25: Inquiries Prior to Manufacturing

Before undertaking the manufacture of a new article, and entrepreneur should consider a number of questions to ensure that the enterprise will be at all profitable.

First, he must ascertain the expense of the tools and machines that must be obtained for the manufacturing process. If the process and product are known, he may research the operations of other producers. If they are unknown, he must extrapolate based on similar but not identical operations.

Second, he must determine the cost of inputs into manufacturing: the materials, supplies, labor, and all other costs that will be incurred by routine production. These are less difficult to research, as they are currently in existence and the prices can be surveyed with little effort.

Third, he must project the quantity of product that is likely to be demanded by customers, which is particularly difficult to estimate. If the article is new, there is no evidence on which an assumption may be based - surveying the opinions of men produces notoriously optimistic estimates. If the article is existing, or competes with an existing product, it cannot be taken for granted that customers will automatically adopt it, as men tend to cling to current practices even when they are less optimal.

Fourth, the time in which goods can be exchanged for revenue should be considered carefully. Many errors in the prediction of capital requirements occur because the entrepreneur fails to consider the time it requires between the purchase of inputs and the return of revenue. The process involves lags in obtaining supplies, manufacturing goods, transporting finished goods to markets, selling the goods, and receiving payment.

And finally, the entrepreneur should consider the impact that his product will have upon existing behaviors and the industries that support them, particularly in the actions that may be taken by those whose livelihood is threatened. For example, a steamboat operator who established a passenger vessel between two cities failed to recognize that the operators of coaches would recognize his business as a threat to their own, and petition the government to restrict steamboats on the public waterways.

Any new product or process will change the market, so estimations based on current behavior must be adjusted to the changes in behavior that will encourage or discourage its adoption. He mentions taxation as an example: when government places a tax on a product their assumption is that consumers will purchase just as much of it in future as in the past, when in reality the tax increase the price and purchases decrease accordingly. He introduction of machinery often displaces workers, who will react against the producer whom they believe to have taken away the source of their income, and may react on their own or seek the sympathy of the public or the protection of government.