A “Wild and Dangerous” Scheme!
“…a scheme at once wild and dangerous.”
“…a trick, too, of the clumsiest description…”
I was hunting for the exact location of “Prince’s Tavern” in Manchester in 1833 when I stumbled upon an Economist article from March 30, 1844 addressing the “practical consequences” of reducing the length of the factory working day from 12 hours to 10. I am always fascinating by the profound and enduring hostility of a faction of employers — amplified by their mouthpieces in academia and the press — to the reduction of working time. I’m amazed how often their bile and zeal leads them to compound the error of biased, unfounded assumptions with boneheaded accounting mistakes. There is nothing so edifying as the sharp-eyed calculation of a businessman who has naught but the most important boon (far beyond any amount of benevolent sympathy or charity!) to the moral and physical independence of the operative at heart!
I’m going to leave this snippet here and invite commentators to identify the egregious accounting error the author commits. Later, I will demonstrate another instance of the exact same error, performed some 27 years later by an employer. These people weren’t merely wrong, they were systematically and consistently mathematically illiterate and intellectually bereft. Frederic Harrison was on the mark when he called the purported “economic science” of his day “this magazine of untruth.”
If half the cost is fixed, then when operative’s wages would be reduced by 16.6%, cost of goods does not increase by 16.6 percent.
I agree with Arne. Fixed cost is “fixed” and does not change. I wonder if the decrease in hours would have allowed them to be more productive?
let me play Simplicio for a moment:
say for the initial condition the workers receive $50 for 12 hours work, fixed costs are $50 irrespective of output, and variable costs are $50 for the 12 hour day output. which can be sold for $150.
now, reduce the day to 10 hours. at the same hourly pay the workers will receive $41, fixed costs will remain at $50, and variable costs (for the reduced output) will be $41. output will be reduced to $125, but costs will now be $132. this looks unsustainable.
tell me what is wrong with my analysis.
I am going to remain mute on the “answer” for a few more days.
you’re taking a chance that no one will care by then.
Considering we’re talking about an 1844 article, perhaps I’ve already missed the “trending” category.
I will care. I consulted on this stuff. It is always good and educational to hear what others have to say. 1844 or not.
oh heck. i care too, i will always care.
might not remember, but i will care.
You will always remember as I will always remind you. The lights dim but they are not dead. I worry about the same also. If I do not write or talk, I may lose what I have.
Meanwhile I can recommend some background reading: Chapter 8, Part III Volume I of Capital, “Constant and Variable Capital” and Chapter 8, Part II, Volume II of Capital “Fixed Capital and Circulating Capital.” The latter chapter draws extensively on Dionysius Lardner’s “Railway Economy.”
The Economist author’s reference to “fixed charges” does a lot of “work” in his calculation but produces very little value!
Thank you Tom.
I will look.
unless i made some bonehead mistake, i believe my short analysis above reflects fairly the “logic” of the 1844 piece. I made some simplifying assumptions which may or may not turn out to be unwarranted, but that remains to be shown. My purpose was to suggest that the 1844 argument was at least not “egregiously’ wrong.
I think if you want to argue that it was wrong… and I think it was…. you need to pay it enough to respect to drop the “egregiously”, or at least show the egregious fault in real time so the rest of us… not quite so well informed as you… can share a kind of instant gratification at feeling ourselves at least instinctively on the right side of truth and justice,if not history.
“…we have seen a calculation… which shows that the fixed charges, for machinery and the general management of a mill, are as nearly as possible equal to the cost of wages in the process.”
What does “fixed” even mean? It could mean constant in proportion to wages. It could mean constant in proportion to output. It could mean constant in proportion to a time period, which could be a day, a year or some longer, unspecified period. The author mentioned machinery, so the reader might readily imagine that fixed is as in “fixed capital” (it is not).
Fixed does not have a fixed meaning! However, if the charges actually were “as near as possible to the cost of wages” there would be no need to adjust for them TWICE as the author has done. That is the egregious accounting error. Double counting.
But “to be fair” let’s assume that “fixed” means one thing in one sentence and yet another in the next. In that case, the fixed charges stay the same amount while both the output and the total wages decline. Note these are “charges,” not production costs. The cost of machinery in the production process is not simply the original purchase price of the machine divided by an unvarying period of amortization. A machine operated for 10 hours a day will have less “wear and tear” than a machine operated for 12 hours a day and thus may have its effective life extended. It may also be subjected to less damage by accidents, etc.
