Modeling Management: Evolution of the Science

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The generalized-exchange model’s large-establishment venue (LEV) provides an important role for the active management of labor. Most notably, human-resource departments, universally present in complex, highly specialized firms, are tasked to calibrate firms’ modal workplace-exchange relations. (See last week’s post.) GEM research has demonstrated that such WERs are rationally nonconvex, implying the payment of unit-labor-cost minimizing efficiency wages.

In the now familiar story, WER identification was greatly complicated by the Second Industrial Revolution and its scaled-up, highly specialized corporate forms. Making sense of LEV workplace exchange, rooted in axiomatic preferences and manifested in collectively observable on-the-job behavior (OJB), proceeded in fits and starts. Labor management passed through drive-system and scientific-management phases before arriving at the equity-based human-resource paradigm (designed to elicit employee acceptance of employer goals) that now dominates in LEV production throughout the world.

Drive System

The infamous “drive system” was most characteristic of large-firm labor management in the nineteenth century. At the onset of the systematic exploitation of scale economies, it was typical for foremen to act as self-interested subcontractors: hiring, supervising, and paying their work crews. Firm owners kept scant employment records, dealing only with foremen. The approach featured close worker oversight, arbitrary treatment, bribery, abuse, and the absence of employee rights. From Sanford Jacoby (1994, p.343): “The fear that the drive system aroused ultimately was founded on the threat of dismissal. The foreman was free to utilize the discharge as he saw fit, and discharges were liberally meted out. The threat posed by dismissal depended on labor-market conditions….” The drive system is recognized to have much in common with the Shapiro-Stiglitz (1984) shirking theory, which has become New Keynesian theorists’ default model of worker behavior.

As establishments became larger and work tasks more specialized and integrated, with much faster throughput time, the close supervision of the drive system was more obviously revealed as ineffective. Moreover, the approach was sufficiently maligned to have become a national issue, motivating high-profile Congressional hearings. The drive system, as firms learned more about workers and specialized workplaces, was over time understood to be rooted in a fundamental misperception of employee preferences and to be inconsistent with firm profit-seeking.

Scientific Management

“Speedy” Taylor. Scientific management was famously developed by Frederick Taylor (1911) to facilitate the transition from the drive system. (The nickname “Speedy”, while predating scientific management, is evocative of his life work.) Taylorism was a revolutionary approach to managing labor as tasks became increasingly specialized and workplaces more complex in the aftermath of the Second Industrial Revolution. Peter Drucker, perhaps exercising dramatic license, once suggested that Taylor’s work is “… the most powerful as well as the most lasting contribution America has made to Western thought since the Federalist Papers.” (Kanigel (1997), p.10)

Scientific management applies systematic measurement to the firm’s central problems of how both to better calibrate the Workplace-Exchange Relation and to improve direct employee supervision. Taylor conducted his interventions with a stopwatch, timing workers’ movements and rest pauses. Selection criteria were established to place workers in jobs for which they are most suited. They were then instructed in the most efficient methods to use in their work tasks. Time-and-motion studies informed his attempt to understand inherently routinized jobs, helping to design the devolution of specialized labor processes into simple, repetitive tasks. Taylorism provided an early blueprint for class-I jobs which, as described in Chapter 2 of the website’s e-book, tend to be monotonous and boring. Scientific Management fits comfortably into market-centric modeling.

Fair Treatment

Taylor separated from friction-augmented general-market-equilibrium (FGME) theory when he eventually recognizes that labor management is not wholly a problem of efficient worker supervision, opening the door to a much deeper understanding of OJB. He argued that, even with optimal oversight, cost-efficient production requires worker cooperation. From Stessin (1960, p. 5): “Taylor called for a ‘mental revolution’ by management in its attitude towards the workforce. He argued that if employees were to be won over to scientific management, they must have the assurance of fair treatment by the employer. This meant that management must voluntarily adopt new concepts of boss-worker relationships. [For example] the supervisor must abandon his prerogative of ‘instant dismissal’ and substitute ‘just cause’ as the standard for separation from a job.” The developer of time-and-motion studies recognized, from his experience in many different workplaces, that labor contracts are inherently incomplete and that employees determinedly insist on fair treatment from management. From a lifetime participating in the Second Industrial Revolution, Taylor eventually identified the key to many modern economic puzzles.

Building on more than a century-long development of management best practices, GEM Project’s two-venue general-equilibrium model class provides a coherent theory of production in the context of costly, asymmetric workplace information. As a result, generalized-exchange modeling rationally motivates recognizably-sized macro fluctuations in job loss, employment, output, wage income, and profits, resuscitating Early Keynesian three-part macrodynamics. First, stochastic real or nominal shocks periodically occur in highly-specialized economies. Second, originating shocks are propagated by nominal demand disturbances and their associated multipliers that combine with meaningful wage rigidity (MWR) to rationally generate most of the subsequent welfare loss. Third, amelioration of instability costs justifies stabilization authorities’ discretionary interventions in total spending.

Equity-Based Human-Resource Management

A 1927-1932 study conducted at the Hawthorne plant of the Western Electric Company can, in retrospect, be understood as a turning point in LEV management’s WER learning curve. Study results famously found that attitudes of individual workers and the role of informal work groups are OJB critical. The question changed from the design of the work environment to how to induce employee cooperative effort aligned with management goals.

As firms’ understanding of the nature of employees and specialized workplaces continued to progress, Taylor’s “mental revolution” – not his stopwatch –  carried the day. Experience produced the ubiquitous management conclusion that employees strongly prefer fair treatment and that their preference for equity critically influences OJB (denoted in the model by Ź) whenever effective direct supervision is limited. Anticipating later findings of behavioral economists, the extensive literature documenting worker behavior has long indicated that interpersonal and intertemporal comparisons of wages and working conditions play a central role in employee satisfaction. As indicated by the evidence summarized in Chapter 10 of the website’s e-book, LEV management has long recognized the importance of reference wages and has implicitly adopted the GEM specification of instantaneous worker utility (Chapter 2):

max Ú(C, Lo, W/Wn), such that(ΔÚ/Δ(W/Wn)│W≤Wn)>0,

where C denotes consumption, L is leisure, W the wage  received, and Wn the efficiency wage. The growing understanding of both worker preferences and the nature of large, specialized workplaces motivated the increasing reliance on professional, centralized personnel management. The altered approach relatively quickly resulted in more regularized employment relationships, welfare benefits, and paternalism (the “American plan”). Those interim practices eventually evolved into the modern equity-based human-resource paradigm, focusing on voluntary employee acceptance of management goals, that dominates in large, highly specialized establishments today.

The nature of contemporary workplace mechanisms of exchange is no secret. Large-firm human-resources departments are responsible for identifying worker preferences and predicting their responses to personnel policies, including labor-pricing decisions. Particular attention is paid to job satisfaction. The evidence shows that department administrators, in consultation with top management, use wage-setting practices that rely more on job-evaluation programs (maintaining established interpersonal reference standards) than on market-wage surveys. Jobs are defined with associated rates of pay; ports of entry for new hires (typically less desirable positions) are typically used; rules (providing a key role for seniority) governing the internal access to more desirable jobs are designed and implemented; formal grievance procedures are established. Due-process rules (especially with respect to discharge) are the norm, effectuating “…standards of equity that a competitive market cannot or does not respect.” (Doeringer and Piore (1971), p.29.)

Blog Type: New Keynesians Saint Joseph, Michigan

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