Idea Transcript
Cambn-dge Journal of Economics 1983, 7, 413-429
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In recent years there has been an increasingly dogmatic reassertion by a growing proportion of economists of the beneficial effects of the invisible hand of market forces and of the inhibiting effect on welfare of institutional control and government intervention. These arguments are based not on a careful examination of how economies actually work and have developed but on abstract, a priori reasoning about how they should operate. Socio-political forces are either assumed not to affect outcomes or are held to distort the operation of the market, in which case they need to be adjusted to make them compatible with the postulates of economic theory. The defect of this approach is that it fails to comprehend the central role of institutions in economic development and the inextricable link between social, political and economic forces in determining how economies function. This complaint against economic orthodoxy is not new; it was made in the nineteenth and early twentieth century by the historical and institutionalist schools of economic thought, which influenced Marshall and which have been kept alive in the work of Galbraith and others (Ekelund and Hebert, 1975). Moreover, there is a rich continental tradition, of which the French regulation school is a notable modern example, of incorporating institutional forces within a broad Marxist analytical framework to explain the process of historical development.! This paper is in keeping with the spirit of these traditions and is written in the belief that it is opportune to restate the case at a time when economic problems are acute and when the main advice of orthodox economists is for government inaction in all things, other than to make the market work more 'perfectly'. The central proposition of this paper is that economic, social and political forces combine in determining how economies develop and that the result is a dynamic nonequilibrium process which can only be revealed by empirical investigation. This is not to suggest that abstract reasoning has no role to play but rather to argue that there are and can be no universal, pre-determined, 'true' systems to which underlying economic forces are tending. Nor is it argued that empirical investigation should be conducted in a vacuum: a theoretical and analytical framework is essential as a guide. But it is necessary at the outset to recognise that the abandonment of conventional economic theorising requires sacrificing the formality of its modelling and the surety of its conclusions. What *University of Cambridge. The research from which this paper developed was undertaken by the Labour Studies Group in the University of Cambridge, Department of Applied Economics and was funded by the Social Science Research Council. I am particularly indebted to my colleagues Roger Tarling and Jill Rubery. I would also like to thank Kathrin Peters for her continued encouragement and critical comments, Sebastiano Brusco and Michael Anyadike-Danes for many very helpful suggestions and the editors of the eJE for their assistance in preparing the final version. ISee, for example, Boyer (1979). 0309--l66X/83/030413 + 17 $03.0010
© 1983 Academic Press Inc. (London) Limited
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Frank Wilkinson*
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1. Social and political organisation and the distribution and creation of wealth in economic theory Orthodox economic theorists generally claim that their 'science' is apolitical: they set out what they regard as a positive analysis of the process of wealth creation and distribution and leave it to others to make political judgements. But because they proffer practical advice based on their theorising they necessarily, if implicitly, adopt a strong position on the nature and effect of social and political organisation. The central thesis of this paper is that it is the failure to be explicit about the nature of social and political organisation and to incorporate it into economic modelling that lies at the heart of the failure of the majority of theoretical economists to provide any real understanding of how an actual economy works. This section considers how various schools of economists evade the issue of incorporating social and political forces into their models. The subject matter of economic theory is the creation and distribution of wealth. According to neoclassical theory, economics is primarily concerned with the 'allocation of scarce means to alternative uses'. Means, usually referred to as 'initial endowments', appear on the market by some unspecified process and the market functions so as to ensure their efficient utilisation and hence to optimise social welfare. Individually, firms, workers and consumers act rationally in pursuit of their own self-interest, but it is assumed that none is sufficiently important relative to the market to influence outcomes and so the market operates impersonally to determine the terms at which factor services and commodities exchange. Technology and preferences, which provide the basis for rational decision making, are assumed to be such that alternatives are traded off against each other, the individual or agent needing to get a more than proportionate increase in the one to compensate for relinquishing a unit of the other. The question of wealth creation and wealth distribution is resolved by identifying the outcome of the competitive process as 'efficient' in terms of both consumption and prod uction. For example, labour expresses its preferences by trading-off work (consumption of wage goods) and leisure l and is paid according to its productivity because entrepreneurs trade off labour against capital. The institutional framework within which neoclassical economists operate is effectively distilled directly from these assumptions about individual behaviour, the organisation of markets and preferences, technology and the distribution of initial endowments. 'The providers of capital get what they want in terms of intertemporal patterns of consumption and what they deserve in terms of the productivity of capital.
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is proposed here as an alternative are broad guidelines formulated with the specific aim of improving our understanding of how economic systems operate in practice. This framework has been developed from empirical and historical investigation and from long discussions with others engaged on similar research. A central feature of this methodology is that the framework itself is to be tested and where necessary modified as a result of empirical findings. The paper is divided into four main parts. The first considers orthodox theories and assesses critically their treatment of social and political forces; the second suggests a possible framework for analysis which incorporates such forces; the third briefly confronts this framework with empirical evidence on some recent changes in the functioning of economies; and the final section applies the proposed framework to the central issue of economics: the creation and distribution of wealth.
