The rise and fall of the factory system: technology, firms, and households since the industrial
revolution
Joel Mokyr
1. Introduction
- Technology did not only affect output, productivity and economic welfare, but also the
optimal scale of the basic economic production unit and the location where the act of
production takes place.
- Factories: concentration of workers under one roof and a radical change in production
technique.
- Firms: substitutes for contracts.
- The key to the understanding of the geography of the firm is the costs of moving goods,
people, and information.
- Whether workers work at home or in a central location depends on the relative costs and
benefits of moving people or moving information and on the changes in the composition of
output and capital-labor ratios that may change labor demand in activities requiring workers
to be actually present.
- Death of distance: more and more production can take place from any location.
2. The industrial revolution and the rise of the factory
- Max Weber: the distinguishing characteristic of the modern factory were labor discipline
within the shop combined with technical specialization and coordination and the application
of nonhuman power.
- Most firms did not switch abruptly from the domestic system to a factory system, but
continued to farm out some processes to domestic workers, until mechanization and
technological complexity had sufficiently expanded to make it worthwhile to bring the
workers under one roof.
- Industrial Revolution was not the beginning of capitalist production, but it did mark the
beginning of the process in which the household would eventually lose its role as the
prevalent locus of production.
2.1. Some implications
- Technologically-driven changes in the number of hours spent commuting reduced overall
economic welfare in ways not wholly captured in national income statistics since some
commuting crowds out leisure.
- Freedom of choice was reduced once workers had to submit to the factory regime.
- The shift to noisy, unpleasant, and dangerous locations reduced workers’ well-being.
- Workers might end up working in factories even if it made them worse off: opportunity cost
was set by what they could earn in declining cottage industry.
- Worker training initiated by capitalist class became increasingly important; much was social
and moral, not technical.
- In a classical world, in which firms produce and households consume, firms compete with
each other. Those who choose techniques that are inefficient shrink and disappear.
Households that employ bad techniques may have lower utility, but only in extreme cases
will these bad techniques lead to their elimination.
- The rise of the factory represented a growing stringency of the competitive environment in
which workers operated, and thus increased allocative efficiency and speeded up the
adoption of new best-practice techniques.
3. Explanations
- Three main explanations in the current literature for the Rise of the Factory:
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, 1. Fixed costs and scale economies.
o Machinery and other technological changes meant that fixed costs at the level of the
plant went up
2. Information costs and incentives.
o Employers who wanted to pay time wages had to move employees to factories.
o Measuring net productivity in a piece-wage putting-out world ran into two
difficulties:
Workers had an incentive to increase their earnings by cutting corners on
quality and finish and make verification for the employer difficult:
asymmetric information.
When the employer owned the capital, he needed to supervise the worker’s
handling his property.
o Team production becomes important after 1780 because the new technology
required more team production.
Introduction of continuous flow production.
Finer and more closely integrated division of labor.
o Growing desire by consumers to purchase a product of standardized quality.
3. Labor effort.
o Factories emerged when workers were placed under one roof in order to make them
work longer hours than they would have if left at home.
o Discipline and supervision in large factories were not the means to adapt to a new
technological environment, but constituted the road to increased output and profits.
Technological progress was a by-product of the intensification of social control.
- New explanation for the Rise of the Factory: the division of knowledge.
o Specialization and division of labor leads to economic progress through three
separate processes:
Growing familiarity of a worker with the process.
Ability to produce improvements once familiar.
Savings of time involved in moving from one task to another.
o Specialization is also useful because workers have different inherent skill
endowments and it would be wasteful for employees to carry out tasks for which
they were overqualified.
o 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.
o The expansion of the epistemic base of technology meant that in an increasing
number of industries efficient production required more knowledge than a single
household could possess.
o When the total amount of knowledge needed for production exceeds the normal
ability of an individual to know, specialization becomes inevitable.
o Asymmetric information is not a problem for the firm but an essential way for it to
operate; not everyone can and should know everything. The problem is to ensure
that agents who possess knowledge, reveal it fully and truthfully.
o It was costly to move workers from their homes to the factory, but even costlier to
supervise, coordinate and instruct them at home.
o The acceleration of technological progress placed the domestic workers at a
disadvantage.
o Much of the knowledge that firms relied upon was codifiable.
o Much of what the new technology required was uncodified: tacit knowledge.
o Technical knowledge: combines the understanding of general relations and
principles with local problems. The more specific and local these technical routines
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, were, and the more tacit the knowledge was, the more production had to rely on an
in-house supply of expertise.
4. Beyond the industrial revolution
- Breakthroughs in communication and information technology.
- Reduction in costs of moving people relative to moving information.
- Production technology continued to favor large units: railroads, growing modularization of
manufacturing, mass production, continuous flow production.
- Some technological advances reduced optimal size: electricity, bicycles, cars.
- The size of an enterprise is a response not only to the demands of a narrowly defined
production technology but also to organizational considerations.
5. A contemporary perspective
- The falling price of communications will affect where people work and live. The old
demarcation between work and home will evaporate.
- The relation between distance and the cost of transmitting information has weakened:
internet, decline in cost of phone calls, exploded use of cellular networks.
- The assumption that travel and telecommunication are substitutes seems at least
questionable and at some level they are complements.
- Travel has a high income elasticity.
- Rapid improvements in information processing have led to fragmentation of activity.
- The relative costs of sending and receiving information versus the costs of moving people
have fallen sharply.
- The distinction between telecommuters and independent contractors is getting rather
murky.
- The movement away from factory-settings will eventually run into diminishing return and
the economy will remain a mixture of work at home and work away from home.
- Commuting is a friction that drives a wedge between total output as a measure of effort and
as a measure of welfare.
- Changing technology will not necessarily eliminate the workplace as an institution, but will
make commuting to work increasingly optional and part-time.
- An increase in the technological opportunity to telecommute will thus allow an increase in
housework at little or no costs in terms of real output.
- Economies of scale at the plant size have not been eliminated, but fewer workers are
employed in manufacturing, and the remaining are increasingly monitoring and controlling
production through automated processes. Some scale effects are weakened by modern
information technology.
- The number of workers whose physical presence is required has been declining.
- The new technology will require on of two things:
o Ability of firms to monitor a worker’s productivity.
o Observe what the worker does even if she is not in the same location.
- Conditioning that makes workers self-motivated is provided through the education system.
- In addition to ease of access, proximity in a plant or office created personal familiarity and
thus conditions of trust and believability.
- Firms that need to produce something that requires access to specialized knowledge is does
not possess, tend to subcontract out the whole stage of the production to specialists: firms
may be replaced by virtual teams.
- Modern communications and information technology are weakening many of the
advantages that the factory has had over the household.
Strategic Games, Scale, and Efficiency, or Chandler goes to Hollywood 1
Coopey and Lyth
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