Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
(?-1899)
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Editor/Trans.
First Pub. Date
1881
Publisher/Edition
New York: Maynard, Merrill, and Co.
Pub. Date
1899
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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PARTICIPATION IN PROFITS.

III.33.1

PARTICIPATION IN PROFITS. Among the many schemes for healing the apparent breach between labor and capital, a breach that is due in great part to the fact that these two factors of production are supplied by two distinct classes, termed capitalists and laborers, is that of allowing the laborer to share in the profits of the enterprise. "It would be of great importance," wrote Mr. Babbage in 1832, "if, in every large establishment, the mode of payment could be so arranged that every person employed should derive advantage from the success of the whole; and that the profits of each individual should advance, as the factory itself produced profit, without the necessity of making any change in the wages." And he then describes a system that had long been in use among the Cornish mines, which was somewhat like that he proposes for his "new system of manufacturing." This new system was hardly noticed at the time, but it was one of the earliest attempts to introduce participation in profits by the laborer. Strictly speaking, participation is not a form of co-operation, for in the co-operative principle the capitalist and laborer are combined, the capital necessary to the undertaking being furnished by those who also supply the labor; and as they assume all the risk, all the profit or loss is also theirs. In participation, however, the capital is, as a rule, still furnished by one class, and the labor by another; but the laborer is allowed to share in the profits received over and above a certain share which is set apart as a remuneration for the capital employed and for the supervision and management of the undertaking. If the profits are not sufficient to cover this share which belongs to capital, no distribution is made among the workmen.

III.33.2

—In support of participation it is urged that, by stimulating him to make his best endeavors, it increases the efficiency of the workman, this result being attained either by effecting a saving in the material used, or by increasing the absolute product of labor. It influences the moral character of the laborer by making him more industrious (as on this not only depends the total profit but also his share of the profits), more thrifty and provident, and in a measure more independent. By giving him a direct interest in the success of the undertaking it brings him into close relationship with his employer, and differences are less apt to arise between them. On the other hand, it is urged that the laborer is working for a reward that is uncertain, and affected by circumstances beyond his control; that he is likely to become discontented if the profits decrease and his supplementary wages diminish; that in many instances he is forced to become a partner in the undertaking, and his freedom of movement and of contract is to that extent restricted; that he is thus made to share all the risks attending any industrial enterprise, without being allowed any voice in the conduct of the undertaking.

III.33.3

—There are many forms of participation, many of them being but modifications of co-operation. Of the real industrial partnerships the following may be mentioned as typical: In 1842 a Paris tradesman, M. Leclaire, finding that high wages did not produce a corresponding increase in the zeal and diligence of his workmen, and being unable to personally supervise all the details of the work, determined to create a common interest between himself and his employés. The surest way of increasing their efficiency was to proportion their remuneration to the results obtained from their labor, and he therefore proposed to divide among such as he should select a portion of any increased profits that might accrue from their exertions. At the end of the year 5 per cent. of the net profits was to be set aside for the capital employed, and a salary for himself as superintendent; all that remained was to be divided among certain of the laborers in proportion to the wages they had received. The result of the first year was remarkable, and his system, somewhat modified in form, has continued till the present day. The first year he distributed 12,200 francs, no laborer who had worked 300 days in the year receiving less than 450 francs as a supplementary income, equal to two-fifths of his regular salary; in the second year the distributive fund exceeded 17,000 francs, and in the third year it was more than 18,000 francs. Encouraged by this success, the business was remodeled and its operations extended. As at present constituted, the net profits are divided into three parts: one-half is distributed among such workmen as M. Leclaire designates, in proportion to the wages earned by each participant; one-fourth is paid to a provident society, of which all the persons in his employment are members; and one-fourth goes to the partner (patron directeur). The workmen are divided into two classes, one of which, comprising a third of the total number, are entitled to a share in the distribution of profits, but the second class do not share in the profits, but receive a small addition to their daily pay, and are entitled to all the benefits conferred by the provident society. The minor details of the system do not concern us here.