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'Only its most honest exponents are prepared to confess this (Hahn, 1982, is a notable example). Others subject alternative theories to 'vigorous' examination and argue that whatever the institutional layering obscuring its operation, the working of the market shines through (see for example Cain, 1976). 2See Keynes (1940). 3Kalecki must of course be specifically excluded from this stricture. Not only did he provide alternative theories of distribution incorporating real-world social and political structures but he also foresaw the political reality of full employment in a capitalist system (Kalecki, 1971).
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Intervention in the market by either private agents or the government imparts imperfections to the system causing it to function sub-optimally, except where increasing returns create natural monopolies and when important external economies or diseconomies exist. In these cases intervention is accepted and accommodated by, for example, theories of 'imperfect competition' and 'second best'. However although neoclassical theorists recognise that the world does not operate perfectly within their own understanding of that concept they believe it should be guided in that direction. Moreover the ability of neoclassical theorists to incorporate 'imperfections' into their schema as 'special' cases has the paradoxical effect of reinforcing their main tenets. But it is just these tenets and their incompatability with, for example, increasing returns and the reality of power relationships which make neoclassical theory completely unsuitable for analysing the real world.! Keynes's criticism of neoclassical theory centred around its inability to account for the recurrence of long periods of high unemployment. He recognised the importance of institutional forces in the determination of money wages and in the allocation of investable funds by the financial markets. In his system wealth creation was held back by a chronic tendency for an advanced capitalist economy to generate excess savings which .were not automatically tranferred to investment. The distribution of income was given a functional role in determining the average propensity to save 2 and in neoKeynesian theories of distribution non-inflationary, full employment equilibrium required that real wages adjust to the pre-emptive claims of investment, capitalist consumption, government and the foreign sector (Kale~ki, 1971; Kaldor, 1955). The analytical framework developed by Keynes and his followers provided the justification for government intervention in the economy and hence has important implications for social and political organisation. But in the emphasis on non-inflationary, full employment equilibrium within a capitalist system, and as a response to the obvious failure of Keynesian policies to provide easy solutions to macro-economic problems, particularly inflation, Keynesians have increasingly judged the operation of social and political forces in terms of their own economic theories. 3 For example, the belief that the distribution of income is the outcome solely of macro-economic forces affects how trade union wage bargaining behaviour is assessed Inflation, it is argued, results from the unwillingness of trade unions to accept the reality of income distribution, the cure being to reform trades unions or control their part in wage determination. This procedure of devising social and political solutions from economic assumptions is given additional support by further theorising which attempts to establish that institutional behaviour is, in fact, compatible with the postulates of economic theory. An outstanding example of this is Wood (1978) who simply asserts that relative pay is overwhelmingly more important than the absolute level of real pay in explaining institutional wage determination. This leaves the distribution of income at the disposal of policy makers and suggests that the problem of inflation is simply a question of institutional reform. If, on the other hand, workers' dissatisfaction with absolute rather than relative real earnings lies at the heart of wage pressure and the development of trades unions
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(Tarling and Wilkinson, 1977; 1982), and if high levels of unemployment are functional in containing that pressure, then neither employment nor inflation can be regarded as a matter of economic, social and political fine tuning. Thus, whilst an important basis for the Keynesian revolution was the specific recognition of institutional forces in shaping economic systems, in its development Keynesianism has regressed towards pre-Keynesian procedures of describing 'ideal' social and political institutions in terms of postulates derived from its own economic theory. This procedure carries with it the important corollary that the policy prescriptions are held to fail mainly because of institutional imperfections. Both Keynes and macro-economists following him have concentrated on broad aggregates and have had little or nothing to say about the organisation of production. However, out of the Keynesian revolution (or perhaps, more precisely, paralleling it) there developed in Cambridge (UK) fundamental criticisms of the micro-economic foundations of neoclassical theory, emphasising that the means of production are not scarce but produced: attention was focused on supply. The value of capital was shown not to be independent of the rate of profit so that, with given techniques, the distribution of income has to be known before the structure of relative prices can be determined (Sraffa, 1960). But the process of production is depicted simply as a combination of physical inputs of commodities, the distribution of income is exogenous and the dynamics of the process of wealth creation is not a central issue. Nor has any effective attempt yet been made to incorporate social and political forces within this alternative analysis of production and value. It, therefore, suffers from many of the defects of conventional theory and as a result is no more useful for analysing actual economic systems. Marx provides the outstanding portrayal of production as an essentially social phenomenon. Following the classical economists in regarding income distribution as a central issue he saw the creation of wealth as dependent on distributional shares determined not, as in neoclassical theory, by economic efficiency, but by the social relations of production. Moreover, Marx emphasised the crucial role of the structuring and restructuring of production in ensuring the wealth distribution necessary to maintain the rate of accumulation. However his emphasis on the inevitability,' and imminence, of the revolutionary downfall of capitalism led him to over-state that system's self-destructive potential. The alleged tendency for the rate of profit to fall, inevitably leading to the 'immiseration' of labour and the building of their revolutionary response, seriously underestimated the wealth-creating potential of capitalism which has enabled both the maintenance of profits and real wage growth. Marxists in general have not responded to this difficulty (Robinson, 1983). Rather they have continued to emphasise the predominant importance of distribution. In its crudest form modern Marxist analysis regards changes in techniques, work organisation and market structures mainly as methods of reorganising the social relations of production to secure for capital the share necessary to maintain accumulation (Gordon et aJ., 1982). The tendency for economists of all persuasions to determine ideal-and idealisednotions of how economies operate from abstract, a priori theorising and then to derive from this criteria to judge the real world helps to explain why economists so often adopt entrenched and mutually exclusive positions. A few examples will illustrate this point. To monetarist and supply-side economists state intervention is generally damaging; to Keynesians it is essential to maintain full-employment growth; to Marxists it is a reflection of the class forces in society and in extreme cases just a tool of capitalist domination. Market domination by large firms causes loss of economic welfare in neoclassical theory
