Systems of Production

Markets, Organisations and Performance

Brendan Burchell, Simon Deakin, Jonathan Michie, Jill Rubery

• Publisher: Routledge
• Year: 2005
• eBook ISBN: 9781134457410
• Topic: Business
• Subtopic: Business General
• Index: Business

In recent years we have seen the predictions of our forebears that leisure time would increase as the years pass utterly confounded. It is a fact of life that in major cities across the world, transport systems are full to bursting with people on their way to and from work. As people have come to accept longer working hours as a way of life, a number of new issues have come into play. These include labour market regulation, contract work and outsourcing, wages and increased attempts at better organisation. The impressive array of expert contributors, including Mark Harvey, Jane Humphries and Frank Wilkinson, have compiled a comprehensive and interesting book.

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Productive systems
Introduction and overview

Jill Rubery, Brendan Burchell, Simon Deakin and Jonathan Michie

The focus of this book is the concept of ‘productive systems’ developed by Frank Wilkinson in a paper first published in the Cambridge Journal of Economics in 1983. Chapter 2 of the present volume updates and extends the argument made in the original paper. It lays out a distinctive interdisciplinary and institutional approach to the analysis of systems of production. The 1983 paper drew on work carried out by the Labour Studies Group of the Department of Applied Economics at Cambridge in the 1970s and 1980s. Since then, the approach has been widely adopted among a network of researchers meeting annually under the auspices of the International Working Party for Labour Market Segmentation.

The first version of ‘Productive Systems’ was written at a time when the influence of Keynesian economic thought was clearly on the wane in the face of the revival of neoclassical economic theory. Nearly twenty years on, neoclassical methodology dominates the economics profession, although its influence on other disciplines is limited and there are signs that the wider standing of economics as a subject is suffering as a consequence of its rigid attachment to neoclassical precepts. In terms of policy, it would be premature to assume that the neoliberal agenda which was formed in the early 1980s in Britain and America has necessarily run its course. Adherents of the deregulatory approach regularly call for its extension to continental Europe, Japan and the developing world – all areas which to some degree have so far resisted it. However, in the Anglo-American world, the causal link running from deregulation and market liberalism to greater inequality of income and opportunity, and the growing failure of privatization and marketization to deliver efficient public services, are becoming clearer by the day. This makes it an appropriate time to return to the arguments made in the 1983 paper, and to consider how they may contribute to the kind of refoundation which economics, and economic policy, are so evidently in need of.

Chapter 2 (Wilkinson), in restating the productive systems approach, places at its core the rejection of the claim that there is a set of immutable economic laws, the supposed ‘laws of the market’, to which institutions must or do conform. The effort of neoclassical economics to deduce the existence of these laws from an arbitrary set of a priori principles is not only fundamentally misguided. It is also highly dangerous from the point of view of policy, since it leads to attempts to force existing institutions into a single, rigid mode. This is what lies behind the rhetoric of ‘lifting the burden’ of regulation in labour and product markets, and applying market-like mechanisms to the provision of collective goods and services in health and education. Such reforms do not result in perfectly efficient allocations of the kind predicted by the concept of market equilibrium, since that concept is almost completely irrelevant to the real-life conditions under which markets and organizations operate. This is not to say that observed forms of regulation and state provision are always ideal; far from it. However, in order for reforms in these areas to work in the general interest (as opposed to the sectional interests which, in practice, they often end up serving), it is essential for theory to acknowledge that relations between the market, the state, and the forms of production are far more complex and variegated than allowed for in neoclassical economics.

Where neoclassical theory reifies the market and loosens it from its institutional moorings in civil society, the legal system and the organization of the state, the productive systems approach sees these institutions as playing a central role in the constitution and development of productive forces. Systems of production exist at a number of levels: the workplace; the enterprise or firm; the industrial sector or inter-firm network; nation states; and transnational trading blocs. Competition between systems is one of the forces determining their comparative success and survival. However, competition does not work according to the process of linear adjustment implied by the neoclassical model. Rather, systems evolve in a way which is shaped by their history and by the particular institutional environments in which they are located. Productive systems both determine, and are determined by, their institutional settings. Thus competition is not a force of nature; it is structured by institutional forces which determine the direction and pace of change of systems. Hence there is a complex relationship between systems and their environments. Systems evolve just as often in response to an internal dynamic of change, than to shifting external conditions. As a result, the process of change is often unpredictable, and is characterized by sharp discontinuities.

