Lets say, hypothetically, that you have a company that makes widgets. One person can make 10 widgets an hour, and there are 100 people making widgets. (There’s a LOT of handwaving here)
If you look at the org chart of the company, there are a TON of positions that are NOT making widgets. R&D, HR, Mid-level management, Executive management. And those Executive and middle management have HUGE financial burdens to the botom line with Golden Parachutes, Teambuilding excercises, Christmas Parties, etc.
Reducing the overall profit of the widget makers…of the 100 widgetmakers, maybe 20 of them are making the product that ‘puts them over the top’ and makes the company a profit.
But then you look at other factors…There’s tax the company pays that effectively supports the government, which is a LARGE conflagration of employees that do not generate a profit.
So in a large organization that’s (presumably) healthy, there seems to be a disproportionate number of people sitting on the backs of the widgetmakers.
(and don’t get me started on supplying the raw materials to the widgetmakers, and then the economic benefit everybody adds to the system when they go home and spend the money made by the widgetmakers.)
This has to have a name, or has to be a concept…I’m not that smart, so what’s it called?
Well, they’re overhead costs, but it seems like the vast majority of the price of a product is sucked up in overhead costs.
I’m sorry, I’m kinda bouncing all over the place, let me restate it.
If you break down the cost of an item, you have:
|Salary of the Executives
|Salary of the Managers
|Salary of overhead (R&D/IT/HR/Legal/etc)
|Salary of the Widget Maker
|Costs of the building
|Advertising
|Shipping to point of sale
|Profit
|Markup
|Tax
The point being all of the things that aren’t ‘actually making a profit on the widget’.
I think the OP might vaguely be getting into Marxian notions of surplus labor. There’s a lot of this in current conservative thinking - generally framed as “the government is intruding into business and taking away productivity and profit they do nothing to generate.” The more basic thought is that a company top-heavy with management and not “doers” is similarly crippled.
(I think most conservatives are just fine with a ton of management, not realizing the anti-government argument applies there…)
I’m not sure what to call it other than overhead. In any company, there are profit centers (your widget makers) and cost centers (everything else you list beside profit and mark up). The goal is for the profit centers to bring in more cash than the cost centers spend. This is a simple view, there are costs associated with profit centers and there can be income from cost centers, but the idea is the same.
First of all, anyone who mixes taxes, interest payments, and overhead costs together has no clue about business.
You might be searching for the concept of fixed and variable costs. Your company wants to make widgets. It takes a certain amount of money just to get into the market–rent on the building, salary of your executives, advertising. Those costs don’t change (theoretically) if you make 1 or 1000. Variable costs are the costs to make one additional widget–adding a widget-making employee, costs of materials, costs of shipping.
These two factors together give you the total cost for making some quantity of widgets. Your marketing department will tell you how much you can sell that many widgets for. (And your sales department will later tell you if your marketing department was right or wrong). Fixed and variable costs together give you economies of scale–because the fixed costs are the same for any number of widgets, the cost per widget falls as you make more of them. Because of demand curves, as you make more widgets the amount you can charge per widget also, generally, falls.
These two factors give you your Earnings Before Interest and Taxes, which allows you to calculate your taxes and retained earnings.
This is all very theoretical and there are lots of “in generals” in there, and any real case gets more complicated very quickly, but I hope this helps.
Yeah, this is probably where you make your first mistake. The hierarchy is a pyramid, and there’s usually a * lot * of peons for each manager type. Any company that was 80% management and support is grossly bloated.
You also overestimate the role of the “widget” makers. Making stuff is relatively easy. *Selling * it is often absurdly hard. So those sales people and advertising people that you see sitting at their desks not making widgets are actually really important.
Conflagration? Well, right there, you’ve solved your surplus employee problem.
I used to work for a large institutional coffee company, the largest as a matter of fact. We had approx 120 employees working in the plant from roasting coffee, shipping, packaging, filling orders, janitors etc, I have no idea what the uilding expenses were but the employee cost at the manufacturing level added about 5% to the cost of the product. Sales and management and service people accounted for about 1000 employees. They also sold spices and other restauraunt related supplies. 90% of those working in the plant could have been replaced in one day. This might be true for about 50% of the corporate employees. I don’t see the ones making the coffee as any more important to the operation than anyone else.
The name for the economic theory is ‘naivety’ with some streaks of casual Marxism thrown in. It comes up a lot among people that don’t understand that the final production of a given product is only a small part of a business.
