This chapter argues that the capitalist organization of production creates clusters of jobs offering workers systematically different opportunities for the use and acquisition of skills, and for regular employment. The capitalists create jobs of various types, and the worker tries to find one suited to his ambitions.

But the freedom of the capitalists as a group is not the freedom of the single entrepreneur. He is not at liberty to organize work as he will. The types of jobs he offers depend on the sort of investment strategy he pursues; and his choice of investment strategy depends on his firm's position in the market. We will see that since the last quarter of the nineteenth century, capitalist industrial societies have been dominated by firms of two kinds. The first count on sizable and stable demand for their products. They invest in technological innovations that reduce production costs and redistribute skills among workers: A few come to have jobs requiring ever-more-sophisticated and general knowledge; the rest are assigned increasingly routine and specialized tasks. Firms of the second kind are smaller. They face fluctuating demand and live in the shadow of the first group. They pursue short-term investment strategies requiring less-specialized use of labor and often employing technologies discarded by the larger firms.

From above, the perspective of the student of industrial structure, the economy thus appears to be divided into a technologically advanced sector made up of large, innovative firms, and a backward sector of smaller laggards.

I conceived this book about social transformation with one set of questions in mind and wrote it guided by another. When the ideas set down here first took shape in the mid-1970s, the strike waves of the 1960s in France, Italy, and West Germany were fresh in mind; but so too was the impression that, measured by many of their explicit ambitions, these movements had failed to revolutionize factory labor. Why had millions of normally cautious workers gone into the streets? Why were they back at their jobs? To understand what happened, I decided to find out as much as I could about the structure of industrial jobs and the demands industrial workers make on them. The naïveté of the questions seemed both a reminder of my ignorance of industry and a way to keep an eye turned to the passionate drama of hope, desperation, and power that is played out in any large conflict.

Visiting factories and reading about them, I convinced myself that workers were neither a homogeneous class united in opposition to management nor a mass of individuals eager for their own reasons to cooperate, even in limited ways, with the bosses. Rather, it seemed that in factory after factory in different countries and times the work force was regularly split along skill lines into distinct groups, perpetuating themselves in different ways. Each had a characteristic definition of its prerogatives and ambitions and little comprehension of those of the others.

There are new things under the sun. At a time when more and more people find the traditional programs of the Left and the Right primitive, impractical, or dangerous; when society seems immobilized by conflicting interests and politics nothing but a mask covering the pursuit of selfish advantage; at a time when nothing new seems imaginable, let alone realizable, factory work is being revolutionized.

Many signs suggest that the Fordist model of organization is being challenged by new forms of the division of labor. International competition and overlapping domestic conflicts between producers and consumers, and between workers and capitalists, are driving many large firms out of mass markets for standardized goods. To survive this challenge manufacturers often have no choice but to produce more-specialized, higher-quality products. The new products must be made in new ways. Mass markets are the precondition for the Fordist organization of production; when they begin to disintegrate, Fordism begins to lose its appeal inside the factory. Where Fordism calls for the separation of conception from execution, the substitution of unskilled for skilled labor and special-purpose for universal machines, I will argue that specialization often demands the reverse: collaboration between designers and skilled producers to make a variety of goods with general-purpose machines.

What different forms this collaboration can take, whom it will benefit, and the extent to which it replaces Fordism as an explicit model of factory organization and provokes broader debate about our fundamental ideas of hierarchy are all open questions.

Conflict between labor and capital pervades contemporary life. Workers struggle to raise their real wages, to protect their jobs, to improve their working conditions, or to get promoted. Most of these struggles are so restricted that they do not come to public attention: The 110,665 grievances entered against management by 89,625 unionized workers in eighteen plants of the General Motors assembly division in 1979 are an example. A few, such as wage settlements in inflationary periods, become matters of public debate. Still more rarely, workers' protests shake governments and states: for example, the autunno caldo in Italy and May 1968 in France.

