The Organization of Work: A Comparative Institutional Assessment

The issue to be addressed here is: Socioeconomic attributes of tb“ enterprise aside, do alternative work modes differ systematically in efficiency respects? A set of simple efficiency criteria is proposed first. Crude rankings of work modes with respect to those criteria are then attempted.

1. Simple Efficiency Criteria 

None of the eleven efficiency measures described below is unfamiliar. Not only will each be recognized as a relevant efficiency dimension, but, at one time or another, the ramifications of each for the organization of work have been discussed previously by others. What has been missing is an overview of the issues. No single mode has been systematically assessed with respect to all of the eleven criteria. Neither has there been an effort to make comparisons across modes in terms of the criteria.

The eleven efficiency indicators are usefully grouped into three types: attributes associated with the flow of product, the efficiency with which workers are assigned to tasks, and the incentive properties of alternative modes. Note- that each of the eleven performance statements that follow is of a ceteris paribus kind.


Transportation expense, buffer inventory requirements, and the “leakage’ ’ of product at successive processing stages are the matters to be evaluated here.

  1. Transportation expense. The physical transport of work-in-process inventories from one station to the next is costly. Ceteris paribus, modes that economize on transportation expense are favored.
  1. Buffer inventories. Temporal separability between successive work stations is effected by creating a buffer inventory. Modes that econo- mize on the level of buffer inventories are ingored.
  2. Interface leakage. Interface leakage has reference to actual or effective losses of product during manufacture. Modes are favored that, at low cost, discourage embezzlement and/or deter the disguise of the true quality attributes of intermediate product as product is transferred across stages.


Assignment issues of three kinds arise. First, there is the matter of assigning workers to work stations. Second is the issue of leadership. Third is the matter of contracting with nonoperating specialists.

  1. Station assignments. Talents will be effectively utilized to the extent that workers are assigned to tasks for which they are relatively well This is a specialization of labor issue. In the normal case where workers are not equally skilled in every task, modes that make discriminating job assignments on the basis of comparative advantage are favored.
  2. Leadership. Modes vary in the degree to which coordination is required and the efficacy with which leadership assignments are made. Modes that economize on coordination needs and make discriminating leadership assignments are favored.
  3. Contracting. The capacity to aggregate demands and contract with specialists to serve the needs of many stations (e.g. maintenance specialists) is the ¡¡/sue here. Modes in which such contracting is easily accomplished are favored.


Differential steady state and intertemporal incentives give rise to perfor- mance differences. Of special interest are:

  • Work intensity. Work intensity refers to the amount of productive energy expended on the job. Modes that discourage workers from malingering are favored.
  • Equipment utilization. The issue is whether equipment is utilized with appropriate care. Modes that disfavor equipment abuse and neglect are targeted.
  1. Local shocks responsiveness. Local shocks are those which affect an individual work station. Work stoppages due to machine breakdown or worker illness are examples. Modes that facilitate quick recovery are favored.
  1. Local innovation. Local innovations involve process improvements at individual stations. Modes that promote local cost economizing process changes are preferred.
  2. System responsiveness. The capacity to respbnd to system shocks and to recognize and implement system innovations (of process, product, or organizational kinds) are the matters of interest here.87 Modes that adapt easily to changing market circumstances and permit systems improvements to be made without requiring extensive contract renegotiation are favored.

2. Efficiency Comparisons 

Although there are some dimensions for which best or worst efficiency ratings are easily made (e.g. the Putting-Out mode has the worst transportation expense features; the Communal-emh mode, where workers move successively across stations and appropriate the fruits of their own labors, has the best work intensity and interface leakage properties but is worst in equipment utilization respects; the Authority Relation has the best system responsiveness properties; and so on), there is little to be gained by using a fourfold ranking system (best,, good, poor, worst) rather than a simpler bivariate ranking in which best or good modes are assigned the value 1 and poor or worst modes are rated 0.

Bivariate assignments for each of the simple efficiency dimensions are reported in Table 9-1, where modes are grouped according to ownership type. Although no detailed rationale for the assignments is attempted here, one is reported elsewhere (Williamson, 1976, pp. 30-50). Most of the assign-ments are nevertheless transparent or are evident from the discussions of ownership comparisons and contracting comparisons that appear below.