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2. Productive systems Productive systems exist where the forces of production combine in the process of production. The constituent parts of productive systems are labour power, the means of production, the methods by which production is organised, the structure of ownership and control of productive activity and the social and political framework within which the production process operates. Importantly, these elements are produced rather than merely existing as preconditions to economic activity, and this applies to the social and political framework as much as to the means of production. Moreover, though it is convenient to consider these elements separately, in practice they are mutually supportive and dynamically interactive. In both the organising and structuring of productive relationships there are two distinct elements: mutual interests and relative power. For example, labour and the means IFor a very powerful statement of this view, see List (1885), especially Chapter XI. List's brilliant attack on the generality of the application of free trade in any other than an ideal world has yet to be refuted.
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but is the engine of growth is Schumpeterian and Marxist economics. For neoclassical theorists, the free operation of the market co-ordinates individual actions to ensure efficiency in both production and consumption; in Marxist theory, employers and workers have unequal access to means of production and subsistence, with the 'free' market allowing employers to maximise the benefits of their relative strength at the expense of workers who, thrown into competition with each other, are powerless to resist. Education functions in a neoclassical schema to improve labour by investment in human capital but for Marxists to condition individuals to their economic lot, rank claimants to income and to establish socially acceptable pre-emptive claims to income and status (Bowles and Gintis, 1976). A fourth, and striking, example is the contradictory functions allotted to technical progress by economists of different persuasions. Technical progress is ignored for much of the time by neo-classical theory with its focus on static rather than dynamic efficiency, whereas for others it is the main vehicle of wealth creation and the driving force of the system (Schumpeter, 1947). For many Marxists it is primarily a method used to undermine labour's control of the production process and to throw people out of work. Thus technical change is compatible with rapid economic progress and/or high unemployment. Part of the problem is that economic phenomena have diverse effects. For example, certain market structures may both increase economic efficiency and act as an important vehicle for exploitation. Economic relationships are shaped by institutional forces and cannot be separated from them. The 'free' market and 'free' trade are not 'natural' states of the world; they are created by human agencies and guided by legislation and institutional rules. 1 Certainly the creation of a 'free' market, where economic agents interact without legal impediments, would change things but precisely how cannot be established by a priori reasoning. It would require empirical investigation both of narrowly defined technical and economic matters and of social and political institutions including the source of the pressures for the establishment of the 'free' market. Such an investigation would require a conceptual framework and if undertaken by economists would need to focus on economic phenomena-particularly the creation and distribution of wealth-but it would also need to recognise explicitly the role of social and political forces in determining economic outcomes. The next section attempts to lay the foundation for such a conceptual framework by examining how productive systems operate.
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2.1 Labour power Labour power as it enters production is itself the end product of a process of social production and reproduction which shapes its quantity, quality and the ease with which it can be used in production. From a given population, the number of individuals available for employment and their hours of work are influenced both by the availability of alternative forms of subsistence and by social organisation. In Britain, for example, labour was separated completely from forms of subsistence other than wage labour at an early date, while in other industrially-advanced European countries the potential labour force maintained a substantial agrarian interest until very recently-a factor which has affected their pattern of industrialisation and forms of labour organisation (Lorenz, 1982).
The emergence of social security systems has also had an important influence on the supply of labour, on its production, availability for waged labour and supply price (Picchio, 1981; Craig et ai., 1982).1 The participation rate is, in addition, a function of family organisation, the level of family income, social attitudes and the legal framework (including the statutory regulation of the employment of women and children). The quality of labour power is determined by its inherited capabilities, education and training, and the standard of living. Education and training have the dual function of enhancing skill and of ensuring effective use by introducing workers to work discipline. The standard of living itself raises major issues, for it is both functional in the production of labour power and the main determinant of the level and structure of final consumer demand. It depends partly on the real wage and partly on domestic labour the level of which, and its distribution between members of the household, depends on power relations within the household and in the labour market (Humphries, 1977; Craig 1 The availability of social security does not always or even usually reduce the supply of labour or raise its supply price. The influence of social welfare on the labour market depends in its level relative to customary family income and its administrative rules (Craig et ai., 1982).