Most explanations of such conflicts draw, deliberately or not, on one of two classic positions in a long-standing debate within social theory. On one side are the moralists. They claim that collective conflict is set off when a group defends an established moral order from outside attack and that it is thus fundamentally conservative or restorative. Their favorite example is the peasant village struggling to defend its tradition against rapacious aristocrats or capitalists. On the other side are the economists. Their claim is that conflict arises from the self-interested pursuit of wealth. For the economist, conflicts are reformative to the extent that they merely redistribute shares of the economic surplus, and revolutionary insofar as they fundamentally change the distribution of rights to the proceeds of economic activity.

This is an essay about the reasons industrialists create different kinds of factory jobs, about why workers put up with these jobs when they do, and about what they want when they do not. It shows how workers' ideas of self-interest, born of the principles of honor and dignity they bring to the factory, can be transformed by workplace struggles. And it shows how these struggles, colliding or combining with conflicts in the larger society and between nations, can reshape technologies, markets, and factory hierarchies.

The essay is a work of synthesis. It combines into a single framework research on industrial technology, factory workers, industrial organization, and labor movements from roughly 1850 to the present: the age of mass production, standardized goods, specialized machines, and unskilled workers. It concerns mainly France, Great Britain, Italy, the United States, and West Germany. Wherever possible I have tried to corroborate and supplement the available sources by my own interviews with workers, managers, and academics from these countries.

But the essay is also a work of reconstruction, for to unify the research findings, it is necessary to reinterpret them on the basis of methodological assumptions often radically different from the ones on which they were originally constructed. I try to show that most of the diverse and frequently contradictory studies of factory work and factory workers from different countries and periods form a whole if arranged according to new ideas of the relation between workers' consciousness and the division of labor.

In this chapter I present a mathematical theory of institution creation. Being only a theory as opposed to the theory, it cannot be considered the only possible approach that one could take. However, it is my feeling that the model presented here does contain two elements that any successful theory of institution creation must contain. The first is a theory of norm creation and change which must be included in any theory that tries to depict the process of the creation of social institutions as we have defined them (i.e., as commonly adhered to regularities in behavior created to solve recurrent societal problems), because it is upon these norms that the regularities in behavior we are calling social institutions can be built. More precisely, we have defined social institutions or conventions as regularities (R) in the behavior of members of a population when they are agents in recurrent situations, Γ, which are such that:

1. Everyone conforms to R.

2. Everyone expects everyone else to conform to R.

3. Either everyone prefers to conform to R on condition that the others do if Γ is a coordination problem, in which case uniform conformity to R is a coordination equilibrium, or

4. If anyone ever deviates from R, it is known that some or all of the others will also deviate and the payoffs associated with the recurrent play of Γ using these deviating strategies are worse for all agents than is the payoff associated with R.

Now, notice that for a social institution or regularity R to be a well-functioning one, everyone must “expect everyone else to conform to R.”

This book considers the nature, function, and evolution of economic and social institutions. Most simply, it is a first step in an attempt to liberate economics from its fixation on competitive markets as an all-encompassing institutional framework. It views economic problems as evolutionary ones in which economic agents have finite lives and pass on to their successors a wide variety of social rules of thumb, institutions, norms, and conventions that facilitate the coordination of economic and social activities. In time, the institutional structure of the economy becomes more and more complex as more and more social and economic institutions are created and passed on from generation to generation. In some instances these institutions supplement competitive markets, and in some instances they totally replace them. Some of the institutions are explicitly agreed to and codified into law; others are only tacitly agreed to and evolve spontaneously from the attempts of the individual agents to maximize their own utility. Some lead to optimal social states; others are dysfunctional. In any case, each arises for a specific reason. It is the purpose of this book to investigate these reasons and analyze the types of institutions that evolve.

But what are social institutions, and what functions do they serve? These questions can be answered only by viewing economic problems in an evolutionary light. Doing this, as Veblen (1898) points out, takes the emphasis away from equilibrium analysis and places it on the disequilibrium aspects of the economic process. The proper analogy to make is between the evolution of an economy and the evolution of a species.

Ideas, once conceived, often undergo long gestation periods and are brought forth with great pain. When in the process they grow into monographs or books, one must realize that despite their mature appearance they are still only infants. This book presents a theory of social institutions that is still in its infancy and in no way purports to be fully mature. However, it does, I think, capture the essence of the phenomenon under investigation and present a formal way of dealing with it.

