Wilkinson, F (1983) ‘Productive Systems.’ Cambridge Journal of Economics. Productive Systems1* Frank Wilkinson
Over the past 30years or so there has been an increasingly dogmatic reassertion by orthodox economist of the beneficial effects of the free markets and of the inhibiting effect on welfare of institutional control and government intervention. These arguments are not based on a careful examination of how economies actually work and have developed but on abstract a prior reasoning about how they are supposed to operate. In the words of Polanyi (1957, p102).These have ‘in the name of the greatest happiness for the greatest number gained the dignity of a secular religion’ prior to and stronger than the laws and organisations of man which are judged on whether or not the natural laws. If they do, they are condemned as in restraint of trade, detrimental to economic welfare and in need of reform to bring them into conformity.
The failure of this approach is one of misunderstanding the central role of institutions in economic development and how social, political and economic forces are inextricably linked in determining how economies operate. 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 though, traditions 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 economic, social and political forces within a broad analytical framework to explain the historical process.( This paper keeps to 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 multiply and when the main advice of economic orthodoxy is for government inaction in all things, other than to make the market work more effectively.
The central proposition of this paper is that economic, social and political forces combine in determining how economies develop and the result is a dynamic non-equilbrium process which can only be revealed by empirical investigation. This is not to suggest that the 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 conform. 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 the sacrifice of the formality of its modelling and the surety of its conclusions. What is proposed here as an alternative are broad guidelines which it is believed may be fruitfully followed to improve our understanding of how economic systems operate. This framework is based on empirical and historical investigation and its development has resulted from long discussions with others engaged on similar forms of research. A central feature of this methodology is that the framework itself is to be tested and when necessary modified by subsequent research.
The paper is divided into four main parts. The first considers orthodox theories and critically assesses their treatment of social and political forces, the second suggests a possible framework for analysis which incorporates social and political forces, the third briefly confronts this framework with evidence of the changes in the functioning of economies revealed by empirical investigation and the final section considers within the proposed analytical framework the central issue of economics; the creation and distribution of wealth.
2. Social and political organisation and the distribution and creation of wealth in economic theory Orthodox economic theorists generally claim that their "science" is non-political: 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 necessary 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 in the modelling of the economy that lies at the heart of the failure of the majority of theoretical economists to provide any real understanding of how the economy works. This section considers how various schools of economists evade the issue of incorporating social and political forces into their models.
The central concern of economic theory is with the creation and distribution of wealth. Neo-classical theory defines economics as being concerned exclusively with the "allocation of scarce means to alternate 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 the pursuit of their own self interests, 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 of which factor services and commodities exchange. Technology and preferences provide the basis for rational decision making and are assumed to be such that alternatives are traded off against each other and the individual needs to get a more than proportionate increase in the one to compensate for relinquishing a unit of the other. Then the question of wealth creation and wealth distribution is resolved by the identification of the outcome of the competitive process as "efficient" in terms of both consumption and production. For example, labour expresses its preferences by trading-off work (consumption of wage goods) and leisure ( and is paid according to its productivity because entrepreneurs trade off labour against capital. The institutional framework within which neo-classical 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. Intervention in the working of markets by private agents or the government , except to remove obstacles its free operation, imparts imperfections to the system causing it to function sub-optimally. In response, to ensure that markets works effectively regulation and institutions are introduced to prevent collective and individual monopolies operating in restraint of trade.
Despite this, as firms began to increase in size and market domination economists began to develop theories which extended the idea of the beneficial effects of individuals operating in markets to include large businesses. It came to be argued that large firms emerge because markets offer opportunities to efficient forms of organisations and this can result in, or may even require, a degree of market control. Firms grow to dominance, it has been suggested, because of their superior managerial and production organisation and economies of their large scale operation gives then market advantage (Chandler, ). Alternatively, Hayek and his followers argue, market success and growth is the consequence of entrepreneurial ability in discovering new profit opportunities in a world of uncertainty (Kirzner, 1997). Monopoly profits are necessary, theorised Schumpeter ( ), to encourage innovators to develop new new products and processes (Schumpeter, ) And, the new institutionalist argue, hierarchical control by large firms provides an efficient co-ordinating and monitoring alternative to the market when contracts are difficult and costly to enforce (Williamson, 1986). Such theories served , broadened range benefits provided by the market to include an evolutionary mechanism by which efficient forms of organisation are promoted and the inefficient superseded. And, although large size may be the reward of success, big firms can only survive by generating the operational and dynamic efficiency by which organisations keep their feet in the market driven “gale of creative destruction” (Schumpeter, xxxx).
The content of these laws have changed as their bases were refuted or to provide explanations for the changing organisation of capital.2) For example, in the 1880s the marginal productivity theory of labour supply was evolved to replace the disgraced wage fund doctrine. However, this re-interpretation of supply side labour market laws left intact the central rule, that if employment was to increase wages had to fall.