Let me give you a concrete example. The Apple iPhone revolutionized the consumer technology industry and helped make Apple the most successful company in the world. Who is more responsible for the iPhone? Was it Steve Jobs and his team of designers and technical people at Apple Corporate headquarters or is Apple Corporate simply ‘sitting on the backs’ of the people in China who do the final assembly of the phones? Should Apple get rid of most of their corporate staff and start paying the people in China who do the final assembly $100 an hour each to make things fair?
Because conservatives don’t care what organizational structure a company has, as long as it makes enough money to stay in business. A company with a ton of useless, incompetent, wasteful managers will go out of business.
There is no such competitive pressure on the government.
What about the guys who designed the widget? Without them, the widget makers wouldn’t know what to make. What about the guys in marketing who figured out what to make? Without them, the engineers wouldn’t know what to design. Etc.
The following terms do apply, and aren’t politically laden:
variable cost: the amount of cost that’s proportional to the number of widgets made. This includes laborer wages and cost of goods, plus cost of things like fuel for processes.
overhead cost: the amount of cost that’s not proportiona to the number of widgets made. This includes most of the engineering and marketing costs.
Back in 1980 I worked for a motor company that would pay one million dollars in overhead to save 25 cents on variable cost, for cross-model parts (e.g., engine parts for engines used in several popular car lines). Since engine control software was overhead, they tended to prefer the less expensive (and harder to code for) sensors and actuators. Each component area had its own budget, but the software budget was centralized. That was quite a burden on the poor coders!
It’s the viewpoint of the machinist that every other person in the company is a useless drug on profits and efficiency. Since he turns out widgets all day, what the hell is anyone else doing?
I think it’s the principle called management. Depending on the product and mode of manufacturing, it’s not surprising to see a pyramidal hierarchy where there are as many or more people managing and supporting the business through means other than direct production as there are on the factory floor. Widgets don’t sell themselves, ship themselves, or maintain a supply of materials to make them. They don’t keep the books, fill out tax forms, enforce regulations, or any of the many other functions a business requires. It takes people to do those things. Only very small businesses can operate with the great majority of resources put into production.
I agree that classic Marxism was the first thing that came to my mind when I read this.
Back then, management and supervision was a much thinner slice of any overall firm. You could much more easily make the argument that labor was the real supplier of wealth even in early factories that required capital to build.
Today it should be clearer that labor is a vital component, but that businesses have layers of extraordinary complexity: design, marketing, human resources, taxation, real estate, customer services, advertising, production, r&d, quality control, on and on, no one of which can be completely removed without the entire edifice toppling.
You can still argue about whether the allocation of revenues and profits to each of these groups is equitable. You’ll never stop, for that matter. But however much sense Marxism meant in the world of 19th century European industrialization - a fair amount, in my opinion - he got the future wrong because he assumed that nothing would or could change the allocation other than a worker revolt. The world has a billion middle-class workers that say otherwise.
And who is coming up with the next great widget? The person on the line that is supplying more than is share of the present (and soon to obsolete) widget. Or the useless marketing and design guys trying to figure out what new widget the public wants and how to produce it at a cost that can keep the people making widgets employed.
Even at the time, that thinner slice was extremely critical. Sales was even more personal then, and engineers and managers didn’t just spring up from nowhere, for no reason. You couldn’t run a manufacturing firm in 1900 without them any more than you could today, and successful workers were usually very skilled in specialty trades as well.
This may have been the biggest failure in Marxism: Marx and Engels conflated extremely variable groups in generic blocs of “Classes,” which simplified real life enormously and helped them sell books but also meant they were largely talking past the people they supposedly wanted to help. Unskilled workers had relatively little in common with skilled workers, who had no cointerest with engineers, who never liked salespeople, who found proto-marketers (i.e., the people who designed the product down at the bottom of it), who had little in common with management. These groups formed a vast, diffuse cloud, with some common interests at different times and places, and none in others. As it turns out, none of these are disposable, which is why all Marxist revolutions turned around and created a harsher, more rigidly stratified version of the above. Or, in places like America, Communist societies divided into foreign and domestic groupings, angered and alienated the actual workers, and the workers themselves organized into different and often competing groupings of unions.
Edit: And continuing the above example; even if you got rid of that 80%, you’re going to have a big group employee meetings constantly, have to make lots of collective decisions, have to hire people to do all kinds of finance and so forth, and eventually you’ll not likely be very different from where you started. There are a few companies around who manage to do just that, but none are very large because they’re usually not capable of sustained growth. The Oneida Company was a famous example, as they started as a religious commune who eventually decided to stop being a commune, partly because they decided that their ideology was stupid and partly becaue they were really good at kitchenwares.