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26: A New System of Manufacturing

Among laborers, there tends to be an "erroneous and unfortunate opinion" that their interests are at odds with those of their employer, when in truth it can be found that a profitable operation is of mutual benefit. This enmity gives rise to distrust and resentment, which in turn leads workers to seek to harm their employers, whether by direct action that interferes with the profitability of the operation or by merely keeping their performance to a bare minimum rather than giving a fair contribution of effort.

Largely, the squabbling exists over the fair distribution of the profits of work. After the costs of production are paid and financiers receive the return on their investments, but a small amount is left and, more often than not, is fairly apportioned between labor, management, and ownership of a firm. Babbage mentions a remarkable system that has been pursued in a number of Cornish minds, which he feels is worthy of attention as a model that serves to remedy or at least mitigate these squabbles.

In these minds, all services are contracted: the work that is proposed for the next two months is described in detail and payment required for the work is negotiated by means of an auction among competing teams of workers. The work is then negotiated with the team that submits the lowest bid, and typically arrives at a rate that is a bit less than the bid made at auction.

It is noted that in this arrangement, the workers share in the risks of an operation, as in mining there is no certainty of how much ore is in a given location or how rich that ore may be after what is visible has been excavated. There are instances in which crews have made very little profit on their work, and other instances in which their rewards have been considerable, but generally the results achieved are within a small variance of those predicted. But aside of that uncertainty, the system is generally regarded as fair as it properly compensates men for their talent and industriousness.

This system benefits both the workers and the operation, and it should be clear that the compensation to the workers is well aligned with the results they produce - the greater the value they create, the greater their personal reward, and the greater reward to the employer. This is far preferable to a fixed-wage system in which workers are paid for the time they spend rather than the results they achieve - such a system creates resentment by an employer who feels he must drive them harshly to make profit of their time, and on the employee who later comes to feel he is not being adequately compensated for the value he is creating because the wage is fixed in a manner relevant to time, not production.

Babbage then describes how such a system might be attempted by a manufacturing operation - which is largely self-evident: the operation suggests a given level of production over a fixed amount of time and workers bid for performing the task. The agreement is safeguarded by a number of rewards and penalties, such as penalizing the workers for wasting materials or guaranteeing them a level of compensation if the employer is unable to furnish materials in a timely manner. The negotiations are for short periods of time (two months in the mining example) as reassurance to both parties: the risk to the men and employer that the product-for-payment agreement is fair is limited by the short span of time.

In operations where labor is divided, the bounty offered for work must be aligned to the work performed: those who make carriage wheels must be compensated for the wheels they produce, and not the number of carriages sold. The latter arrangement divorces work from reward because the workers control only the production of wheels, not of other components, nor of the sales staff - such that the wheels they produce may rest in inventory for an undetermined amount of time without compensation to the workers.

He also suggests that this could be applied to intellectual products as well: while an idea for an improved process generates no revenue until labor is performed, the proponent of the idea could be offered a reward such as a percentage of the profits or savings generated by the innovation for the next year. Such a program is necessary to encourage workers to share ideas with the manufacturer, rather than maintaining secrecy of their methods to gain a personal advantage while other workers continue to use less efficient methods.

Babbage proposes a list of benefits for adopting such a system:

  1. Every person engaged in work would have a direct interest in its successful performance, because their compensation would be directly tied to a meaningful activity that produces measurable revenue
  2. Where the bounty is diminished for waste of material or damage to equipment, the efficiency and safety of the operation would be the concern of every worker
  3. Workers would be guided to apply themselves to the kinds of work to which their talents are best aligned
  4. Workers who were industrious would be attracted to such an establishment, and workers who are shiftless and lazy would seek opportunities elsewhere
  5. The cost to the manufacturer would be aligned to the costs incurred at a given level of production - he would not pay for idle workers
  6. The frequency of negotiations would ensure the perception of fairness in the compensation to both parties
  7. Workers would readily identify impediments to production, as their interests are in making efficient use of their time

Naturally, there is fear on both sides that such a system would cause them loss instead of gain - whether the workers would receive less than they are accustomed or the operator would pay more than he is accustomed. Babbage suggests that the disadvantage would fall first upon the operator, as he would have to offer a higher price to make the new system appealing to the workers, but over time the auction process would ensure, thorough open competition, that the arrangements are fair to both parties.

He also suggests that this is a cultural change. The relationship between employer and worker is often regarded as a modification of the relationship between a feudal lord and his subjects, in which there was a vague sense of duty for the lord to provide for the livelihood of his subjects (even if they did nothing) and for the subjects to see to the interests of their lord (even if they were not adequately compensated). In this vague arrangement, each is expected to give loyalty and service to another party regardless of how they are treated in return.

There is also the difficulty of getting rid of workers who are shiftless or dishonest. In general, the employer must abide the conduct of the workers, and while they may be amenable to receiving partial compensation for doing less than the agreed upon amount of work, this creates difficulties for the employer's operations because lack of performance by one team can interrupt the steady flow of work to other teams. This is a risk the employer must bear - while they may refuse to consider bids from dishonest parties in future, they are simply stuck to the terms of their agreement for the duration.

He comments that there is often a mixed approach, in which employees accept a low salary in exchange for a periodic bonus based on performance. This mitigates both the risk and benefits to both parties, and often the arrangement is far too vague to be mutually satisfactory over a long period of time.