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of production are mutually dependent: the one cannot operate without the other. However, the degree of dependence varies between labour and capital. In a capitalist system, labour is largely separated from the means of production and from means of subsistence other than the sale of labour power. Capital, on the other hand, controls the means of production and has massed resources to maintain subsistence for a considerable time without production. Thus although labour and capital are complementary in production, labour is much more immediately dependent on that relationship than is capital, and this difference is an important determinant of relative power. But differential access to the means of production and consumption are not the only factors influencing power relationships. The fact that there are relatively few employers makes it easier for them to choose amongst the numerous potential employees and to collude in the fixing of terms and conditions of employment. Thus although labour and capital are complementary in production, so that in this respect their relative status is not determined, in other respects labour is inherently inferior to capital. Nor can the relationship between labour and capital be considered a special case: producers and consumers of raw materials, intermediate goods and final products also have a mutuality of interests, though here either side may be more or less well placed to exploit that dependency. Generally speaking, then, the relationships we are considering are based on complementarity but the terms are fixed by relative power. It is with this in mind that the constituent parts of productive systems are discussed below.
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2.2 Means of production Although the means of production include raw materials, intermediate goods and machines, attention here will be focused only on machines. l The technology incorporated in machines is essentially an economic and social phenomenon reflecting such things as the level, structure and certainty of demand, ownership and control of productive resources, and the availability, quality and docility of different classes of labour. Of course the development of technology makes use of 'scientific and engineering principles' but these cannot easily be taken as exogenously determined: research does not take place in a vacuum, scientists excited by practical problems try to solve them in a particular social environment. Engineering, the practical application of scientific principles, is even more obviously constrained by the environment of the productive system in which it operates. For example, an important source of technical advancement is learning by doing where, by definition, the limits are set by the technical, economic and social conditions in which the doing gets done. Moreover since, at any point in time, the technology of the productive system is largely given by the existing stock of machines, with the amount of equipment embodying the latest technology being relatively small, piecemeal replacement of old machines will require that new machines 'fit in' thereby restricting any radical departure from the existing method of organising production. 2.3. The relations oj production The organisation of production involves the application of labour power to machines, while the successful operation of a productive unit requires the assembly of the means of production and their efficient utilization. Although the smooth running of machines as mechanical instruments can be regarded as largely a technical question,2 the efficient use of labour is quite another matter. Skill and effort cannot be separated from the labourer who decides whether, and how, they are to be used, these attitudes being formed by education, socialisation, traditions and other social forces. Thus the reiations of production, as the internal organisation of product units can be described, are not simply a technical matter; they also involve the exercise of power, a point which applies with equal force to the structuring of productive units. For example, the most efficient size of productive units in terms of output per composite unit of input of labour power and the means of production may appear to be determined by technical factors such as econolAlthough much of what will be subsequently said also applies to intermediary products. 2Although observed differences in the output of the same machines operated by different operators with apparently the same amount of effort suggests a complementarity between machine and operator, so that even at this level efficient operation may be partly a social phenomenon.
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et ai., 1982). The composition of the basket of goods and services constituting the standard of living is formed by economic, social and political forces. What are adequate living standards changes through time as real wages rise, aspirations are raised, new goods mare developed and their consumption widely diffused. Producers of consumer goods are sovereign in that they determine what is to be produced and use their massed resources to form consumer tastes. But, on the other hand, the established standard of living, both in quantitative and qualitative terms, constrains producers by estabilishing patterns of demand to which they must respond. Thus the production of labour power and the standard of living upon which it depends, and which is the main determinant of final consumer demand, result from a complex interaction of economic, social and political forces.
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mies of scale and the benefits of vertical integration, but the massing of the means of production on a single site has other, non-technical, advantages and disadvantages. On the one hand, it increases the degree of control and facilitates the more effective utilisation of machines and labour power (Marglin, 1974) while, on the other, it increases the organised power of labour.
2.4 Market relations
2.5 The social and political framework As emphasised earlier, the relationships we have been considering are based on mutual interest but their terms are fixed by relative power. These two elements are clearly observable when the social and political framework within which productive systems operate are examined. Trade unions and trade employers' associations, the state, international organisations and other agencies foster collective interests and reflect the power relations between individuals and between sectional, class, regional, national and other groupings. Thus the organisation of trade unions and employers' associations is based on shared objectives but the internal organisation reflects the balance of power between sectional interests. In their negotiations trade unions and employers' associations seek to regulate, often jointly, rates of pay and conditions of work and to provide procedures for resolving disputes. This results at least partly from their mutual interest in the proslLabour economists freely use the distinction between the 'internal' and 'external' market to distinguish between the firm's actual and potential labour force.
