Technology and Theories of Economic
Development:
Neo-Smithian Approach
(The Theory of Flexible Specialization)
The Second Industrial Divide
by
M. J. Piore and C. F. Sabel, 1984
1
Review


Throughout 19th century, collision of craft and
mass production
Technological foundations of craft production


Machines and processes could augment the
craftsman’s skill, allowing the worker to embody his or
her knowledge in ever more varied products
The more flexible the machine, the more widely
applicable the process, the more it expanded the
craftsman’s capacity for productive expression
2
Review

Technological foundations of mass production



The guiding principle is that the cost of making any
particular good could be reduced if only machinery
could be substituted for the human skill needed to
produce it
Decomposition of handwork task into simple steps
The more specialized the machine, the faster it
worked and the less specialized its operator needed to
be, the greater its contribution to cutting production
costs
3
Review


Craft production: a world of small producers, each
specialized in one line of work and dependent on the
others
Mass production: a world of ever more automated
factories, run by ever fewer and less skilled workers

Manchester cotton goods, Singer sewing machines,
Remington typewriters, American Tobacco cigarettes, US
Steel
 Domination of giant firms using specialized equipment to
turn out standard goods, at prices that local producers
could not meet
 1913: Ford’s Model T; the culmination of a century’s
experience with mass production (precise machinery
with no hand finishing)
4
Review




The first industrial divide: the early 19th century victory
of mass production over craft production as the dominant
form of industrial organization
Mass production: offering enormous gains in
productivity; higher profits, higher wages, lower
consumer prices, range of new products
Requirement: large investments in highly specialized
equipment and narrowly trained workers
Profitable only with markets that were


Large enough to absorb an enormous output of a single,
standardized commodity
Stable enough to keep the resources involved in the
production of that commodity continuously employed
5
Review

The profitability of investment in mass-production
equipment depends on the stabilization of markets:
two consequences of the Americans’ discovery


From 1870s to the 1920s, the construction of giant
corporations which could balance demand and supply
within their industries
The creation of a Keynesian system two decades later for
matching production and consumption in the national
economy by using government spending on public projects
to settle the balance of supply and demand to the higher
level of output if there is an under consumption trap
6
Review


Stabilization of markets: a minimum state intervention
guaranteed the prosperity of a competitive market
economy
Mass production-mass consumption technology in US:


Stabilization in individual markets through micro-regulatory
institutions such as the corporation
Matching aggregate demand to productive capacity by
coordinating the stabilization of individual markets through
macro-regulatory institutions such as the wage-determination
system
7
Review

Microscopic world of shop-floor industrial
relations and macroscopic world of international
trade, relating to corporation and Keynesianism



1944 British and American government officials Bretton Woods,
IMF (supra national bank) and GATT (trade rules)
Role of US in international trade: dollar being the international
medium of exchange
American system of shop-floor control in the 1950s
8
Review

American system of shop-floor control in the 1950s:
 A job is defined aggregate of well-specified tasks and
seniority is a criterion in the allocation of jobs
 Worker’s income, employment security and degree of
autonomy all depend on the definition of their jobs and
on seniority
 Wages are set according to characteristics of jobs, not
the individuals who hold them
 Jobs broken down into their component tasks and into
hierarchical lines of progression and seniority districts
involving more skill and higher pay
 Seniority rules govern job security
9
Review

Crisis of 1970s


A series of shocks to the economy intensified by
political responses that ignored the institutional
foundations of stability in a mass production
economy
The dramatic spread of mass production and the
resulting exhaustion of the possibilities for further
growth within the regulatory system created after
World War II
10
Review

Five critical episodes in crisis of 1970s





Social unrest
Floating exchange rate
The first oil shock and the Russian wheat deal
The second oil shock
High interest rates, world recession and the debt
crisis
11
Review

Two kinds of response to economic crisis of
1970s


Global: economic policymakers addressed
worldwide unemployment and stagnation with
instruments of domestic economic control
Individual: enterprises struggled in their own
markets and by their own means to meet the
performance standards that had been set during
prosperity
12
Review

Two major company level (individual)
responses to the crisis depending on the
country’s adaptation to mass production


Conglomeration
Multinationalization
13
Review

Conglomeration


Large corporations hedge risks in their primary (or
original market) through diversification into others
by founding new subsidiaries or by merging with
going concerns
Shortcoming: the risks it sought to contain could
not be reduced through diversification, risks in
different markets were cumulative, not offsetting
14
Review

Multinationalization

Extending the mass production model that is favored by
American automobile firms by linking the production
facilities and markets of the advanced countries with the
fastest growing third world countries while defending their
position in metropolitan markets

