Wednesday, April 20, 2016

The Whys and the Wherefores of the Factory System

If you are like me your understanding of the factory system that started up with the Industrial Revolution is a mish-mash of history and Marxist revisionism. Yes, the factory system was efficient, but it achieved its efficiency by exploiting the workers. Yes it produced cheap products, but it threw artisans out of work, "de-skilling" the work environment so it could pay workers less. And, of course, it replaced production for use with production for profit, replacing use value with exchange value.

But now I've read Joel Mokyr's review of the factory system in The Gifts of Minerva, and I find I'm not quite sure what he argues. So I figured I better write a blog post and get the whole thing clear in my mind.

Big picture: The industrial revolution was not a finance thing, of capitalists accumulating and profiting. It was a knowledge revolution, an interaction of "propositional knowledge" with "prescriptive knowledge." Some people invent a machine or a technique; the next question is: how or why does it work? Then there is a theory like Newton's mechanics. How can it be exploited into useful products? When you have a world of constantly expanding knowledge and constantly improving technique, people have to get together to compare notes and transfer knowledge.

Now the British economy at the time of the industrial revolution was typically a domestic economy. People usually worked at home. The stereotypical process at the time was the textile "putting-out" system, where entrepreneurs supplied cottagers with machines and materials and paid piece-rates on finished products.

Why then did entrepreneurs change the system to a factory system, where workers had to commute to work and get paid hourly wages instead of work at home and get paid piece rates? You'll be shocked to learn that it wasn't so that they could extract more socially necessary labor and convert use value into exchange value. No, the reason was practical and prosaic. Mokyr comes up with four main drivers towards the factory system.

Fixed costs and scale economies. Many of the new technologies could not work at the scale of a domestic cottage. Many of them represented fixed costs, and the employer had an interest in supervising the workers and maximizing the machine utilization.

Information costs and incentives. Piece-rates incentivize the worker to maximize quantity. But suppose consumers are more concerned about quality? Then the employer will also focus on product quality. Then he will want to bring the work in-house and pay the worker a time wage so he can specify exactly the process to be used and inspect the quality of the product. Also, in a complicated production process it is difficult to "disentangle" the value of the individual contributions of workers. In addition, the new processes required more "team production," such as the continuous flow, or assembly-line production system.

Labor effort. The Marxians argue that putting labor in a factory makes it easier to get workers to work longer hours and increase profits. Alternatively Gregory Clark argues that the factory helps get more effort from workers lacking self-control. There is, of course, an economy of scale in supervising workers at a central location rather than running around visiting their cottages.

Division of knowledge. Mokyr argues that the new factories required a lot of specialized knowledge. How to build them, how to fix them, how to improve the process. "[A]fter 1760, efficient production required more knowledge than a single household could possess." Here we have an interesting counterpoint to the Marxist "de-skilling" argument. The new processes required specialized knowledge. The machine operator or line worker may have needed less skill than the old domestic artisan worker, but could not thrive unless backed up by mechanics, process experts, and specialized knowledge that were constantly adapting to new propositional and prescriptive knowledge.

So let Joel Mokyr sum up:
[A]s long as the minimum competence requirement is small, plants can be small and coincide with households with all the associated advantages; when it expands it will require either a sophisticated and efficient network for the distribution of knowledge or a different setup of the unit of production... Factories thus served as repositories for technical knowledge and vastly reduced access costs to this knowledge for individual workers. (p.141)
In addition, of course, the industrial revolution featured "professional associations of mechanics, machinists, engineers, and skilled workers" which provided communications channels for the propagation of knowledge.

Similar arguments are made regarding the creative synergy of artists' colonies, and the concentration of the IT industry in Silicon Valley. The more you can concentrate people together at their work, the more they can talk to each other and exchange ideas and experience.

And, of course, there is the modern argument that, with the Internet and its efficient communication of information, we can all work at home as "telecommuters" and save the significant cost of commuting.

So there you have it. The factory arose because of the need to bring people together to exchange knowledge and information.

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