased production is purchasingpower.

(8) It Works: Let us look at results. For over fifty years this simple device of production has turned out wealth as it never was turned out in the world before. The American standard of living has been raised to a point higher than ever before. American wage scales have reached a point higher than ever dreamed of. Capital accumulated while prices for goods reached new low levels.

(9) No Classes in America: There are no classes in the American system. All of us are Market. All of us are Capital. All of us are Labor.

(10) Flow of Capital Necessary: The increase in production depends upon improved machines and methods of production. A constant flow of new Capital into industry is necessary to provide these improved tools for production.

(11) Obstacles to Production of Wealth: There are only two real obstacles to the operation of the Industrial Triangle in producing a higher standard of living. Government imposes both of these.

(1) Political control that curbs the natural demands of each element of our Triangle:

(a) Regulation and control affecting the demand of Market, such as price control.

(b) All manipulation of Capital which limits return or limits flow of new Capital.

(d) All regulation that limits Management in its struggle to devise improved production methods.

(2) Taxation which consumes the wealth produced before it can be distributed to Market, Labor and Capital:

(a) In our umbrella factory story, if taxes take modest part of the 50¢ increase in wealth of the second factory day, then a substantial part of the increase is available for distribution and the standard of living rises.

(b) If taxes take the whole 50¢-increase, our Triangle is at a standstill.

(c) If taxes take more than the 50¢-increase, prices must rise, wages must fall and return to capital be reduced. The standard of living necessarily falls.