Developing countries would provide the expanding margin of
demand necessary to achieve further economies of scale but
the new demand would only do this if the level of demand
created in the advanced countries was sustained
15
Review

Unable to be corporate substitutes for failed
international coordination: four hidden costs




Dispersion of production
Inventory and quality-control costs high compared
to Japanese kanban system (just in time, with flow
of components)
Unable to consolidate the market around a
standard, transnational design
The impact of foreign competition and the level of
world demand hard to predict
16
Review

Exceptional success: re-emergence of craft
production




Third Italy (Venetian province), West Germany, Japan
Created new products and processes to build markets
in specialty steel, precision machine tools, specialty
chemicals, luxury shoes, medium-priced textiles,
motorbikes, furniture
By the end of 1970s, a model of industrial
development
Shift toward greater flexibility: technological
sophistication
17
Review

Exceptional success: re-emergence of craft
production


Technological dynamism allowing a shift from a purely
reactive strategy, aimed at survival to an extensive
strategy which has threatened to cut ground away
from mass production
Instead of using general purpose equipment to
produce special-purpose machines, do the reverseuse special-purpose equipment to produce generalpurpose machines to fill the craft needs
18
Review

Japan



The rationalization of small suppliers across the
industrial spectrum
Zaibatsu model; a federation of efficient suppliers in
export sector linked to final assembler
A tradition of permanent innovation and
organizational flexibility
19
Review

Italy



A flexible network of small and medium-sized firms,
using numerically controlled computer technology to
adopt to shifting markets
Unlike Japanese suppliers having their autonomy
Italian small producers turned to forced draft
innovation
20
Review

West Germany





Large firms moving toward production of more
intelligent products
Customized goods using sophisticated microprocessor technologies beyond the grasp of
competition
Government programs and academic reorganization
Decentralization of the factory
Return to the workshop as the basic unit of
production
21
Claim


Present deterioration in economic
performance
The limits of the model of industrial
development founded on mass production

Use of special-purpose (product specific)
machines and of semiskilled workers to produce
standardized goods
22
Argument




Technologies and operating procedures
Forms of labor-market control
Instruments of macroeconomic control
Rules of international monetary and trading
system to be modified
23
Economic Development as Experiment
in Productive Organization

Crisis

Institutions (regulatory mechanisms) no longer
secure a match between the production and the
consumption of goods (regulatory crisis) → the
distribution of power in the system of industrial
technology



The late nineteenth century
The Keynesian welfare state in 1930s
The choice of technology (the engine of social
development)
24
Industrial Divideds

The path of technological development itself
is at issue

The first industrial divide → mass production in
the nineteenth century




Great Britain and then US
Limited growth of less rigid manufacturing technologies
(craft systems)
Skilled workers using sophisticated general-purpose
machinery
Economic success depending on cooperation
25
Industrial Divideds

The second industrial divide


Strategy building on the dominant principles of massproduction technology requiring an extension of existing
regulatory institutions, including a redefinition of
economic relations
Strategy leading back to craft methods of production
26
The post-1973 Crisis → Look at the
history of Industrial Capitalism

Double aim of presenting a model of mass production
both as a general type of economy and as a historical
creation of competing nations


The beginning of extensive mechanization in the early
nineteenth century → the first industrial divide: victory of
mass production over craft production as the dominant
form of industrial organization
The development of single nations

Crisis of the 1970s


Shocks accelerated by political responses ignoring the institutional
foundations of stability in mass production
Dramatic spread of mass production and exhaustion of the
possibilities for further growth within the regulatory system
27
The Mass-production Economy in Crisis


External shocks to the economic system
further disrupting the economic activity
through their effects on regulatory institutions
and political response to these disruptions
further undermining macroeconomic stability
The incapacity of the late 1960s institutional
structure to accommodate the spread of
mass production technology
28
Crisis: Five Overlapping Episodes





Social unrest of the late 1960s and early
1970s
Floating exchange rate
The first oil shock (1973-79)
The second oil shock (1979-83)
1980s high interest rate, world recession and
debt crisis
29
Social Unrest


US → students protests against the war in Vietnam and the civil
rights movement
Western Europe → students, immigrant workers, blue-collar workers



Postwar regulation removing the market discipline, new
generation matured in the postwar prosperity
Extension to the work place of the democratic rights of
political participation
Changing attitudes of the workers



Labor market behavior from outsiders to industrial society versus full
participation (permanent members of industrial workforce)
The price → each national economy being more vulnerable to wage
inflation
Employers counter measures → illegal workers, women, short-term
employment contracts, subcontraction
30
Floating Exchange Rate



