Factory vs. Artisanal Shop

In this chapter the existence of economies of scale in the antebellum industry is discussed.

This question is of importance as it is connected with the question whether the change from artisanal shops to the factory systems led to efficiency increases and if yes, what were the

2 In modern competitive markets values of nearly 200 % are surely implausible, so one could argue that the threshold should be somewhat lower than 200 %. But the exact value of the threshold is unknown and therefore a high value is used as the antebellum industry was surely not completely competitive.

3 The data were made available by Jeremy Atack.

4 For every firm the other firms of the same industry are used to construct the efficiency frontier.

reasons for this increase. For a long time, historians have diverged in their opinion on this question. The main empirical contributions to this question are Sokoloff (1984) and Robinson and Briggs (1991). Sokoloff first showed that the size of establishments increased signific-antly from 1820 to 1850. He then estimated various production functions, in which he found evidence for increasing returns to scale for firms until they had between 5 and 16 employees, which indicates that the increasing size of the firms in the antebellum industry led to increases in efficiency. His results were questioned by Robinson and Briggs (1991) who found no evid-ence for returns to scale in a small sample of firms from Indianapolis. They also argued that many factories were only larger shops, in which the same production techniques were used with a larger workforce. This does not lead to increased efficiency.

One problem with estimations of production functions is that one has to explicitly spe-cify the functional form. Though the specifications Sokoloff and Robinson and Briggs used were very simple and widely used ones,⁵ the possibility of specification errors and resulting biases remains. Therefore, our efficiency values are used to test the earlier results.

The Scale efficiency values are regressed on a factory dummy, which equals one for all firms with between 6 and 15 laborers (following the literature; see Sokoloff 1984), and a large factory dummy for firms with more than 15 laborers. As in the other regressions in this chapter industry, time and region dummies are also included.

Table 1: Truncated regressions of scale efficiency on the factory dummies.

Coefficient P-Value

Factory 0.58722*** 0.000

Large Factory -0.28925*** 0.000

Number of Obs. 0 0.511

5 They used Cobb-Douglas and Translog-specifications.

Industry Dummies included

N 12389

Notes: */**/***: significant on the 10/5/1 percent level. A crop service establishment with less than 6 workers located in New England is the reference category.

The results for scale efficiency reinforce the findings of Sokoloff. Factories are signi-ficantly more scale efficient than small firms, and the coefficient is large and highly signific-ant. Large factories are less efficient than small factories, so the economies of scale vanish after a certain threshold.

Next, a second model is presented, which assumes constant returns to scale. This spe-cification ensures that the results do not report the spread of efficiency in certain size classes, which is possible when variable returns to scale are used and therefore firms are only com-pared to firms from their respective size class.⁶ Table 2 shows the results from the constant re-turns to scale specification.

Table 2: Truncated regressions of constant returns to scale efficiency values on the factory dummies.

Coefficient P-Value

Factory 0.07163*** 0.000

Large Factory 0.02798*** 0.001 Number of Obs. 0.00017*** 0.000 Industry Dummies included

N 12408

Notes: */**/***: significant on the 10/5/1 percent level. A crop service establishment with less than 6 workers located in New England is the reference category.

6 See Appendix 2 for a detailed examination of the technical reasons for the constant-returns-to-scale specifica-tion.

This model shows similar results as the first, with factories being significantly more efficient than shops. It is also confirmed that scale efficiencies vanish somewhere, although this specification shows large factories to be still more efficient than shops.

As Sokoloff remarked, some historians believe in the efficiency advantage of factories only in mechanized industries, as textiles and iron, but not in other industries. To test this, the regressions shown above were repeated by industry. Though, due to limited observations, not all facets of textile and iron manufacturing are in our dataset, the regressions showed that in 13 out of 19 cases the pattern shown above was found, namely higher efficiency in factories, while large factories had somewhat lower values than the normal factories. Rising efficiency values even for the group of larger factories accounts for four of the remaining six cases, while only two cases showed higher efficiency in artisanal shops than in factories. This sug-gests that the efficiency advantage of factories, though varying in size over the different in-dustries, was a universal facet of the antebellum industry and not only limited to some early mechanizing industries.

Sokoloff estimated the amount of value added when scale economies were exhausted to be 9.500 $ (in prices of 1860) for non-mechanized factories. Our estimates point towards a values of 6.500 $ of value added for the turning point of scale economies. Both the scale and constant returns to scale model lead to similar values here. This means that scale economies existed, but were exhausted early. Though our estimates suggest that scale economies were exhausted earlier than we believed until now, they still show that scale economies were im-portant for a large number of establishments.