In stressing diversity and the importance of local conditions, the productive systems approach does not neglect certain general conditions which affect all systems operating in a capitalist or market framework. The first and most fundamental of these general conditions is the inequality or asymmetry which exists between capital and labour. This is a function of deeply embedded conventions of property, which allocate residual control and income rights in the assets of most firms to the suppliers of equity capital or, alternatively, but less commonly, to representatives of other external stakeholders such as customers or taxpayers. Most likely through a combination of efficiency (diversification of risk) and historical contingency (absence of general access to finance capital), most workers do not have ownership rights, in this sense, in the organizations for which they work. Hence there is a fundamental and unavoidable separation of interest between capital and labour, and, as a result, the potential for distributional conflict between them. But at the same time, capital and labour are in a relationship of mutual dependence: at a minimum, each needs a certain degree of cooperation from the other if the system of production is to survive and flourish. On this basis, they have the possibility of working together in such a way as to enhance the overall joint product. The central issue for all productive systems, then, is how to achieve and sustain those forms of voluntary cooperation on which the well being of all parties, in the final analysis, depends. This is an issue, at one level, for management theory and practice, and, at another, for the political process.

In the productive systems approach, institutions are thought of as bundles of conventions, norms, laws and practices, some of which are inherited through the force of habit and precedent, and some of which are fashioned to meet particular needs in the manner of legislation. Institutions matter for the process of production, since they shape distributional outcomes, manage risks and set the rules of the game in terms of competition within and between systems. Relevant institutions in this sense include associations in civil society (trade unions, employers’ bodies and the professions), the institutions that shape the reproduction of the labour force, including the family and the education and training system, the forms of local, national and transnational government and the legal system. These institutional forces shape the search for conventions of voluntary cooperation in particular contexts, giving rise to particular, local forms of comparative advantage or disadvantage. Efficient productive systems are those in which distributional conflicts are overcome in favour of general agreement on norms of cooperation and cohesion, establishing a virtuous cycle of growth. Inefficient systems, by contrast, are those within which degenerative tendencies towards distributional conflict outweigh efforts at cooperation, thereby engendering a self-reinforcing process of decline.

The evolution of institutional systems and of productive systems is therefore an adaptive process. Distinctive solutions emerge, shaped by local environmental conditions; they may display greater or lesser degrees of efficiency. However, there can be no assumption that the less successful systems will necessarily be ‘selected against’. Systems can survive even when it is clear to all that there are more successful alternatives; but the costs of institutional change may be so great as to outweigh fundamental reforms. Hence systems may persist, or be destabilized, quite independently of the intensity of external environmental factors. There may well be diffusion of practices through imitation and learning from one system to another, but this inevitably involves an adaptation of general models to local circumstances. In short, what we observe is a non-equilibrium, non-teleological process, in which outcomes are influenced in a non-deterministic way by a variety of internal and external factors.

In this vein, Chapter 3 (Harvey) develops Wilkinson’s theoretical framework by arguing that market competition should be understood as an ‘instituted’ economic process. This means that competition emerges out of historically conditioned forms of production, organization and regulation. Such an approach stands in contrast to neoclassical economics, on the one hand, but also to ‘oversociologised’ notions of ‘embeddedness’, on the other, since both reduce economic relations to the micro-level of interpersonal interactions. An institutional focus makes it possible to see, on the contrary, that the form of competition depends on the ways in which the parties to exchange relations are constituted and the relevant property rights and pricing mechanisms are defined. The very formation of separate labour, product and capital markets depends on the ‘instituting’ of economic processes in this sense. Structural conflict and tension between different forms of instituted processes are a major source of diversity and change within productive systems. This argument is developed by reference to empirical research on the emergence and evolution of retail markets. The effect is to explain more precisely the nature of market competition in particular settings, rather than to see competition itself as an all-embracing explanation for economic and institutional change.

