Saturday Aug 16, 2008

Organizing Production

In his Contemporary Strategy Analysis, Robert M. Grant describes a more recent phase in the long evolution of economic organizations:

As late as 1840s, the largest enterprises in the US in terms of numbers of workers were agricultural plantations. Most manufacturing was organized through networks of self-employed, home-based workers. The English woolen industry consisted of home-based spinners who purchased raw wool (on credit) from a merchant to whom they sold the yarn; the merchant resold the yarn to home-based weavers from whom he purchased cloth. This "putting-out" system survived until the onset of the Industrial Revolution. With the advent of water-powered looms, weavers moved to factories where, initially, they rented looms from factory owner by the hour. Factory-based manufacture made this system of independent contractors inefficient—it was difficult to schedule machine time, and there was little incentive for the independent workers to look after their rented machines. The emergence of firms where market relationships among workers, machine owners, and merchants were replaced by employment relationships between the owner of capital and the workers was a more efficient means of organizing production.

The issue of relative roles of firms and markets is a central aspect of economic organization. In the capitalist economy, production is organized in two ways: in markets (by the price mechanism) and in firms (by managerial direction). The relative roles of firms and markets is determined by efficiency… 

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