III.33.4

—For many years a large railroad in France (Chemin de fer d' Orléans) set apart 15 per cent. of the surplus or net profits to be divided among certain of its employés. During the first years of the experiment the plan worked fairly well; but as the operations of the road were extended, the number of employés was largely increased, the expenses of management became larger the fund for distribution became less, and also the share of each participant, so that while in 1853 the company divided 1,966,963 francs among 3,365 persons, in 1868 it divided only 1,775,559 francs among 11,376 employés. The main object to be gained in this case was to insure as far as possible a greater care of the valuable plant on the part of the employés, and this could be better secured in no other way.

III.33.5

—The third type is to be found in the plan adopted by Messrs. Henry Briggs, Son & Company in their Yorkshire collieries. Prior to the passage of the limited liability act such an arrangement as M. Leclaire's could not have been adopted in England without making the workmen liable for the losses incurred, in that they shared in the profits of the undertaking. But this barrier being removed, Messrs. Briggs were among the first to take advantage of participation. In 1865 they formed a limited liability joint stock company, retaining two-thirds of the stock in their own hands. The remaining portion they offered to their employés in shares of £10 each, and stipulated at the same time that whenever the profits of the business should exceed 10 per cent. on the capital employed, one-half of this profit was to be divided among the employés. The plan worked with advantage for a number of years, but disputes arising through the fluctuations in the coal market, the arrangement has been annulled.

III.33.6

—The distribution of profits may either be made in a cash payment at the end of the year, or the share of profit may be capitalized during a certain period, the interest being drawn by the workman, and the principal, on his death, going where he may wish, or, a part may be paid in cash and a part capitalized. The manner of payment differs widely in the various establishments that have adopted the system.

III.33.7

—It is not believed that participation in profits will ever be widely in use, as it can be successfully applied to only a limited number of occupations. "The fund on which participation draws is the surplus profit realized in consequence of the enhanced efficiency of the work done under its stimulating influence. Such extra profit is therefore obtainable wherever workmen have it in their power to increase the quantity, improve the quality, or diminish the cost price, of their staple of production by more effective production, by increased economy in the use of tools and materials, and by a reduction in the cost of superintendence. In other words, the surplus profit realizable will depend on the influence which manual labor is capable of exerting upon production. Evidently, therefore, this influence will be greatest in branches of industry where the skill of the laborer plays the leading part, where the outlay on tools and materials bears a small ratio to the cost of production, and where individual superintendence is difficult and expensive. It will, on the contrary, be least effective in industries where mechanism is the principal agency, where the interest on capital fixed in machinery is the chief element of cost prices, and where the workmen, assembled in large factories, can be easily and effectively superintended" Another limitation lies in the fact that its application depends, in every case, on the will of the employer. "It is not to be expected," says W. T. Thornton, "that employers will often be found entering into special engagements with their laborers, in trades in which such special engagements must necessarily result in pecuniary loss to themselves; even in trades to which the bonus system is best adapted, unless employers choose to adopt it of their own accord, there are, of course, no means of compelling them. In the utmost development, therefore, of which it is susceptible, the partnership or bonus system can never affect more than a portion of the laboring population." Still another objection is named by Thorold Rogers: "that it necessitates the abandonment of that secrecy which it is believed is essential at all times, and particularly in some emergencies, to success. The value of secrecy may be overrated, probably is; but its significance is felt, and will in all likelihood be felt more and more as the principle of limited liability is adopted." It is not known that this policy has been adopted to any extent in the United States.

III.33.8

—AUTHORITIES. Böhmert, Die Gewinnbetheiligung, 1878; Fouger ouse, Patrons et Ouvriers de Paris, 1880; Billon, Participation des Ouvriers aux Bénéfices des Patrons, 1877; Pare's Co-operative Agriculture, 1870; Leroy-Beaulieu, La Question Ouvrière au XIXe Siècle, 1872; and Thornton, On Labor.

WORTHINGTON C. FORD.

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