Chapter 4 (Lorenz) offers a further example of empirical work which is informed at a deep level by the productive systems framework. Here the focus is on the conceptualization of relationships between firms. The chapter explores the notion of ‘trust’ as an influence on the economic relationships between individuals and between firms. The chapter is important at two separate levels. First, it gives an insight into a way in which productive systems might operate well, sympathetic to the discussion of successful and unsuccessful productive systems in Wilkinson’s chapter, but going beyond it to explore the roles of key individuals who span boundaries between firms. This understanding is shown to be useful in explaining why some industrial districts perform better than others. It also provides an excellent example of how qualitative empirical work can assist us in understanding the nature of economic relationships between organizations, in the process overturning conventional conceptualizations.

Chapter 5 (Deakin) takes up the theme of the coevolution of productive systems and the institutional environment. It argues that social rights can have a ‘central, constitutive role’ in shaping labour market relations and are not always, as neoclassical general equilibrium theory suggests, an impediment to efficiency. The chapter first demonstrates the case for social rights using the evolutionary economics perspective developed by Hayek. This perspective focuses on the role of competition in contributing to dynamic efficiency in the sense of acting as a ‘process of discovery’. However, these market processes need to be facilitated by ‘numerous inter-locking conventions’ which act to share information and to underpin mutual expectations of behaviour, thereby saving on transactions costs. Hayek’s analysis is shown to provide only a partial fit with the productive systems approach, as it is too narrowly focused on the need for conventions to underpin private property rights. A more general case can be made for social rights once this focus is expanded to include areas where property rights lack relevance. These include goods for which no property rights exist (public goods) and areas of activity where individuals are unable to participate and develop their potential because of social exclusion. Market processes in this context lead to cumulative inequalities. Deakin therefore expands the case for the legitimacy of social rights by utilising Sen’s concept of capabilities, that is, the provision of opportunities to individuals to develop their potential contributions to the economic and social order. Social rights and the enhancement of the productive aspect of the economic system are seen as complementary and not conflictual: systems of labour regulation and social rights can contribute towards both dynamic efficiency and the maintenance and advancement of democratic values.

Indeed neoliberalism, in seeking to unravel the welfare state and return western societies to a minimal nineteenth century regime of property and contract rights, can be seen to be aiming to restrict the application of principles of democratic participation within the economic sphere. The apparent success of neoliberalism in stabilizing the economies of Britain and the United States during the long boom of the 1990s needs to be seen as part of a process of adjustment to an earlier period of crisis, in the 1970s. The implications of this process are still not yet completely clear. Neoliberalism was born out of a crisis in productive systems at the start of the 1970s which was most extreme in Britain and the United States since, by contrast with continental Europe and Japan, they were less able to withstand pressures to abandon consensus politics and returned instead to a system of distributional conflict. As the postwar Keynesian consensus was dismantled, established conventions of trust between management and labour were overturned and the terms of trade between social groups were altered. In the process, a new basis for societal cooperation appears to have been established. However, given the weakening of civil society (in particular trade unions and the professions, but also organized capital) which has taken place, together with the diminution in the role of the state as guarantor of social conditions, this new compromise rests on inequality, growing social exclusion and the mobilization of a reserve army of labour. It is a matter of judgment whether cooperation founded on such conditions will prove to be more stable and enduring than the model of social citizenship under the welfare state which it replaced, but there is every reason to think that it may not.

These issues are taken up in Chapter 6 (Ladipo, Mankelow and Burchell) which provides an exploration of the forces leading to and evidence for job intensification over recent decades. For conventional economics the issue of the wage–effort relationship is settled in the marketplace. In contrast a productive systems approach, however, recognises that it is in the workplace that the wage–effort relationship is fully realized. In this context, the chapter provides carefully analyzed and convincing evidence of heightened work intensity over recent decades particularly in the United Kingdom associated with its deregulated productive system. The consequences of these developments for individuals and families are documented, through evidence of raised stress levels, ill-health and family tension. Work intensification has tangible economic costs in its effects on motivation levels, turnover rates and in the risk of compensation claims against employers. However, in keeping with the productive systems approach, it is not assumed that such counterproductive effects will be sufficient to bring about a process of self-correcting change. Without the development of countervailing power, through for example, collective action and trade union organization, employers are unlikely to recognize the destructive impact of work intensification. As Wilkinson argues in Chapter 2, in order for the rhetoric of mutuality of interests, as stressed in the human resource management to hold, the definition of interests needs to be expanded beyond those of management. Otherwise, new forms of human resource management may be little more than a mechanism for promoting self-exploitation of workers.

