Capitalists shooting their own feet – destroy trust and layer management

There was a wonderful article – The Origin of Job Structures in the Steel Industry – written by Katherine Stone and published in 1973. It was part of an overall research program that several economists and related disciplines were pursuing as part of the radical economics that was being developed at Harvard and Amherst in the early 1970s. One of the major strands of this research was to understand labour market segmentation and how labour market structure, job hierarchies, wage incentive systems and more are used by the employers (as agents of capital) to maintain control over the workforce and extract as much surplus value (and hopefully profits) as they can. It challenged much of the extant literature which had claimed that factory production and later organisational changes within firms were technology-driven and therefore more efficient. The Harvard radicals found that to be unsustainable given the evidence. They also eschewed the progressive idea that solving poverty was just about eliminating bad, low pay jobs, an idea which had currency in that era. They showed that the bad jobs were functional in terms of the class struggle within capitalism and gave the firms a buffer which allowed them to cope with fluctuating demand for their products. It also allowed them to maintain a relatively stable, high paid segment (primary labour market) which served management and was kept docile via hierarchical incentives etc. I was reminded of this literature when I read a recent paper from Dutch-based researchers on the way firms have evolved in the neo-liberal era of precarious work. Much is made of the supposed efficiency gains of a more flexible labour market. How it spurs innovation and productivity through increased competition and allows firms to be more nimble. The entire ‘structural reforms’ agenda of the IMF, the OECD, the European Commission and many national governments is predicated on these myths. The Dutch research shows the irony of these manic neo-liberals.

The reference for Katherine Stone’s article is – Stone, K. (1973) ‘The Origin of Job Structures in the Steel Industry’, Radical America, 7(6), November-December, 19-66.

It was finally published as ‘The Origins of Job Structures in the Steel Industry, 6 Review of Radical Political Economics 27 (1974). It was reprinted in Labor Market Segmentation 27-84 (edited by Richard C. Edwards, Michael Reich, and David M. Gordon, Heath, 1975); in Root and Branch: The Rise of the Workers Movement (Fawcett, 1975); in Complex Organizations: Critical Perspectives (edited by Mary Zey-Ferrell and Michael Aiken, Scott, Forsman and Company, 1981); and translated in Swedish in Klass-Maktoch Arbetsdelning (Archives Studies, Stockholm, 1987).

Katherine Stone, now a labour law professor at UCLA, studied the evolution of the job structures and management hierarchies in the C19th steel industry in the US. It is a long article but worth reading if you are interested in these things. I read it back in the late 1970s when I was working on segmentation theory.

Her essential argument is that in the C19th:

… work in the steel industry was controlled by the skilled workers. Skilled workers decided how the work was done and how much was produced. Capitalists played a very small role in production, and there were yet few foremen. In the last 80 years, the industry has transformed itself, so that today the steel management has complex hierarchy of authority, and steelworkers are stratified amongst minute gradings along job ladders. Steelworkers no longer make any decisions about the process of steel.

Why did this happen?

Katherine Stone wrote:

Out of their efforts to gain control of their workers and prevent unified opposition, the steel employers set up the various structures that define work today.

The major changes occurred between 1890 and 1920 and the employers began by busting the steel workers’ union. Then the management confronted the two-fold problem: making the workers work harder and stopping them uniting in rebellion.

To maintain discipline of the increasingly hostile workforce, the managers created “a new labor system”, which used a range of techniques to make “workers’ individual “objective” self-interests congruent with that of the employers and in conflict with workers’ collective self-interest”.

Such things as “wage incentives” coupled with “new promotion policies” worked to divide and conquer the workforce.

She traced the way in which the management secured control of the steel workplace using time-and-motion management techniques pioneered by – Frederick Winslow Taylor – the founder of so-called Scientific Management.

Stone showed that the introduction of these assembly line type techniques “narrowed skill differentials between the two grades of workers, producing a workforce predominantly ‘semi skilled’.”

To avoid this homogenisation feeding into unity, “elaborate job hierarchies were being set up to stratify them”.

It is a sorry tale and well worth reading in its totality.

She concluded thus:

The institutions of labor, then, are the institutions of capitalist control. They could only be established by breaking the traditional power of the industrial craftsmen. Any attempt to change these institutions must begin by breaking the power the capitalists now hold over production. For those whose objective is not merely to study but to change, breaking that power is the task of today. When that is done, we will face the further task of building new labor institutions, institutions of worker control.