Large size which is condemned by Smith as in restraint of trade is justified by Hayek and his followers as an inevitable consequence of the freedoms afforded entrepreneurs by the market to discover new profitable opportunities in a world of uncertainty (Kirzner, 1997) and by the New Institutionalists as a second best solution when markets fail (Williamson, 1986). The use of such arguments at law are used to justify the continued existence of the large corporations on the grounds that they are a product of the laws of trade whilst associations of small firms and trade unions are condemned as being in restraint of those laws. (Berk, 1994)
Keynes' criticism of the neo-classical theory centred around its inability to account for the recurrence of long periods of high levels of unemployment. He recognised the importance of institutional forces in determining money wages and in influencing the financial markets so as to inhibit their function of productively allocating investable funds. In Keynes' system wealth creation was held back by a chronic tendency for an advanced capitalist economy to generate excess savings which were not automatically transferred to investment. An adequate level of investment to ensure full employment was inhibited by firms expectations of declining profitability and hence their view of future income distribution. In the developments of his analytical framework Keynes gave the distribution of income a functional role in determining the average propensity to save. ( This notion has been developed in noe-Keynesian theories of distribution to which full employment, non-inflationary equilibrium required that real wages adjust to the pre-emptive claims of investment, capitalist consumption, governments and the foreign sector [Kalecki (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 social and political functioning in terms of their own economic theories. ( For example, the belief that the distribution of income is the outcome of the macro-economic forces provides the framework for assessing trade union wage bargaining behaviour. Inflation, it is argued, results from the unwillingness of trade unions to accept the reality of income distribution and its cure is one of reforming trades unions or controlling their wage determining activities.
The devising of social and political solution 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 secondary, supportive theorising in Wood (1978) which simply asserts the relative pay is overwhelmingly more important than the absolute level of real pay is 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 the level of real rather than relative pay lies at the heart of the wage pressure and the development of trades unions (Tarling and Wilkinson 1977, 1982), and if high levels of unemployment are functional in containing that pressure, then neither the level of employment or 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 developments 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 fail mainly because of institutional imperfections.
Both Keynes and macro-economists working in the Keynesian Tradition have concentrated on broad aggregates and have had little or nothing to say about the organisation of production. However, developments from the Keynesian revolution (or perhaps more precisely paralleling it) in Cambridge (UK) fundamentally criticised the micro-economic foundation of neo-classical theory, a rebuttal which emphasises that the means of production are not scarce, rather they are produced. This concentrated attention on supply and showed that the value of capital was not independent of the rate of profit so that, with given techniques of production, 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 inputs of physical quantities of commodities, the distribution of income appears as an exogenous variable 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. Thus this alternative approach suffered from many of defects of conventional theory and as a consequence is no more useful for analysing actual economic systems.
Marx provides the outstanding example of the portrayal of production as essentially a social phenomenon. He followed the classical economists in regarding income distribution as a central issue and saw the creation of wealth as being dependent on distributional shares determined not, as with neo-classical theory, by economic efficiency, but by the social relations of production. Moreover Marx emphasised the role of the structuring and restructuring of production as crucial in ensuring the wealth distribution necessary to maintain the rate of accumulation. However his emphasis on the invitability, and imminence, of the revolutionary downfall of capitalism led him to over-state that system's self-destructive potential. The emphasis placed on the 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 profits to be maintained and real wages to rise. 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 from 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 al (1982).
The methodology adopted by economists of all persuasions of determining ideal - and idealised - notions of how economies operate from abstract a priori theorising and then deriving from this exercise criteria to judge the real world help explain why economists so after adopt entrenched and mutually exclusive positions. A few examples will illustrate this point. To the monetarist and supply-side economists state intervention is generally damaging, to the Keynesian it is essential to maintain full employment growth, to the Marxist it is a reflection of the class forces in society and in some extreme Marxist presentation just a tool of capitalist domination. Market domination by large firms causes loss of economic welfare in neo-classical theory but is the engine of growth in Schumpeterian and Marxist economics. For neo-classical theorists the free operation of the market co-ordinates individual actions to ensure efficiency in both production and consumption while in Marxist theory employers and workers have unequal access to the 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 neo-classical schema to improve labour by investment in human capital but for Marxists to condition individuals to their economic functions, rank claimants to income and to establish socially acceptable pre-emptive claims to income and status. (Bowles and Gintis). A fourth and perhaps the most 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 which concentrates attention 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 high rates of economic progress or economic stagnation.
Part of the problem is that economic phenomena have many roles. 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. ( Certainly the creation of a "free" market, where economic agents interact without legal impediments would have an effect but its nature 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 attention of economic phenomena - particularly the creation and distribution of wealth - but it would also need to explicitly recognise the role of social and political forces in determing economic outcomes. The next section attempts to lay the foundation for such a conceptual framework by examining how productive systems operate.
Productive Systems Productive systems are 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 systems 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 a precondition to economic activity, and this applies with equal force to both the social and political framework as to the means of production. Moreover, whilst it is convenient to consider these elements separately, in practice they are mutually supportive and dynamically interact.