US → domestic inflation, loss of
competitiveness, balance of payments deficit,
first devaluation then floating exchange rate
Western Europe → purchasing power linked
the wage structure to the cost of living, trade
imbalances, free currencies
Corrective for this balance of payments →
devaluation, allowing to sustain a BOP deficit
in the medium term
31
Floating Exchange Rate

The adjustment of a single price replaces the
adjustments of hundreds of prices → wrong





Internal wage price structure rigid
The problem of international economic interdependence
The price of goods in international trade connected
distantly to national economic performance
Discouraged investment in mass production,
encouraged the formation of major trading blocs
Widely fluctuating exchange rates weakening
stability of mass production
32
The First Oil Shock





1973: Arab oil embargo (political reaction) and the
Soviet wheat deal (poor harvest)
Shortages of grain and oil → increase in all prices
due to rigidity
Inflation and uncertainty
Mass producers with long-term investment
(reduction in efficiency advantage)
A shift in the objective of economic policy in the
industrial world from expansion to restraint
33
The First Oil Shock


Growth of mass markets retarded by the uncertainty
of oil prices and of exchange rates, further slowed
by the decline in demand
Move the epicenter of economic expansion from the
developed world to the developing world (1971-74)





Southeast Asia low wage mass production of
consumer goods
Brazil and Poland growing by foreign borrowing
Manufactured exports from the developing countries
Deterioration in mass production
Favoring more specialized technologies
34
The Second Oil Shock

Iranian revolution of 1979


Shocking in the sense that capitalist countries
convincing themselves that they had a chance of
recovering from the preceding disturbances with
their institutions → destroyed confidence in the
system of international adjustment
Oil price increase, recession in the world, the
inflation, low interest rates
35
High Interest Rates, World Recession and
the Debt Crisis



Prolonged recession that developing world also
followed
Developing countries also refinance the debts they
had contracted (to finance development programs)
at low interest rates in the 1970s with depressed
world trade
US and IMF to defend the liquidity of the world
banking system try to impose a disciplined national
economic policy on debtors

Volatility of markets, more uncertainty about the nature of
demand
36
Shift in Public Policy



Two first episodes Keynesian logic other three
attack on institutions making this logic workable
US → eliminate government institutions restricting
entry to markets
Decontrol of prices restoring the free play of market
forces


Eliminate rigid wage structure
Shift some of the burden of regulating the economy
from the state to the market
37
Crisis: An Overview

Three critical supply shocks:




The labor shortages produced by the revolt of the
marginal labor force
The food shortages occasioned by the poor Soviet
harvests
The oil shortages of 1973 and 1979
Given rigid wage-price structure → inflation,
slow growth, low productivity gains, rising
unemployment

The crisis of demand
38
Crisis: An Overview

Two aspects of the demand crisis


Classical deficiency of aggregate demand (due to efforts to
control inflation through monetary and fiscal restraints)
Confusion about the level and composition of demand in
individual markets and about the price and availability of
resource inputs


Break-up of mass markets for standardized products
Decline in the rate of productivity increase and slower rate of
growth, increase in the level of unemployment

Policy makers’ efforts to control inflation and to enhance price and
wage flexibility caused fluctuations in demand intensifying the
confusion
39
The Crisis as Limitations of the System

The saturation of industrial markets


Saturation of consumer goods markets in the industrial countries
make it more difficult to increase economies of mass production
through expansion of domestic markets
Conventional theory → as the income of the developing
countries rose, the market for mass consumption goods
would increase solving the problem of saturation in the
developed countries

However, trade among industrialized countries within
industries


Two explanations: increased product differentiation
Specialized commodities, regardless of cost
40
The Crisis as Limitations of the System

The third-world development strategies


Not limit themselves to the export of products that
reflected their endowments of primary products
and unskilled labor, changed endowments
(trained labor, imported technology…)
Transform domestic industry centering on mass
produced-consumer goods


East and Southeast Asian producers (export-led
development)
Latin America (import substitution)
41
Flexible Specialization

Flexible specialization




In the networks of technologically sophisticated, highly
flexible manufacturing firms in central and northwestern
Italy
Strategy of permanent innovation: accommodation to
continuous change, rather than an effort to control it
Based on flexible- multi-use-equipment; skilled workers;
and the creation of an industrial community that restricts
the forms of competition to those favoring innovation
A revival of craft forms of production that were emarginated
at the first industrial divide
42
International Keynesianism and Flexible
Specialization