Chapter 7 (Craypo) provides further consideration of the role of unions within productive systems and in particular within the US productive system. It develops a concept of union bargaining power termed an ‘ability to pay, ability to make pay’ model. The achievement of reasonable wages is conditional both on employers having the capacity to pay without risking going out of business and on the power of the unions to make the employer pay. The former depends on the system of competition and on opportunities for competitors to pay substandard labour costs. The latter requires not only the organizing of individual workplaces but the development of unionization across the organization and sector, broadly defined, to prevent competitive undercutting by non-union plants or companies. Craypo outlines how the opportunities for negotiating reasonable wages has been undermined, on the one hand, by forces that have reduced the leverage of organizations on prices, and, on the other, by restrictive and outdated regulations which inhibit the ability of unions in the United States to consolidate their organization to prevent destructive competition from non-union firms or competitive unions. Three sector case studies – cars, airlines and the retail trade – provide evidence of the three major contributors to union decline, namely, deindustrialization, deregulation and industrial restructuring. The result has been a vicious cycle which inhibits the development of labour-management cooperation based on trust relations. The new productive system carries with it the seeds of its own destruction; it spreads low prices but brings with it low wages and low living standards and thus cannot sustain in the long term a high value added economy such as the United States.

Chapter 8 (Konzelmann and Forrant) demonstrates the fragility of creative work systems within the context of deregulated and uncoordinated markets, drawing on three contrasting case studies of manufacturing companies in the United States. Creative work systems which involve workers in active problem solving and innovation, do contribute to improvements in productive efficiency, but these systems are expensive to set up and are slow to provide rewards. They are thus vulnerable both to competition from low cost, low road competitors in the same market and to pressures from the financial markets to provide continuous improvement in shareholder value. Of the two case study companies that introduced creative work systems, only one has been able to sustain the strategy protected by a long-term relationship with a major customer. The other experiment proved equally successful in improving productivity and quality but fell victim to takeovers and to changes in management personnel and business strategies. Destructive markets can thus operate to undermine successful systems, viewed from a production rather than a short-term financial value perspective. In the third case, the option of developing creative work systems was eschewed in favour of an explicitly coercive strategy to take costs out, using global relocation as a threat to win concessions both from within the workplace and from its suppliers. Unfortunately it may be the last example which becomes the dominant model if the macro environment and product market structure are not able to protect experiments in new and more productive forms of working.

In the course of the 1990s, the process of market liberalization which began in Britain and North America began to spread to mainland Europe. Chapter 9 (Mückenberger) examines pressures for institutional change in Germany which derive from a combination of forces: the unification of the country in the early 1990s, which drove up unemployment to levels not experienced for several decades; the effort to meet the convergence criteria of European Monetary Union; and the impact of globalization, which led German scholars to speak of the abandonment of the traditional social state by the ‘global competition state’. The chapter studies the process of change in relation to six key features of the German system: the ‘dual system’ of vocational training; the ‘standard employment relationship’ of permanent, stable work r...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Preface
• 1. Productive Systems: Introduction and Overview
• 2. Productive Systems and the Structuring Role of Economic and Social Theories
• 3. Productive Systems, Markets and Competition As ‘Instituted Economic Process’
• 4. Inter-Organisational Trust, Boundary Spanners and Communities of Practice
• 5. Social Rights and the Market: An Evolutionary Perspective
• 6. Working Like a Dog, Sick As a Dog: Job Intensification In the Late Twentieth Century
• 7. The Decline of Union Bargaining Power In the United States: An ‘Ability to Pay, Ability to Make Pay’ Analysis
• 8. Creative Work Systems In Destructive Markets
• 9. German Industrial Relations In a Period of Transition
• 10. Labour ‘Flexibility’ – Securing Management’s Right to Manage Badly?
• 11. The Political Economy of the Minimum Wage
• 12. Economic Functioning, Self-Sufficiency and Full Employment
• 13. Equal Opportunities As a Productive Factor
• 14. Decent Work As a Development Objective