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  Modeling Management: Evolution of the Science

  By James Annable | May 7, 2021

  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...

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