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The term relations of production as used above refers to the interaction of labour power and means of production within the productive unit. If all productive units were independently controlled, transactions between them could be described as market relations which would then take place at market prices. Market relations are essentially power relations. If no participant in the market is sufficiently strong to dominate the buying or selling side and if buyers and sellers are evenly matched, market prices will be outside the control of the participants. Even in this case there is market power; it is just evenly balanced. A firm establishes market control, for example, if it can determine the size of its market through productive innovation, advertising, exclusive dealerships, and so on or, in the case of its inputs, through controlling the local labour market or making sub-contractors dependent on it. So the extent of market power is given by the degree of unilateral control over input and output prices or the terms of trade with all other market participants. When a firm owns several productive units it might be supposed that the terms at which they trade are merely a question of internal accounting. But the cost of production of an individual unit reflects the relative power both of the firm and of the units within the firm, including the suppliers of the productive power employed in that unit, so that the distribution of power within and between productive units influences the terms on which they trade with each other. The difference between the determination of the terms of trade between commonly-owned productive units and independently-owned ones is, therefore, a matter of degree rather than of kind and the term 'market relations' can be used to describe both types of transaction.! Of course, common ownership provides opportunities to arrange internal prices so as to maximise the market advantage of the enterprise as a whole. An international firm, for example, can ensure systems so that profits accrue where they are most easily realised, while a conglomerate can change market relations between itself and its competitors.
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3. Relations within and between productive systems While it is possible to draw up sets of blueprints for the relations of production, market relations and the social and political framework for all conceivable productive systems, this does not mean that a choice can be made between different systems, since each system is the unique outcome of its own history. The way a system changes involves a complex interaction of technical, economic, social and political forces which itself takes place in historical time. The interesting questions, therefore, are not about choices between techniques or the achievement of equilibrium but about the conditions leading to the emergence of different productive systems and the terms on which systems co-exist. 3.1 A snapshot The concept of productive systems outlined above is perfectly general in its application and provides the basis for analysis at any level-the family, productive units, firms, industrial districts, industries, regions, economies or the world. Where the boundaries are drawn depends on the problem in hand. The relationships within and between systems are both complementary and competitive in pursuit of the distribution of the product of joint effort. These objectives are secured by the organisation of production, the structuring of markets and the social and political superstructure which impinges on both production and markets; each of these elements has the dual function of fostering complementarity and regulating competition. The relations of production, market relations and the political and social framework determine the relationship both within and between productive systems, but the relative importance of each depends on the degree of disaggregation. For productive units, internal structure is determined mainly by the
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of negotiations also reflects the power relations both within and between the employers' and workers' organisations. The activity of the state can also be variously interpreted. The provision of education, health, social welfare, law and order and the regulation of trade unions and business can be seen as furthering the common interest by increasing efficiency and curbing the destructive exercise of sectional interests. Alternatively state activity can be regarded as serving the particular interest of capital or labour. For capital, it provides services which capitalists are incapable of providing individually and it makes good the erosive effect of capitalist competition on, for example, the stock of labour power. For labour, the provision of social welfare alleviates the burden of poverty, disease and ignorance and thereby increases its relative strength. There is little doubt that all these elements exist in both the structuring of state power and the formulation and administration of state policy and are manifest in the legal framework and in the way in which the state intervenes in class and sectional divisions. At the international level, nation states conclude treaties and collaborate in international institutions designed to regulate trade, international payments and capital flows. The origins of many of these institutions-for example the IMF, the World Bank, GATT and the EEC-are to be found in the need for nation states to protect themselves against unregulated movements of goods and finance and the possible destructive effects of unilateral attempts at control. In this respect, international agencies reflect the mutual interests of nation states in encouraging the beneficial effects of trade and financial interaction, though the form they take and the way they operate reflect the distribution of power between countries (de Cecco, 1979).
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I In the case of multi-national firms the transaction between parts located in different countries are 'internal' from the perspective of the firm but 'external' to the national production system. 2Allowing, of course, for any adverse effect of poor working conditions, high work intensity and poor social provisions on the quality and efficiency of the production of labour power.