But that is presumably irrelevant because the author is talking about fixed charges, not fixed costs. These charges may be interest on bonds, dividends on stock, salaries or fees paid to directors. Remember, this is about charges not only for machinery but also for “the general management of a mill.” These are business costs but they are not costs of production although the word “process” at the end of the author’s sentence may imply production costs.
What does a capitalist do? I picture Mr. Moneybags in his armchair at the club, smoking a cigar, reading the Financial Times, writing letters to the editor of The Economist and occasionally raising (or lowering) the price of his goods and lowering (or raising) the wages he pays his workers based on the “state of the market” as reported by the FT.
Or does a capitalist have some responsibility for running his establishment as efficiently as possible under changing circumstances?
The fallacy of the 1/6 + 1/6 wage deduction necessitated by a reduction in hours is made more vivid if we assume a reduction of the working day from 12 hours to 6 hours. In the latter case, wages would have to be reduced by 50% + 50% = 100%! Egads! Workers would have to work for free — unless the management took the unimaginable step of putting on a second shift!
And here is the way around the maze of multiple meanings of the word fixed. EVEN IF the output per worker per hour remained constant with a reduction in working time from 12 to 10 hours, this in no way requires that the output of the factory would decline correspondingly. Additional workers could be hired (paid by the 16.5% deducted from the wages of the existing workers), new efficiencies could be found (by identifying and eliminating old inefficiencies, etc). The bottom line is there is more to running a factory than lowering wages or raising prices.
All this is ASSUMING that output falls proportionately to the reduction in hours and that wages thus must fall correspondingly. In fact, the historical experience was that output per worker INCREASED following the passage of the Ten-Hour Bill.
thanks. i will try to study this, but for now i stand by by my complaint that “egregious” is not quite so…egregious.
but to end the suspense, i believe that reducing hours may well have resulted in higher production. that fits pretty well with my experience. and it is certainly more humane. and probably there is plenty of room in those “fixed” costs to pay a higher hourly wage.
also, i admit to having trouble following the 1844 reasoning… not because it was wrong, but because it seemed clumsy. and for what it’s worth I “assumed” fixed costs meant costs that would not change whatever production was, so i included “other” costs that would change with production, and “assumed” the change would be linear, and further that those assumptions were broad enough to pretty much cover whatever you wanted to throw into them.
now, with your having expanded the universe of assumptions i will go back and try to parse out the logic of 1844.
oh, i assumed that “fixed” costs were…near equal to the cost of wages” meant as a starting condition for the argument, and an approximation to the actual experience of factories running under the current (1844) conditions. this seems to me to be the only way the argument makes sense. i never heard of fixed costs being fixed to wages, or fixed to output. i did assume that the cost of “capital” was part of fixed costs over a reasonable period of time, other things remaining equal (other than hours per day of operation… again, the only way the argument makes sense).
on the assumption of cutting the working day by 50%, then as a first approximation we would assume wages would be reduced by 50%. but wait, we note that production would also be reduced by 50%, but “fixed” costs (originally the same as the cost of wages) remain at 50% of the original cost of operation… which is now 100% of the income from the new reduced output. leaving no income to pay for wages.
so i don’t think the 1844 argument has double counted the reduction in wages that would be caused by cutting hours by 50%.
now, keeping with your 50% reduction in hours (to keep from confusing my little head), if you hire an equal number of workers to keep total house constant and keep production and income at he original level, you have simply cut wages by 50% per person, total wage cost remains the same, total fixed costs remain the same, total output remains the same, so i think, absent bonehead error, that you may have found the “egregious” error in the 1844 argument. i hope so, and I hope I may have helped make in more clear.
“…we have seen a calculation… which shows that the fixed charges, for machinery and the general management of a mill, are as nearly as possible equal to the cost of wages in the process.”
I have seen that calculation. It was conducted by the Manchester Chamber of Commerce and published in the Journal of the Royal Statistical Society in April, 1842. https://tinyurl.com/tql6oum
It is “as nearly as possible equal to the cost of wages in the process” WHEN WORKING HALF-TIME FOR HALF WAGES! Amazing! About 1/3 of the “fixed charges” are depreciation from wear and tear, repairs etc., which would be subject to modification with less intensive use. Another 1/3 of the fixed charges are “interest” on capital invested. To the extent this is capital invested by the owner, it is also known as “profit.” Another 10% or so is salaries, which could be subject to adjustment. Etc.
“Fixed charges” is thus an accounting convenience. It doesn’t mean they are costs of production eternally carved into stone. But consider what the Economist author has done by representing the fixed charges “as nearly as possible equal to the cost of wages in the process.” He has effectively doubled the impact of the “fixed charges” on his calculation. Instead of an 8 1/4% cut in wages, they necessitate a 16 1/2% cut!
