Ralph Borsodi

In the summer of 1920 the first summer after our flight from the city Mrs. Borsodi began to can and preserve a supply of fruits and vegetables for winter use. I remember distinctly the pride with which she showed me, on my return from the city one evening, the first jars of tomatoes which she had canned. But with my incurable bent for economics, the question "Does it really pay?" instantly popped into my head. Mrs. Borsodi had rather unusual equipment for doing the work efficiently. She cooked on an electric range; she used a steam-pressure cooker; she had most of the latest gadgets for reducing the labor to a minimum.

I looked around the kitchen, and then at the table covered with shining glass jars filled with tomatoes and tomato juice.

"It's great," I said, "but does it really pay?"

"Of course it does," was her reply.

"Then it ought to be possible to prove that it does even if we take into consideration every cost the cost of raw materials, the value of the labor put into the work yourself, the fuel, the equipment."

"That ought to be easy," she maintained.

It didn't prove as easy as we anticipated. We spent not only that evening, but many evenings, trying to arrive at a fairly accurate answer to the question. It wasn't even easy to arrive at a satisfactory figure on the cost of raw materials she had used. Some of the tomatoes had been grown in our own garden; some had been purchased. How much had it cost us to produce the tomatoes we had raised? We had kept no figures on gardening costs. Even if we had kept track of all the odd times during which we had worked in the garden, that would have helped little without a record of the time put into caring for the single row of tomato plants we had planted.

It proved equally difficult to determine how much time should be charged to the actual work of canning since several different kinds of household tasks in addition to canning were often performed at the same time. While the jars were processing in the pressure cooker, work having nothing to do with canning was often performed.

And when it came to determining how much electric current had been used how much to charge for salt, spices, and other supplies the very smallness of the quantities used made it difficult to arrive at a figure which approximated the facts. However, by abandoning the effort to determine gardening costs, and labor costs, and substituting the market value for both raw materials and for labor, we did finally come to figures which I felt we might use.

Then we still had the problem of determining what it had cost to buy canned tomatoes; we had to buy canned goods in a number of different stores so as to get a fair average price on the cannery-made product; of making certain that they were of a quality similar to those which we had produced at home, and of reducing the quantity in each can and each jar to some unit which would make comparison possible quantitatively as well as qualitatively. When we finally made the comparison, the cost of the homemade product was between 20 per cent and 30 per cent lower than the price of the factory-made merchandise.

The result astonished me. That there would be a saving, if no charge were made for labor, I expected. I was prepared to find that it paid to can tomatoes whenever the cash income of a family was so low that anything which might be secured for the housewife's labor was a gain. But after every item of expense had been taken into account, and after analyzing the costs of domestic production as carefully as I would have analyzed similar costs in such a cannery as that of the Campbell Soup Company, that a saving should be shown was astonishing. How was it possible, I kept asking myself, for a woman, working all alone, to produce canned goods at a lower cost than could the Campbell Soup Company with its fine division of labor, its efficient management, its labor-saving machinery, its quantity buying, its mass-production economies? Unless there was some mistake in our calculations this experiment knocked all the elaborate theories framed by economists to explain the industrial revolution, into a cocked hat. Unless we had failed to take some element of which I was ignorant into consideration, the economic activities of mankind for nearly two hundred years had been based upon a theory as false as its maritime activities prior to the discovery of the fact that the world was round.

Slowly I evolved an explanation of the paradox. First I sought for it in advertising. I wrote a whole book, National Advertising vs. Prosperity, about my excursions into, the much-neglected field of advertising economics. Advertising, however, furnished only a partial answer to the question. While I did come to the conclusion that certain kinds of advertising involved economic wastes, I discovered that the bulk of advertising had no more effect upon prices than any other activities incidental to the creation of time and place utilities. Articles discussing my analysis of the economics of advertising were published in the trade press in 1922; my book appeared a year later, in 1923.

My voyage of discovery into the realm of advertising economics led to a deeper search for the truth. Three years later, in 1926, I published the results of several years of study in a book (for which Lew Hahn wrote the introduction), which I called The Distribution Age.

Here I came much nearer to a satisfactory explanation of the curious results of our cost studies of home canning. Factory production costs had, it is true, decreased year after year as industry had developed. Nothing had developed to stop the factory in its successful competition with handicraft industry, so far as costs of production were concerned. Our economists, therefore, took it for granted that the superiority of the factory in competition with the home would continue indefinitely into the future. What they overlooked, however, was that while production costs decrease year after year, distribution costs increase. The tendency of distribution and transportation to absorb more and more of the economies made possible by factory production was ignored. Transportation, warehousing, advertising, salesmanship, wholesaling, retailing all these aspects of distribution cost more than the whole cost of fabricating the goods themselves. Less than one-third of what the consumer pays when actually buying goods at retail is paid for the raw materials and costs of manufacturing finished commodities; over two-thirds is paid for distribution. While we were busily reducing the amount of labor needed to produce things - as the technocrats recently discovered - we were busily engaged in increasing the numbers employed to transport, and sell, and deliver the products which we were consuming. That a time might come when all the economies of factory production would be lost in the cost of getting the product from the points of production to the points of consumption had been generally ignored.