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perity of the firm and industry and in the continuity of production. But the outcome relations of production (though these are influenced by rules and laws fixed in the social and political framework) and the relations between productive units depend on market relations (both internal and external) and the social and political superstructure. The relationships within and between economies are regulated by markets and the international social and political superstructure. l The rest of this section explores the relationship within and between productive systems. The costs of production of a productive system are determined by the cost of labour and the means of production, the level of technology, the skills of the work force, the effectiveness of management in both extracting labour power and running the system efficiently, and rules and laws which impinge on the operation of the system and on the degree of responsibility of the productive system for social provision. These include the rules of trade unions and employers' associations and collective agreements. Laws influence working conditions (particularly health and safety), regulate the employment of certain classes of worker (especially women and children) and directly affect costs by imposing social security and other obligations. A productive system can secure comparative advantage over its competitors from lower costs of inputs, poor working conditions, high intensity of work and poor social welfare provision, as well as from superior technology and more efficient operation. 2 Consequently, unit costs reflect the social and political as well as the economic and technical elements in the organisation of production. The terms on which productive systems trade with each other are also determined by a complex of factors which differentiate supply and demand and which leave the balance of advantage on one side or the other. Families and social groupings-productive systems for labour power-are differentiated in terms of incomes, accumulated resources, socialisation, education and information which produce wide variations in skills and aptitudes in the labour force. These are reinforced in many cases by professional associations and trade unions controlling labour supply by restricting access to certain occupations and also sometimes through sex, race and age discrimination. They are further reinforced by systems of hiring in which advantages of sex, race, family and class are realised in signals which pass between potential employers and employees. Thus the organisation of the production of labour power results in wide differences in skill and other aspects of labour quality between individuals and social groups quite independently of their initial endowment. As a consequence workers with equal potential are equipped with wide ranges of skills and others with equal skills and abilities are available at widely different prices. Imposed on this basic fragmentation are wide differences in regional and national systems of education and training and social norms such as attitudes to child and female labour. Fragmentation is not confined to labour. Wide variations in the efficiency of machines, access to finance and other basic requirements fractionalise capital into a hierarchy based on relative market power. Such differences are reinforced and multiplied by the 'technical' advantage of economies of scale and resources for research and development and by employers' associations, agreements and laws which concentrate market power in selected hands. Within this hierarchy of firms, subordinate relations develop. Large firms 'capture' their suppliers and can dictate the terms of trade. In the product market the
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3.2 Fluctuation and change So far the emphasis has been on static analysis, but an examination of how productive systems initiate and respond to change re-emphasises the importance of incorporating social and political relationships into the analysis. There is increasing evidence of major new developments in advanced industrial economies in recent years, with the growing importance of the small-firm sector, regional and international relocation of industry and changes in the structure of employment towards casualisation of the labour force, with the growth of part-time and home working and labour-only sub-contracting. The cumulative effect of changing patterns of consumption provides an explanation for changes in patterns of retailing which have had repercussions on the organisation of production. The preference for more casual and variable dress led to the development of the boutique mode of selling and to the growth of chains of such shops, thus increasing competitive pressure on the large chains of bespoke tailors which were integrated into large-scale factory production. As a consequence, large-scale factory production of suits and other apparel collapsed and was replaced by the growth of small firms, 'putting-out' systems and a rapid increase in imports. In a similar way, the change in taste away from plant-baked bread to more traditional forms has led to a sharp decline in mass-
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'leader' establishes the ruling price to which the 'followers' must adjust and, in terms of market shares, firms with relatively weak bargaining power fit into the interstices between their more powerful competitors. The structuring of productive systems in the product and factor market-s has an important bearing on relations within them. The availability of disadvantaged segments in the labour market provides the basis for survival of disadvantaged firms in the product market. Even within successful firms, additional flexibility is achieved by excluding certain occupational grades from collective bargaining. It is quite usual, for example, to separate such jobs as cleaning, canteen and low-grade clerical work from the main company agreement or for such tasks to be subcontracted so that they are lower paid arid enjoy less favourable working conditions. It is significant that these jobs tend to be filled by women, racial minorities or other 'socially disadvantaged' groups. In a similar way in the highly prosperous Emilian region of Northern Italy, where wages are high, firms in the clothing industry subcontract to neighbouring regions which are less prosperous and have low wages (Solinas, 1982). The ability to take advantage of low pay segments of the labour market adjusts the terms of trade in favour of particular productive systems and the beneficiaries include workers in a strong bargaining position. The foregoing analysis can be generalised to all productive systems including national economies. At the international level, variations in the cost of production resulting from differences in social and political systems, legal frameworks and forms of social provision are likely to be much wider than in individual economies. The absence of any effective way of imposing the 'rules of the game' on international trade and finance means that the terms of trade between nation states are more overtly determined by economic and military power. By institutional manipulation, successful economies can retain economic supremacy by means of, for example, favourable exchange rates and various forms of import controls and export subsidies short of direct intervention. Meanwhile the politically strong (which generally also means the economically strong) have the power to impose conditions for trade and financial transactions favourable to themselves, either directly or indirectly, by manipulating international agencies upon which the weak depend (Robinson, 1966).