Under those circumstances, I don’t see why I should cut him any slack about his sleight of hand with the semantics of “fixed charges.”
nice . . .
turns out i did make a bonehead error. i think it doesn’t change the final solution, but i need to count on my fingers a few times before i can be sure (hah!) i fixed it.
ha ha! “fixed” it!
well, i know what bonehead mistake i made, but i can’t see it in what i have written here… maybe because i recalculated using your numbers and did it right the second time. maybe my eyes are just tired.
but i am hoping we can agree that without adding new workers the 1844 arithmetic is “correct,” it is also egregious and probably dishonest. because as you point out just hiring the extra workers brings the hourly pay back to what it was, with the shorter day’s pay reduced only by the original 16%.
but what is puzzling me is that the 1844 argument begins with two paragraphs of meaningless noise, then makes a handwaving argument which is “correct” but deceptive. and then he finishes out with more meaningless noise that assumes “what everyone knows” about economics.
and Sandwichman finds the correct answer (add more workers) but doesn’t stop there and goes into hyperspace with “semantics” on “fixed costs” which don’t really enter into the problem, and further muddies the waters with what “everyone knows” about efficiencies in manufacturing.
geeze, i have enough trouble just getting the numbers to line up without all the arm waving.
If you read much of Sandwichman, he proposes shortens the hours of work and adds more workers. I get lost in the semantics also. You did get to the right place. I wonder what his classroom is like and if he provokes a lot od discussion?
In my classes we do what amounts to a catechism. I assign weekly readings and a set of discussion questions then each week the students take turns answering the discussion questions from the readings and I offer a commentary. Seems to work and gets good student reviews. The amount of discussion provoked seems to depend on the mix of characteristics of the students. Sometimes there is a lot and sometimes students just answer the questions and then silently take in my commentary.
I’m not sure what to do with the idea of “correct arithmetic.” If I call a cow’s tail a leg, how many legs does a cow have. The answer is four. Calling a tail a leg doesn’t make it one. Likewise, if I define something as a fixed charge for accounting purposes that doesn’t mean that it is unalterable. What happens to those fixed charges if there is a fire and the mill burns down? Well, there is insurance so luckily the mill may be rebuilt but in the meantime those fixed charges become academic because there is no production taking place.
In looking at the difference between full-time production and half-time working, Henry Ashworth would be justified in using the same fixed charges because the half-time situation would be a temporary response to a fall in demand. The whole point is to produce less because the mill can’t sell more. In the case of the reduction from 12 to 10 hours, there is no suggestion that demand will change (although there is no guarantee that it won’t!). The mill manager is being paid 200 pounds a year — surely he has some responsibility to take up the slack by either hiring up to 72 more workers or by some combination of more workers and new machinery?
The semantics of fixed charges is, I think crucial here. If one is going to use the terminology of accounting to give people the impression that an amount is “unalterable” by circumstances, then one is obligated to play by the rules of accounting, which explicitly disallow double counting. The Economist author tries to have it both ways, create an impression with the terminology but let “common sense reckoning” pull a much larger rabbit out of the hat.
I came back to see what you would say, but I have to admit I had already concluded that it was unlikely that the assumptions I would make would be the same as the 1844 author. Nor, it turns out, the same as the 202 author.
you and I think very differently. i have no doubt you are good at teaching students to think about economics. from my point of view you muddy the water so much with “the big picture” and “semantics” you make it hard to see the argument at hand. this is not a criticism, just a ‘from my point of view” and i have a reason for pressing it.
consider a corollary that emerges easily when we have a clear view of the math, “other things being equal” (which they never are, but are easier to understand when we take them one at a time… and make it much easier to see how we are being lied to.)
or, “Look Ye Here! The Rest of the Story” which they were not going to tell us:
Assuming the 1844 argument, say we have
$50 dollars of labor input with X workers working 12 hour days, and $50 of “fixed costs” (whatever those may be). and we produce $100 worth of product, which we can sell for $100, leaving $50 to share among X workers.
now, suppose we cut the working day for each worker to 8 hours, but triple the number of workers. now we have 2X work hours which will produce $200 worth of product, which we can sell. deducting the $50 fixed costs we have $150 income to share among the 3X workers. this leaves us $50 per X workers, same as we had before… but now each worker is working only 8 hrs instead of 12, so we can increase his hourly pay by 50%. His daily pay will remain what it was for the twelve hour day.
i hope i can leave the “economics” to the experts but have at least shown the 1844 argument was missing a leg to stand on, which is pretty much how popular economic arguments (aka political arguments) work.
