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Summary Mandatory Article Readings GBH 2019
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Eleah Ketting S3698416 GBH2019 Mandatory Articles Key PointsMokyr (2001), the rise and fall of factory systems
Abstract: The factory system, which arose with the British Industrial Revolution, was responsible for bringing about the
separation of the location of consumption (the household) and that of production (the plant or office). This separation has had
large effects on economic welfare. The reasons behind the emergence of the factory system are analyzed here, and a new
interpretation is proposed, based on the need to divide up the growing knowledge base of production in an age of technological
advances. The possibilities and implications of telecommuting as a reversal of this trend are examined. The consequences of the
modern factory were far-reaching from the workers, consumers, and managers.
Summary/key elements: technology affects output, productivity, and economic welfare. But it also
affected other parts of the economy such as the optimal scale of production and the location of
production. In 1760-1830 due to the Industrial Revolution (IR), there was the rise of the factory.
However, also before the IR, there were people working at largen production sites. A factory is a mix of
two economic phenomena: the concentration of workers (manufactories) and a radical change in
production technique.
The paper argues that the rise of factories was driven by technology, which determined the
relative costs and benefits of moving people rather than information. Firms are substitutes for contracts
and reduce uncertainty and opportunistic behavior, ad set incentives to receive efficient responses from
agents. Mokyr argues that the decision on where the production-related activities are carried out depends
on the relative costs and benefits of moving people compared to moving information. In addition, it may
depend on the changes in the composition of output and capital-labor ratios that could change labor
demand in activities requiring workers to be actually present on the shop floor. While transportation costs
and information costs may have both fallen, a change in their ratio may affect the location of production
in a complex manner. There are also benefits related to concentration.
Before the IR, most firms were located widespread and employment was domestic. The firm
owned the raw materials, the goods in the process, and the needed equipment. Most work was outsourced
to the workers’ homes. Workers were paid based on their personal output since monitoring was
impossible. By 1914 most workers were relocated into factories even though the process took a long time
and never quite complete. The reason it took a long time was because entrepreneurs wanted to wait and
see how technology would further develop. They had to wait before it was worthwhile to bring workers
under one roof. Often, we see a “mixed” system in which some stages of the production are carried out
domestically whereas others are concentrated in factories.
The discontinuity of the Industrial Revolution has been at times overstated. It was not the
beginning of “capitalist” production - the putting-out system could be quite hierarchical and tightly
controlled. Moreover, pre-Industrial Revolution manufacturing produced quite a number of organizational
forms that could accommodate a variety of technical needs. For instance, it could and did practice a
division of labor at a fairly high level. Yet the Industrial Revolution marked the beginning of the process
in which the household would eventually lose its role as the prevalent locus of production.
The paper also points out some implications of the factory system. First, by mentioning
‘’alienation’’ (Marx) which meant that workers had to communicate with strangers during their work
hours. But also, the cost of commuting. There was no urban transit at first, so factory owners set up
‘’factory villages’’ near the production sites where necessary. Another consequence of the factory system
was the collapse of leisure-income choice. Absenteeism was an incentive to be fired, so workers did not
enjoy the freedom of choosing to work or take a day off. Next, working in factories was not under great
condition, e.g noise, pollution, accidents, etc. Workers still worked at factories because relative to other
jobs it paid well.
After the emergence of factories, employers saw the importance of training their workforce. Most
workers had to learn how to obey orders from supervisors and some skills to operate new machines.
Factory masters often subsidized schools and general human capital (literacy) could improve. All the
same, the rise of the factory represented a growing stringency of the competitive environment in which
,Eleah Ketting S3698416 GBH2019 Mandatory Articles Key Points
workers operated, and thus increased allocative efficiency and speeded up the adoption of new
best-practice techniques.
Why did it rise when it did?
One: The most obvious candidate for the cause of a shift in plant size is that the new technologies
changed the optimal scale of the producing unit and introduced increasing returns where once there were
constant returns. Some equipment, for purely physical reasons, could not be made equally efficiently in
small models that fit into the living rooms of workers’ cottages and thus required large plants. With the
new machines, fixed costs rose, in order to keep average costs down, output had to be increased.
Two: transaction costs were higher in decentralized households and the new technology changed
monitoring costs and incentives to self-monitor. By saving on transaction costs, they were simply more
efficient than cottage industries (whether putting-out or independent producers), and thus their rise was
inexorable. Such a simplistic approach cannot possibly do justice to the historical reality, after all, the
cottage industry (so working from home) had proven to work for many years.
Three: by concentrating all workers under one roof and placing them under supervision, actual
labor effort is enhanced. This includes the monitoring of quality which is better enabled with paying a
time-wage, or minimum wage. But this is also an incentive to only deliver minimal effort of work which
would decrease output. However, a piece-wage could increase the output but it could mean quality would
drop since workers would be focused on quantity and not quality.
Four (added by Mokyr): The reason why firms needed increasingly internal specialization is
because as time advanced, there was more and more knowledge that was necessary to operate the
best-practice techniques in use. The point is not just that each worker knows what she needs to know to
carry out her task, but that she becomes in charge of a subset of the total knowledge required so that
others can ask her when needed. This means that asymmetric information is not “a problem” for the firm
but an essential way for it to operate. In an age in which direct contact was the main technique of sharing
information, access costs are minimized within a single plant, especially when the exact description and
formalization of the technical details of production were more difficult than demonstration and emulation.