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production, a re-emergence to prominence of traditional bakers and the innovation of hot-bread kitchens and in-plant bakeries in supermarkets. Technical progress can also be identified as an important factor. In printing, developments in photo-reproduction, composing and plate-making have been major factors in the vertical disintegration of the industry. There is now convincing evidence that in Britain at least parts of the industry are being reorganised on a cottage industry basis. Each successive phase of the production process-i.e. design, composing, plate-making, printing and finishing---can be put out to specialised producers, the network being organised either by the customer or by a contractor who may not be directly involved in any part of production. However, even in printing the evidence is not unambiguous: developments in photo-composition and plate-making favour large-scale production, and here and in other parts of the industry there are signs of specialised firms growing to a fair size. The same dual tendencies are evident in shoe making; machines small enough to be used by homeworkers are being developed which allow several stages of the shoe assembly process to be carred out as one--though automatic stitchers, used to sew the uppers, are only viable with long runs. In retailing the development of new modes of selling has had a dramatic impact. The growth of self-service supermarkets aided by computerisation and modern information technology has reduced small shops in many sectors to providing special services such as late hours and seven-day opening. The growth of large firms has also changed the balance of power between retailing and manufacturers, reinforced by the spread of 'own' brand selling which allows the retailer more easily to switch suppliers. The new forms of retailing have also had an important impact on the labour force. Mass advertising fixes the 'quality' of goods in the mind of the consumer and self service, which allows more detailed customer examination, has reduced the bulk of the sales staff to shelf fillers and check-out operators. The growth in store size allows much closer tailoring of the labour force to the peaks and troughs of customer 'traffic' and has led to a rapid growth in part-time employment. On the other hand, the task of running such large enterprises has resulted in a growing number of administrators. The labour force has, therefore, become increasingly divided into two segments: one consisting of wellpaid and usually male administrators and the other typified by relatively unskilled, low-paid, part-time and usually female employees (Bluestone and Stevenson, 1981). Uncertainty is also an important factor modifying productive systems. Firms seek to reduce the fixed element in costs by subcontracting parts of the production process and by changing the terms and conditions of employment towards more casual forms. Subcontracting takes the form of 'putting-out' or employing small firms to undertake such functions as transport, maintenance, cleaning and catering. In parts of the engineering, printing, and clothing industries the production process has become increasingly vertically disintegrated. But the process has not been confined to industries where the stages of production are readily separable. In Japan, in the largest, most modern and integrated steel works in the world, more than 50% of the labour force is employed on a subcontract basis. These effects are cumulative and have repercussions in social and political organisations. The progressive restructuring of productive systems and the related growing uncertainty have found a response in changes in power relations between labour and capital and in the institutional and legal framework. For example, the power of organised labour has been contained in the USA, UK and in Italy, with loss of union control over the pace of work, a deterioration in working conditions, a reduction in the security of
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lAlthough in aggregate expenditure may have risen as the level of employment has increased.
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employment and cuts in real wages. In West Germany, firms have changed their employment policies towards a more selective provision of primary working conditions. This has been achieved largely through an upgrading of qualifications (without any observable change in job content) which has benefited German male workers and increasingly marginalised women, immigrants, the young, the old and the disabled. In France, changes in the law have extended the opportunities for temporary employment and reduced job security. In the UK and the USA, monetarist policies, high unemployment, lower job security, pressure on social welfare provision l and legislative changes have seriously weakened trade unions and their organisation (Wilkinson 1981). Thus the forces which can be identified as modifying productive systems include changes in the pattern of demand, economic conditions, technology, power relations between organised labour and capital and state policy. These economic, social and political forces interact and transform both market relations and the relations of production. What must also be stressed, however, are the preconditions for these changes and the subsequent adjustment in the social and political framework which accompany them. The single most important precondition is the existence of a large 'secondary' sector where labour power is cheap and the labourer docile and readily exploitable. This is found amongst disadvantaged groups in industrial areas, in rural areas of advanced industrial countries and in the Third World. In Japan the secondary sector is very large and carefully organised by large firms to provide them with considerable flexibility (Morishima, 1982). Elsewhere, 'secondary labour' has been increasingly mobilised as large firms relocated their operations to evade union control and as the comparative advantage of firms already located on the periphery increased with the growing industrial and political strength of labour in the centre. The benefits to capital of relocation are not confined to cheap labour, but include less onerous legal controls on employment, more stringent restrictions on trade unions, lower social welfare contributions and other taxes, and greater opportunity to evade the laws which do exist. Thus the existence of differential bargaining power between productive systems which capital can seek out and exploit imparts a dynamism which is independent of economic, technical, social and political developments but which may initiate such changes. The dynamic forces outlined above may cause once-and-for-all changes in productive systems or initiate cumulative responses. The latter can be illustrated by a comparison between a successful and an unsuccessful productive system. A successful system will be one with comparative advantage in terms of its economic, technical, political and social organisation. This is not to say that it is superior in each of these but that, on average, it will be in a strong competitive position. It is likely to be at the forefront of technical progress, use its labour force effectively and will have a system of managerial control and industrial structure which continuously reduces its costs of production. Internal, problems will be eased by controls made effective by the social and political structure, by favourable terms of trade secured by domination in factor and product markets and by the increase in wealth brought by rapid productivity growth and competitive success. These benign conditions will create a virtuous circle in which productivity growth, competitive success, and demand expansion interact to produce continuous increases in prosperity. Examples of successful national productive systems include the UK from 1800 to 1870, the US and Germany from then on, and Japan more recently. In an outmoded system the pace of technical advance will be slow, its labour force will be ineffectively used and the systems of managerial control and industrial structure