The reactions of firms to 1970s pointing two
contrasting way out of the crisis


The world-car strategy suggesting multinational
Keynesianism: the extension of the principles of
institutional organization that gave rise to
corporation and the macro-regulation
Flexible specialization suggesting a shift of
technological paradigm and a new system of
regulation; a time when industrial society retuned
to craft methods of production regarded since 19th
century as marginal
43
Multinational Keynesianism
The construction of an international economic
order based on the extension of Keynesian
macro regulation
 The crisis
→ under-consumption rooted in the saturation of
core markets for consumer durables
→ way out is to increase demand for those
products by raising the aggregate purchasing
power of at least some nations not currently
able to afford them

44
Multinational Keynesianism


Microeconomic regulations and world car
strategy with multinational corporations
However, a system of macroeconomic
regulation that balances the growth of supply
and demand needed
 Given the continuing dominance of the mass
production paradigm, macroeconomic
coordination can be achieved only by
Keynesianism

An international version of the Keynesian order
45
Multinational Keynesianism

Related institutional mechanisms



Integration of the developed economies (with large
stagnant markets) with those developing economies (with
fast expanding markets) through creation of trading blocks
or within a unified system of world trade
Mechanisms for stabilizing business environment (that
failed to invest under uncertainty) requiring trading partners
to maintain uniform rates of inflation and stable foreign
exchange rates
Mechanisms to allocate the expansion of productive
capacity among the advanced industrial countries and
newly industrializing countries

Expanding and reorienting international economic institutions
(IMF, GATT…)
46
The Alternative: Flexible Specialization

A real technological trajectory? Or dynamism of
flexible specialization temporary


The application of computers to industry favors flexible
systems
Under appropriate conditions of competition, increased
efficiency occurs with flexibility at every level of
technological development
→ not a once-in-a-lifetime burst of improvement in
flexible production techniques, rather a movement
down a development path
47
The Alternative: Flexible Specialization

Computers & Flexibility → lowering costs in short run
 The specialization of the equipment to the operation:




Physical adjustments in the equipment
Changing tools and the fixtures that position the work
piece during machining (craft-production)
Scrapping and replacing the machinery (massproduction)
Equipment adapted to the operation by the computer
program so put to new uses without physical
adjustments (computer technology)
48
The Alternative: Flexible Specialization


Technology has ended the dominance of
specialized machines over unskilled or
semiskilled workers, restoring human control
over the production process
Markets & Flexibility → computers adapting to
any environment


The character of market environment is also vital for
computer application in production
Flexible use of technology not only depend on
computers
49
The Alternative: Flexible Specialization

Microeconomic regulation → price-regulated economy
 Price system failed to be an allocative mechanism
under mass production due to lumpiness of
investment
 In flexible system resources are general purpose and
easily deployed leading to shifts in demand changing
prices
 But the maintenance of technological dynamism
difficult → the problem of organizing continual
innovation → solution cut the wages
50
The Alternative: Flexible Specialization

Important difference between organizing
innovation in mass production and flexible
specialization


In mass production, once the market has stabilized
and extended, the corporation can advance the
division of labor through simplification of tasks thereby
lower production costs
In flexible specialization, the organization of innovation
just begins with the creation of a market, thus microregulation is a question of finding compatible
institutional answers to the problems of activating and
coordinating innovation
51
Four Organizational Forms of Flexible
Specialization

Regional conglomerations




Composed of a core of equal small enterprises
bound in a complex web of competition and
cooperation
None of the enterprises dominant
Arrangements as short term contracts
Recombination of the productive enterprises:
trade associations
52
Four Organizational Forms of Flexible
Specialization

Federated Enterprises




Japanese zaibatsu → association defined
economically by interlocking personnel and
financial agreements
Not as integrated as the mass-production
corporation and member firms are not
hierarchically arranged
But sense of common identity is much sharper
than that of firms in regional conglomerations
Association defined socially depending on family
as an organizing principle
53
Four Organizational Forms of Flexible
Specialization

Solar firms and Workshop Factories




Not produce long runs of standardized products but their
products have high capital requirements (not economies of
scale)
A collection of workshops treating external suppliers as
collaborators
Dependence on subcontractors for getting advice in solving
production and design problems
Large and central firms in their industry that supply
internally many of the services that in a regional
conglomeration would be supplied by the community
54
Which One to Choose?

If flexible specialization and mass production operated
side by side within each industry



The flexible producers would chip away at the markets for
standard goods (thereby undermining the capacity of the mass
producers to obtain the necessary economies of scale)
The mass producers would have to control the expansion of
the flexible specialization
A unified international economy where the old mass
production industries might migrate to the
underdeveloped world, leaving behind in the
industrialized world the high tech industries and the
traditional isolated conglomerations in machine tools
and textiles
55