I have already mentioned the work of Stephen Marglin in a previous blog or two. He wrote the 1974 classic article – What Do Bosses Do?: The Origins and Functions of Hierarchy in Capitalist Production – which showed that the rise of factory production and the division of labour that came with it:

… was the result of a search not for a technologically superior organization of work, but for an organization which guaranteed to the entrepreneur an essential role in the production process, as integrator of the separate efforts of his workers into a marketable product …

Likewise, the origin and success of the factory lay not in technological superiority, but in the substitution of the capitalist’s for the worker’s control of the work process and the quantity of output, in the change in the workman’s choice from one of how much to work and produce, based on his relative preferences for leisure and goods, to one of whether or not to work at all, which of course is hardly much of a choice.

[Reference: Stephen Marglin (1974) ‘What Do Bosses Do? the Origins and Functions of Hierarchy in Capitalist Production, Part I.’, The Review of Radical Political Economics, 6(2), 60-112.]

You can also read the 1975 follow-up – What Do Bosses Do? Part II.

Both Marglin and Stone were part of a radical study program examining labour market segmentation, the way in which capitalists created and implemented control functions to ensure the workers produced adequate quantities of surplus production, which, of course, is the source of profits in a capitalist system.

With this background in mind, I thought a recent paper by Alfred Kleinknecht, Zenlin Kwee and Lilyana Budyanto was pertinent.

The paper – Rigidities through flexibi­lity: Flexible labour and the rise of management bureaucracies – was published in the latest issue of the Cambridge Journal of Economics, 39(5), September.

The context of the paper is the growing push by employer groups and neo-liberal governments to impose so-called “structural reforms” in labour markets as part of the austerity push.

The alleged motivation of these austerity proponents is based on their stated belief:

… that every obstacle to the ‘free’ working of markets reduces the market system’s capacity to automatically find equilibrium and allocate scarce resources efficiently … In this view, a trade union is an anti-competitive cartel organisation, preventing downward wage flexibility and keeping people unemployed. The same holds for generous social benefits and high minimum wages that cut off access to low-paid work. This line of reasoning would plea for removal of firing restrictions in order to make labour markets ‘more dynamic’ and change power relations in firms. All this seems to support ‘structural reforms’ of labour markets, which are now widely propagated as a response to the financial crisis.

But, as the authors note, the human cost of this forced precariousness in labour markets is that morale falls which is likely to reduce “innovation and productivity”.

It is a similar issue that Marglin and co were concerned with. The breakdown of morale when the capitalists started expropriating homeproduction.

There is a strong recent literature that suggests these ‘reforms’ (aka hacking into the job security and wages of workers to redistribute more real income to the top-end-of-town) undermine productivity, reduce innovation and work effort.

The paper compares the organisation of firms in two “varieties of capitalism”:

Anglo-Saxon liberal market economies (LME) versus Rhineland-type coordinated market economies (CME), paying particular attention to labour market institutions …

So it is another micro-focused study and focuses:

… on the role of social capital on corporate governance, i.e. the role of trust, loyalty and commitment.

The issues of trust, loyalty and commitment were, of course, central to the sorts of considerations that Stephen Marglin and Katherine Stone were also interested in.

The work of Marglin and Stone was focused on the beginnings of industrial production and the way in which the capitalist class had to introduce a control function because they couldn’t trust the workforce to work hard and long enough to generate the surplus production that was the source of capital accumulation and maintenance of the capitalist hegemony.

The recent article is focused on the contemporary evolution of capitalism as a sense of acquired “trust, loyalty and commitment” has broken down as the capitalists became too greedy.

The basic contention is that:

… ‘low road’ Human Resource Management (HRM) practices in the Anglo-Saxon style reduce the loyalty and commitment of workers, thus increasing the need for management and control … flexible work practices reduce trust …

They cite a sparse literature that supports that contention.

The authors use a unique Dutch database which has information on firms that are “still of the ‘Rhineland’ (CME) type” and a group of firms that have “adopted various elements of Anglo-Saxon LME” – that is, invoked “low road HRM practices”.

The principle break from the CME model has been the substantial increase in:

… the number of flexible workers, i.e. people on temporary contracts, manpower agency workers or ‘self-employed’ freelancers, increased substantially.

The authors estimate that up to 35 per cent of the Dutch workforce is now working in these precarious circumstances.

I noted when I was Portugal in early September how part of the austerity push has been to increasingly allow firms to hire so-called ‘non-contract’ workers which means they can escape all the statutory requirements including minimum wage rates, holiday pay, sick pay etc.