In judging the pages that follow, we must first ask what it is that a theoretical social scientist can attempt when he tries to make sense out of a particular aspect of the real world. It is my feeling that the first step he must take is to strip the phenomenon under study of its misleading worldly trappings and to lay bare its true nature. What may often be discovered is that the exotic phenomenon under investigation is isomorphic to a phenomenon with which we are quite familiar and comfortable. It is in the identification of these structural similarities that the essential qualities of the phenomenon are discovered and it is this process that any social scientific theory must attempt before going on to deal with more complicated questions. This is exactly what I have attempted to do in this book. I have tried to lay bare the essence of social institutions and the structure of the evolutionary problems they are called upon to solve.

One of the demands that confronts social scientists is the demand for relevance. For many, this demand is a curse because it robs social scientists of their ability to justify total abstraction. The inevitable question in social science is always: “So what? What difference does this make to the real world?”

It is my belief that there are two methodological responses to this demand. One is a response in which the social scientist makes his work directly applicable to meaningful empirical questions. This is what the layman usually sanctions as “relevant” social scientific research. The other approach, however, and one that I feel is equally relevant, is an approach that aims not to change the real world directly but rather to alter the way we view the real world by changing the prevailing theoretical paradigm existing among scholars. In other words, one approach is to theorize directly about the real world, whereas the other is to theorize about the theory existing to describe the real world (i.e., to be metatheoretical). My aim in this book was closer to the latter approach than to the former. What I have written may not be as directly applicable to the real world as it is to the way we view that world. I have tried to broaden the institutional frame of reference that we use to analyze empirically relevant social phenomena and to open up a new set of questions that could be asked about such phenomena. Consequently, the theory presented here is one step removed from direct application, yet still potentially applicable.

At this point in our discussion we have defined the type of problem whose solution requires the creation of a social institution and have discussed the actual process of institution creation by depicting it as a Markovian diffusion process whose absorbing points corresond to stable social institutions. This discussion has begged some very important questions: What function do social and economic institutions serve that could not be fulfilled in their absence? Exactly why are they efficient, if indeed they ever are?

The answer that we give is simple. Social and economic institutions are informational devices that supplement the informational content of economic systems when competitive prices do not carry sufficient information to totally decentralize and coordinate economic activities. More precisely, we see that although prices convey information concerning the relative scarcity of social resources and thereby create an incentive system for agents to economize, social institutions convey information about the expected actions of other agents when these actions are not perfectly coordinated by prices and consequently create incentives for such coordinated activity. In addition, we see that institutions tend to “codify memory” for the agents in the economy and thereby transform the game they are playing from a game of imperfect recall into one that has what we will call institution-assisted perfect recall. This transformation allows a considerable amount of informational efficiency, in that it permits the agents in the economy to employ stationary behavioral strategies in their play of the game and such strategies are highly efficient informationally. This will be accomplished by referring to a simple model of a two-person two-good Edge-worth barter economy.

If, as we have indicated in Chapter 1, economics is going to study the rise and evolution of social institutions, a very simple methodological approach is suggested. We should start our analyses in a Lockean state of nature in which there are no social institutions at all, only agents, their preferences, and the technology they have at their disposal to transform inputs into outputs. The next step would be to study when, during the evolution of this economy, such institutions as money, banks, property rights, competitive markets, insurance contracts, and the state would evolve. Looking at economics this way has distinct pedagogical advantages, because it allows us to connect a highly abstract economic theory with the world as we view it through the institutions we observe in everyday life.

The type of method suggested in this chapter is not new. In political science, theorists have tried to deal with the evolution of the state as a “social contract” among free individuals and, as a result, have depicted the institution of the state as emerging from a state of nature. Recently, Robert Nozick (1975) has used such a state-of-nature approach to study how the state can arise in a noncoercive way or at least in a manner that is consistent with individual liberties. He is, as a matter of fact, convinced that we can learn a great deal about such social institutions as the state by understanding how the institutions could have evolved that way.