Eventually I stumbled on an economic law which still seems to me the only satisfactory explanation of our adventure with the canned tomatoes: Distribution costs tend to move in inverse relationship to production costs. The more production costs are reduced in our factories, the higher distribution costs on factory products become. At some point in the case of most products a time comes when it is cheaper to produce them individually than to buy them factory made. Nothing that we can do to lower distribution costs by increasing the efficiency of our railroads, and nothing that we can do to eliminate competition as socialists propose, upsets this law. As long as we stick to the industrial production of goods this law is operative.

A simple illustration makes this clear. With factory production, large quantities of one product are made in one spot. To use automatic machinery, to divide labor most efficiently, to transport raw materials inexpensively, it is necessary to manufacture in quantity. Raw materials and fuel must therefore be assembled from long distances before the process of fabrication can begin. After the raw materials have been fabricated into finished goods a process which may require movement of the semi-manufactured goods back and forth among several plants located at different points of the country the finished goods must be transported and stored at the points of consumption until the public is ready to use them. The larger factories are made in order to lower production costs, the greater become the distances and the more intricate the problems involved in assembling the raw materials and distributing the finished goods. Thus the lower we make the factory costs, the higher become the distribution costs.

It cost the Campbell Soup Company much less to produce a can of tomatoes in their great factories than it cost Mrs. Borsodi to produce one in her kitchen. But after they had produced theirs, all the costs of getting it from their factory to the ultimate consumer had to be added. In Mrs. Borsodi's case the first cost was the final cost. No distribution costs had to be added because the point of production and the point of consumption was the same.

All the orthodox economic teachings to which I had subscribed underwent a complete transformation as soon as I fully digested the implications of this discovery.

I discovered that more than two-thirds of the things which the average family now buys could be produced more economically at home than they could be bought factory made;
- that the average man and woman could earn more by producing at home than by working for money in an office or factory and that, therefore, the less time they spent working away from home and the more time they spent working at home, the better off they would be;
- finally, that the home itself was still capable of being made into a productive and creative institution and that an investment in a homestead equipped with efficient domestic machinery would yield larger returns per dollar of investment than investments in insurance, in mortgages, in stocks and bonds.

The most modern and expensive domestic machinery need not, therefore, be a luxury. It can be a productive investment, in spite of the fact that most manufacturers of appliances still sell their machines on the basis of a luxury appeal. Even appliances like vacuum cleaners can be made paying investments, if the time they save is used productively in the garden, the kitchen, the sewing and loom room.

These discoveries led to our experimenting year after year with domestic appliances and machines. We began to experiment with the problem of bringing back into the home, and thus under our own direct control, the various machines which the textile-mill, the cannery and packing house, the flour-mill, the clothing and garment factory, had taken over from the home during the past two hundred years. Needless to say, we have thus far only begun to explore the possibilities of domestic production.

In the main the economies of factory production, which are so obvious and which have led economists so far astray, consist of three things: (i) quantity buying of materials and supplies; (2) the division of labor with each worker in industry confined to the performance of a single operation; and (3) the use of power to eliminate labor and permit the operation of automatic machinery. Of these, the use of power is unquestionably the most important. Today, however, power is something which the home can use to reduce costs of production just as well as can the factory. The situation which prevailed in the days when water power and steam-engines furnished the only forms of power is at an end. As long as the only available form of power was centralized power, the transfer of machinery and production from the home and the individual, to the factory and the group, was inevitable. But with the development of the gas-engine and the electric motor, power became available in decentralized forms. The home, so far as power was concerned, had been put in position to compete with the factory.

With this advantage of the factory nullified, its other advantages are in themselves insufficient to offset the burden of distribution costs on most products. Furthermore, even these advantages are not as great as they seem. What is saved through minute division and subdivision of labor tends often to be nullified by the higher costs of supervision and management. And the savings in the factory made possible by quantity buying become more and more minute when the home begins to produce raw materials itself.

The average factory, no doubt, does produce food and clothing cheaper than we produce them even with our power-driven machinery on the Borsodi homestead. But factory costs, because of the problem of distribution, are only first costs. They cannot, therefore, be compared with home costs, which are final costs. The final cost of factory products, after distribution costs have been added, make the great bulk of consumer goods actually more expensive than home-made products of the same quality.

This is what we learned from Mrs. Borsodi's adventure with the tomatoes.