The effective minimum wage has plunged well below the legal minimum wage as a consequence.

As similar trend has been accelerating in the Netherlands and that shift has allowed the researchers to test the differences within firms that have adopted the neo-liberal, ‘race-to-the-bottom’ path against those that still operate in the CME tradition.

The “two indicators of flexible labour: (i) percentages of workers on temporary contracts and (ii) people hired from manpower agencies plus freelance (‘self-employed’) workers” are used to explain (via statistical analysis) differences in the “management ratios” within firms.

That is, how many managers and control/supervision staff there are to the total workforce in the firm.

They use a range of ‘control’ variables: firm size, firm age etc.

So what did they find in terms of differences in management practices (ratios) between the “high road” and “low road” firms?

I will leave it to you to study their methodology and statistical techniques. My view is that they are sound.

I produced the following graph from their underlying dataset. It shows the 16 industrial sectors and their corresponding management ratios (left-axis, blue columns) and the proportion of precarious workers (right-axis, red line).

With some exceptions, the lower is the proportion of precarious workers the lower the management ratio. In statistical terms, the relationship is strong.

The conclusions of the study are:

1. “sectors such as healthcare, education, public services or public administration have smaller management bureaucracies compared with private business firms. Possible explanations are higher trust and loyalty due to possibly lower rates of job turnover, the latter being favoured by typically high rates of trade unionisation in such sectors.”

2. Contrary to popular opinion, “larger firms have relatively lower management ratios than their smaller counterparts.”

3. “using higher shares of temporary workers, manpower agency workers and self-employed (freelance) workers is related to heavier management bureaucracies.”

4. “The deregulation and privatisation campaign of the 1980s and 1990s often suggested that we could choose between two opposite allocation principles: markets or bureaucracies. At least in the case of the labour market, our above results suggest we get both: thicker management bureaucracies and higher transaction costs within firms as a response to deregulation of protective labour market institutions.”

Conclusion

So it is rather ironic that the greed that has led governments to support the destruction of job security, the race-to-the-bottom wage structures, and the de-skilling of the workforce actually ends up costing firms in terms of innovation, lower productivity, and bloated management structures.

The higher management ratios – lots of petty middle managers checking up on workers all the time, filling out forms, having managing-for-performance interviews with their workforce and all the rest of the crazy overkill – are the result of the reduction in trust and loyalty that has accompanied these labour market changes.

They fit squarely into the literature on capitalist control.

Upcoming Events

Finland, October 2015

I am visiting Finland between October 7-11, 2015 and will be giving a number of presentations and talks during those four days.

1. Thursday, October 8, 2015 – SOSTE Talk 2015.

SOSTE is the “Finnish Federation for Social Affairs and Health is a national umbrella organisation that gathers together 200 social and health NGO’s and dozens of other partner members.”

I am their guest and I will be speaking at their annual conference – SOSTE Talk. The topic will be on Full Employment and how governments can achieve it.

I will be speaking between 9:00 and 10:30.

2. Thursday, October 8, 2015 – Austerity and Beyond – University of Tampere

After a 90 minute train trip from Helsinki to Tampere I will be speaking at the University of Tampere on the theoretical and political background of Eurozone austerity. There will be two discussants and a free conversation to follow.

The presentation and discussion will run between 15:00 and 18:30. All are welcome.

The location is Tampereen yliopisto (University of Tampere), Kalevantie 4, 33014 Tampereen yliopisto Tampere, Finland.

For more details E-mail: kirjaamo@uta.fi

3. Friday, October 9, 2015 – Guest Lecture at University of Helsinki – Economic Austerity and the Alternatives.

The Topic will be similar to the discussion at the University of Tampere although I will branch out and discuss Modern Monetary Theory (MMT) undoubtedly.

There will be two discussants and an open discussion to follow.

The event is free and open for everyone. It is organized by the Finnish Society for Political Economy and the Department of politics and economics, University of Helsinki.

The Finnish Karl Marx Society has promised to organise a good quality video broadcast from the event which will be available on YouTube soon afterwards.

The event will run from 17:00.

The location is Unionikatu 40, 00170 Helsinki, Finland.

Here is the promotional poster for the Helsinki event:

Newcastle, October 21, 2015

On October 21, 2015, I am a keynote speaker at the Poverty and Inequality Forum being held at the Newcastle City Hall and organised by NOVA. More details to follow.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.