The replacement for the domestic system was the large-scale plant/firm which brought the workers under
one roof, made them specialize, and coordinated the exchange of knowledge between them. Mokyr says:
‘’The point I want to make (...): the optimal size of the firm (or plant, to be accurate) is a function of the
relative efficiency with which knowledge flows inside a firm relative to between firms, and the total
amount of knowledge necessary to run a best-practice operation in a competitive world.‘’.
Changes continued at an accelerated rate during the so-called second Industrial Revolution after
1860 or so, there were some major developments in the technology of moving people and information.
The age saw some breakthroughs in communication and information technology: the telegraph and later
the telephone, as well as a variety of management devices that facilitated the flow of information. All the
same, the preponderance of productivity gains were in the movement of people: trains, streetcars, and
bicycles. Some technological advances reduced the optimal size or at least flattened the cost curves
considerably. The most important of these was electricity, which made power supply less bulky and
allowed small, household-sized firms access to power on the same terms.
The decline of the factory: Also due to technological developments! Just as the Industrial
Revolution did not quite create factories de novo but turned them from a rarity into the normal way in
which production was carried out, it seems clear that the movement away from “factory-settings” will
eventually run into diminishing return and that the economy will remain a mixture of work at home and
work away from home. Certain industries and services, from food processing to dental care, will
inevitably require a physical presence. But the weights will change significantly, and such a
transformation, much like the movement in the other direction two centuries ago, will be largely
technologically-driven, depending on both the production technology itself and the information
technology used to communicate with them and monitor them.
, Eleah Ketting S3698416 GBH2019 Mandatory Articles Key Points
How do the four causal roots of the emergence of the factory discussed above perform in analyzing the
impact of modern technology on the future of the workplace? Economies of scale at the plant size have
not been eliminated, but due to increasing automation, robotization, and the substitution of capital for
labor, fewer and fewer workers are employed in manufacturing, and the remaining are increasingly
monitoring and controlling production through automated processes. To sum up, in recent years, modern
communications and information technology are weakening many of the advantages that the ‘’factory”
has had over the household. Mokyr states the relative costs of factories vs home production have gone up
because commuting technology has not improved (efficient-wise) radically.
Lamoreaux, Raff, and Temin (2003), Beyond markets and hierarchies
e sketch a new synthesis of American business history to replace (and subsume) that put forward by Alfred D.
Abstract: W
Chandler, Jr., most famously in his book The Visible Hand (1977). We see the broader subject as the history of the institutions of
coordination in the economy, with the management of information and the addressing of problems of informational asymmetries
representing central problems for the firm- and relationship design. Our analysis emphasizes the endogenous adoption of
coordination mechanisms in the context of evolving but specific operating conditions and opportunities. This naturally gives rise
both to change and to heterogeneity in the population of coordination mechanisms to be observed in use at any moment in time.
In discussing the changes in the population of mechanisms over time, we seek to avoid the tendency, exemplified by Chandler’s
work but characteristic of the field, to see history of adoption in teleological rather than evolutionary perspective. We see a richer
set of mechanisms in play than is conventional and a more complex historical process at work, in particular, a process in which
hierarchical institutions have both risen and, more recently, declined in significance.
Summary/key elements:
The article extends previous research from Chandler. In the 1970s Chandler said the success of the U.S.
economy was due to the rise of vertically integrated, large, managerial directed enterprises. Chandler
argued those firms were more efficient than small family-owned companies. Small firms were dependent
on the market when it came to raw materials and the sale of the output. On the contrary, large firms were
able to determine this themselves. Chandler named this the visible hand of management (because of
hierarchical layers of salaried managers). And it overtook the invisible hand of the market.
But by the 1980s the classic Chandlerian firms were frequently outperformed by more specialized
vertically disintegrated rivals. Therefore, Lamoreaux feels the need to extend Chandler’s framework in
order to fit that new situation. Her focus is on the multiple ways firms have and can respond to change.
Whereas Chandler’s framework made sense concerning how large firms arose and got their competitive
advantages, it had difficulty explaining the erosion of those same firms in the 1980s. Williamson
acknowledged Chandler’s framework was not perfect and added something about economic activities
within a firm which enables managers to lower their specific transaction costs. First, economic actors
have only imperfect information to guide their behavior. Second, what information they do possess is
typically asymmetric. People know more about their own capabilities and circumstances than they know
about those of the parties they transact with. This means that two parties, due to asymmetric information,
can influence the amount of benefit they get by influencing the amount of information they exchange.
They can exploit the other party. However, Williamson did not mention the consequences of those
transaction costs, being the relative advantages and disadvantages of managerial coordination.
In the analysis that follows, we retain Williamson's core assumption that imperfect information
creates the potential for exploitation whenever goods or services are exchanged, but argue that economic
actors have attempted to resolve these problems in a wide variety of ways. The methods are called
coordination mechanisms. Lamoreaux places these methods along a one-dimensional scale with on the
left-hand pure market exchange (pay price, receive good, end communication) and on the right-hand pure
hierarchy (permanent, very long-lasting relationship in which superiors command subordinates). As
companies move right on the scale, they have an incentive to behave in such a way that encourages
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