I’ll post the Ashworth calculations later but in the meantime I refer to just one item of fixed charges: “Capital for carrying on trade, stock and cotton 12,000 l. at 5 percent… 600 L.” This refers to what we also call “raw materials” and “inventory of finished goods.” Common sense suggests that when daily output is reduced to 5/6 of the previous standard, only 5/6 as much raw materials will be consumed in production and inventories of finished goods might be also assumed to be reduced correspondingly. Your Simplicio calculation included a category of “variable costs (for the reduced output)” that presumably figured raw materials as a “variable cost.” But Ashworth’s fixed charges are NOT costs of production. The fact that less raw materials are required to produce less output is irrelevant. The fixed charge is interest on capital employed to maintain a given STOCK of raw materials and finished goods, not the cost of a reduced FLOW of raw materials and finished goods. I’m fine with Ashworth’s figures as an accounting entry and I am fine with your figures as a common sense reckoning. The confusion arises when one switches back and forth between technical terminology, which has a precise meaning and common sense understandings of the same terms that actually mean something different.
oh, my little start on the economic argument: Mr 1844 will argue (scream) “but i can’t sell $200 worth of product “in the current state of trade.””
But, I say, you will have just changed the current state of trade, and with three times as many workers making the same daily pay “the state of trade” will surely allow businesses as a whole to sell more product…
I am uncomfortable in the foggy land of assumptions. on the other hand if I can make the assumption clear I can perhaps show that calling a tail a leg leads to a contradiction and is therefore false. but if i am talking to martians who have no clear idea of the difference between a tail and a leg, asserting that a tail is not a leg may not help them understand my point.
unless we are talking about coyote dinner in which case the distinction between a tail and a leg may not be important.
i hope i was not switching back and forth between “technical” (well defined) usage and “common sense.” I don’t know anything about technical, nor i think was 1844 talking to a technical audience.
i was trying to make his argument clear to myself and to other non technical people, so I (we) could decide between your “egregious” and his ‘wild and dangerous.”
turned out you were right, but it took pointing out the fallacy… which you did, eventually and without emphasis, that he was falsely, and secretly, assuming he could not maintain the original production level.
i don’t think i would have seen this (perhaps at all if you had not pointed it out) if i had not clarified the math (for myself if for no one else).
I included variable costs because i thought it would be necessary to make sense. it did probably make it easier for non-technical (me) to take the argument seriously but i think in the end it made no difference to the argument,
No, I don’t think you were switching back and forth. I do think “1844” was switching back and forth in a way that grossly inflated the negative “practical consequences.” It is hard to know for sure whether he was being intentionally deceptive or was operating from a place of self-deceptive confirmation bias. His misuse of Ashworth’s calculation, however, would seem to be evidence of either dishonesty or incompetence.
well, i got the same answer he did without switching back and forth. what got the correct answer was finishing the analysis with the same assumptions by allowing him to hire enough workers to replace the work lost by the reduction in hours. i don’t see that this involves any switching, or avoids any switching. it’s just recognizing what was left out.
reminds me a bit of achilles and the tortoise, where Zeno carefully directs you to consider only those instants BEFORE A catches T, and sure enough in all of those instants (however infinite) A does not catch T.
carefully directing you to consider only what happens if you don’t hire more workers to keep output constant fools you into thinking output must fall and therefore pay must be reduced not only by the reduction in hours but also by the reduction in output.
what i am thinking is that you know so much more than i do about economics, or factory production, that you have to look at all of it and pay attention to factors you know about, but which have really nothing to do with the argument 1844 was making.
because i have seen this style of argument (1844’s style) very often in political persuasion, i conclude that 1844 was being dishonest, or had “seen a calculation” that was dishonest (very common.. most lies in economics are heard second-hand). there are too many very smart liars (non partisan expert liars, in fact) for me to graciously lay it to simple incompetence.
change of subject:
do you know if anyone is trying to construct a useful measure of National Wealth? unlike GDP which economists admit is a poor measure of National Happiness, a measure of Wealth would assign reasonable value to what we have: forests, clean water, agricultural land, open space..
so that when a forest is cut, besides adding the cost of cutting and processing lumber to GDP we would have to subtract the value of the uncut forest, which i believe can be reasonably estimated…. though it may increase in value as CO2 spirals out of control..
this should be no different from a person, or company, keeping track of its “assets” as it keeps track of its sales.
Short answer: yes, useful for illustrative purpose; but no, not used for policy purposes. Most recent I’m aware of involved Stiglitz et al around a decade ago.