In both the organising and structuring of production relationships have two distinct elements: mutual interests and relative power. For example labour and the means of productivity are mutually dependent: the one cannot operate without the other. However the degree of dependence on this complementary relationship varies between labour and capital. In a capitalist system labour is largely separated from the means of production and alternative means of subsistence to 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 length of 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 that the only factors influencing power relationships. The relatively small numbers of employers make it much easier for them to choose 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 and therefore their relative status is indeterminate; in all other respects labour is inherently inferior to capital. In these respects the relationship between labour and capital cannot be considered a special case: producers of raw materials, intermediate goods and final products also have a mutuality of interests but 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.
a. 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 social organisation. In Britain for example labour was separated quite completely from forms of subsistence other than wage labour at an early date while in other industrially advanced European countries - France for example - the potential labour force maintained a substantial agrarian interest until very recently a factor which has affected it's pattern of industrialisation and forms of labour organisation (Lorenz, 1982). The emergence of social security systems also have had an important influence on the supply of labour, on its production, availability for waged labour and supply price (Picchio, 1981; Craig et al. 1982) (. The participation rate is also 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, the standard of living mainly determined by the real wage and by education and training. The latter, including the early socialisation of children, has the dual function of enhancing skill and ensuring the more effective use of labour power 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. The standard of living 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 Craig et al.). The composition of the basket of goods and services constituting the standard of living is formed by economic, social and political forces. What constitutes adequacy in living standards changes through time as real wages rise, aspirations raised and new goods are developed and their consumption widely diffused. In these latter respect the producers of consumer goods are sovereign in that they determine what is to be produced, the new goods on offer and as they use their massed resources to form consumer tastes. But on the other hand the established standard of living, both in quantitative and qualitative terms, acts as a cohesive force on producers by establishing 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, results from a complex interaction of economic, social and political forces.
b. Means of production Although the means of production include raw materials, intermediate goods and machines attention will be focussed only on machines. ( 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 and where by definition, the limits are set by the technical, economic and social condition 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 and 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 system of organising 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 ( the efficient use of labour is quite another question. Skill and effort cannot be separated from the labourer who decides whether and how, it is to be used; these attitudes being formed by education, socialisation, traditions and other social forces. Thus the relations 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 conclusion which applies with equal force to the structuring of productive units. For example, the most efficient size of productive unit in terms of output per composite unit of input of labour power and the means of production may appear to be a more or less technical matter determined by economies 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 utilization of machines and labour power (Marglin, 1974) while on the other it increases the organised power of labour.
d. Market Relations The term relations of production as used above refers to the interaction of the labour power and the means of production within the productive unit. If all productive units were independently controlled transactions between them can be described as market relations and the terms of these transactions market prices. Market relations are essentially power relations. If no market participant is sufficiently strong to dominate one side of the market, and if those on both sides of the market are evenly matched market prices will be outside the control of market participants. Even in this case there is market power, it is just evenly balanced. A firm, for example, establishes market control if it can determine the size of its market by, for example, productive innovation, the differentiation of its product by advertising, the establishment of exclusive selling agreements with retailers; or in the market for its inputs by control over a local labour market or by creating a dependency relationship over its sub-contractors. So market power is determined by the degree of unilateral control the firm achieves over input and output prices and hence its terms of trade with all other participants in the markets in which it trades.
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 costs of production of individual units reflect the relative power of both the firm and the suppliers of the productive power employed in that unit and if the balance of these powers varies between the firms productive units this would influence the terms upon which they trade with each other. In such a case the difference between the determination of the terms of trade between productive units owned by the same firms and those owned by different firms is a matter of degree rather than kind and the term "market relation" can be used to describe both types of transactions.( Needless to say common control of a number of production units provides opportunities to arrange internal prices in such a way as to maximise the market advantage of the whole. An international firm, for example, can arrange its internal pricing systems so that profits accrue where they are most easily realised, and these internal terms of trade can be important in determining the market relations between the conglomerate and its trading partners.
e. Thesocial and political framework
As emphasised earlier the relationship we have been considering are based on mutual interest but are structured with the terms of the relationship 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, employers' and trade associations, the state, international organisations and other agencies foster collective interests and reflect the power relations between individuals and between section, class, regional, national and other groupings. Thus the organisations of trade unions and employer and trade associations is based on shared objectives but their internal organisation reflects the balance of power between sectional interests. In their negotiation trade unions and employers associations seek to regulate, often jointly, rates of pay, conditions of work and to provide procedures for resolving disputes. This results at least partly from their mutual interest in the firm's and industry's prosperity and the continuity of production. But the outcome of negotiations also reflects the power relations both within and between the employers' and workers' organisation.
The activity of the state can also be variously interpreted. The provision of education, health, social welfare, law and order and the regulation of, for example, trade unions and business enterprise can be seen as furthering the common interest, of increasing the effectiveness and efficiency of production 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 individual capitalists are incapable of providing and by making good the erosive effect of capitalist competition on, for example, the stock of labour power. For labour, state social welfare activities can be seen as shifting the balance in favour of labour by lifting from it the burden of poverty, disease and ignorance. 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 nation states have in protecting themselves from the unregulated international movements of goods and finance and the possible destructive effect of unilateral attempt to control such flows. In this respect international agencies reflect the mutual interests of nation states in encouraging the beneficial effects of trade and financial interaction. However the form international institutions take and the way they operate reflect the relative powers of nation states (de Cecco 1979).
Relations within and between productive systems