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4. Productive systems and the creation and distribution of wealth What is observed in this brief sketch of the changes in productive systems is a dialetical process in which techniques of production and economic, social and political elements dynamically interact. Changes in techniques, products and the power relations between capital and labour and their different factions lead to the destruction or radical modification of productive systems and the growth of new forms. The changing balance of power within and between productive systems interacts with the social and political framework and both are modified in the process. This perspective suggests an economic process radically different from that of 'equilibration' in orthodox theory, in which power relations and other imperfections merely displace the economy by some conceptually measurable distance to a 'disequilibrium'. What is implied is a non-equilibrium process. At one level the fittest (and best organised) survive. But such a simple evolutionary approach ignores the way in which productive systems create their own environment and how they mutate under the impact of innovation in techniques and organisational forms. Such a process cannot be said to be tending to an optimum or, indeed, anywhere else because outcomes cannot be known with any certainty, nor is there any easily obtainable standard of reference. The best that can be said is that certain productive systems are relatively successful and that others are relatively unsuccessful. But if there are not optima, are there any ways by which economic success or progress can be evaluated? This final section will consider this question by examining the role of productive systems in creating and distributing wealth, the two central issues in economics. There are two aspects of wealth: material goods and the decency of life. The latter includes self-fulfilment in work, the hours of labour and leisure, conditions of work and living and the general environment. The creation of wealth depends on co-operation within and between productive systems and an increase in wealth creation depends on the better use of labour power, the application of improved engineering and scientific principles, advances in the organisation of work and industry and the development of favourable social and political systems. There are, however, difficulties in deciding what constitutes an increase in wealth; an increase in material goods may be accompanied by a reduction in the decency of life if, for example, conditions of work are worsened and the environment is detrimentally affected. The second major issue is how and with what effect wealth is distributed amongst rival claimants, though this question cannot be easily separated from the first. The continued creation of wealth requires the reproduction of the productive system, and the relative importance of the different components determines their minimum share of wealth. But the question cannot be confined to input-output analysis; the motive for undertaking production is the acquisition of wealth, and the withholding of the forces of production (and hence the partial or complete cessation of wealth creation) is an important strategy
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will reflect competitive failure. The slowing down of wealth creation and the declining share of total wealth will intensify distributional struggles, and this will be exacerbated by the breakdown of control at the level of production, by market failure and by the failure of the socio-political system to resolve the difficulties. In this hostile environment the productive system will be under severe pressure but the resulting crisis is unlikely to resolve the problem of outmodedness. On the contrary, the struggle over distribution and control will tend to increase the inflexibility of the system and hasten its relative decline. Currently Britain is a good example of an outmoded national system.
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'Conventional trade thoery denies that if the game is played to the rules there can be losers. But this makes the heroic and unsupported assumption that the teams are equally matched (see List, 1885, Chapter XI). 2In this respect the Luddites are the most maligned of all resistance groups. Given the evidence that threshing and other machines were destroying their livelihoods and nothing concrete was being proposed to provide an alternative, the Luddites had a responsibility to themselves and to their families to resist their introduction. The charge that they resisted progress was nothing more or less than an expression of self-interest on the part of the gainers and the economist they employed to give logical and moral justification for the ascendancy of those benefiting directly and indirectly from the new methods.
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in influencing its distribution. Moreover, the development of productive systems to change the composition of wealth and to expand the flow requires investment, and whether wealth is put to such productive purposes depends on the motives of those controlling the surplus. In a capitalist system where the means of production and labour power are separately owned, the creation and expansion of wealth depends on profitability, which concentrates wealth in the hands of the organisers and controllers of the means of production and provides the incentive for their use. But although the alienation of labour from the means of production subordinates labour to capital, giving the latter control of the surplus, the ability of labour individually and collectively to influence the price of labour and to resist the extraction of labour power requires capital to adopt counter strategies to ensure profitability. The exercise of power necessary to secure the surplus may be detrimental to the production of wealth, both because the struggle will hinder the smooth operation of a productive system and because the coercion of labour may reduce the decency of life by worsening the conditions of work and the environment. Thus the exercise of power in determining the distribution of wealth may be detrimental to its creation. These conclusions apply with equal force to relations between productive systems. The wealth of any productive system is given by the quantity of output multiplied by value added per unit of output. The latter is determined by the efficiency of production and the terms of trade with other production systems, which are both functions of the degree of market control. The relationship between the distribution of wealth as between productive systems and overall wealth creation depends, just as it does internally, on the motives of those in control of the systems to which the surplus flows: whether it is consumed, used to reinforce market control or employed productively will determine whether a given distribution of wealth enhances wealth creation. To the extent that distribution concentrates wealth in the hands of those who will apply it most productively then competition---or more precisely the exercise of power-will enhance wealth creation. To the extent that control over wealth is used to secure a particular distribution its allocation may inhibit wealth creation. In the end, however, economics as conventionally defined, which regards the economic process as equilibrating and effectively excludes social and political processes, provides little if any useful guidance as to whether a particular distribution of wealth aids or retards wealth creation. To take an example, whether unrestricted trade between a successful and an unsuccessful national productive system enhances total welfare depends on how the costs and benefits are distributed and whether the question is being addressed by the winners or the losers.l The gainers may find it reassuring to add up the benefits of their expanded productive power and deduct from it the cost in terms of lower productivity of the losers to conclude that they are operating in the interests of all. But it is an act of supreme altruism for the losers to aquiesce in such arithmetic. Nor are they likely to be reassured when told by economists that acceptance will guarantee a share in the benefits since all the evidence points to the opposite direction. 2 What constitutes
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economic progress and an 'efficient' distribution of income is essentially a political question because the objectives are political and social in character and not purely economic in the usual, narrow, sense of the term. One traditional function of economists has been to provide justification for political answers and the necessary exercise of power they entail: but that is another story.
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