The Putting-Out and Federated modes, which are the entrepreneurial ownership modes, have rather poor product flow attributes, mixed assignment attributes, and are indistinguishable in incentive respects. Inasmuch as the Federated mode involves concentrating work stations at a common location, transportation expense economies are realized over the Putting-Out mode. Buffer inventories for each mode are high, however—though the reasons differ. For the Putting-Out mode, inventories are high because each station works on its own schedule (subject to daily or weekly output agreements), and product is moved in discrete shipments. Buffer inventories are high for the Federated mode so as to reduce the temporal dependence on predecessor stages, which are linked by bilateral contracts. Small buffer inventories would predictably result in numerous disputes if, as is commonly the case, it is costly to assess responsibility for delivery failures.

Interface leakage for both entrepreneurial modes is high. Chronic theft and quality problems are reported in connection with the Putting-Out mode (Babbage, 1835, pp. 135, 219; Freudenberger and Redlich, 1964, p. 395; Marglin, 1974, p. 51). Theft is riot a problem with the Federated mode, but quality control is. Not only is there an incentive for each stage to shade quality, but there are complex attribution problems when complaints are registered.89

The Putting-Out mode has leadership advantages over the Federated mode since there is a central contracting agent. The dispersed location of the stages, however, makes it difficult for leadership to be exercised in contracting, local responsiveness, or system responsiveness respects—hence Putting- Out is rated no better than the Federated mode in those dimensions.

The two collective ownership modes have generally good product flow attributes, rather poor assignment properties, and very different incentive properties. The Communal-emh mode has higher buffer inventory requirements, since each worker moves successively across all stages, taking his own work-in- progress inventory with him. Assuming that setup costs are not negli-gible, each worker will remain at each stage for a considerable period. Inventory requirements thus are correspondingly great.

The Communal-emh mode has excellent work intensity incentives, since every worker appropriates the fruits of his own labors. The Peer Group, by contrast, is subject to free rider abuses. (Although careful screening of candidates for Peer Group membership could serve to check such abuses, that would violate the random assignment assumption.) In other respects, however, the Peer Group has superior incentive properties to the Communal-emh mode. That is because the Peer Group is a cooperative mode whereas the Communal-emh mode is given to aggressive suboptimization.

Such suboptimization is especially evident in the case of equipment utilization. The benefits attributable to careful utilization of equipment are realized mainly by others, while the costs of intensive or careless utilization are shifted mainly to others; adverse incentives proliferate. A complex bargain would have to be struck and policed to alter that adverse outcome. Peer Group members, by contrast, experience no such myopic equipment use incentives. The suboptimization versus cooperative aspects of the two modes explain other incentive differences as well. s

The Authority Relation has product flow attributes superior to the other capitalist mode, Inside Contracting. Absent penalties on excess work-in- process inventories, contractors have the incentive to accumulate such inventories so as to realize greater operating autonomy. By contract, the Authority Relation does not need to rely on pecuniary penalties to move inventories: fiat will do. And it can carry low inventories because of its superior responsiveness attributes. Interface leakage is also a problem with Inside Contracting, because contractors have an incentive to suboptimize (shade quality) that is not operative among hourly employees.20

Inside Contracting and the Authority Relation have uniformly good as- signment attributes. They have very different incentive properties, however, mainly because inside contractors have greater autonomy, appropriate the fruits of their own labors more fully, and need to be bribed to adapt cooperatively,, while employees working in an Authority Relation mode are less given to aggressive subgoal pursuit and do not resist adaptations because they do not possess the requisite property rights. Thus inside contractors work intensively and introduce local innovations, but respond to local or system adaptation requirements much less readily. Also since inside contractors do not own the equipment, malutilization may occur.

Specifically, the relevant time horizon to which inside contractors refer is the contract termination date. Repairs generating benefits that more than recover costs within the contract interval will be made, but those for which the benefits can be recovered only if the contractor wins the bid for successive contracts will be deferred.21 Equipment repairs of a major kind will thus be delayed and left to the capitalist at the contract renewal interval. Even minor repairs may be postponed as contract termination dates approach.


Consider now Table 9-2, where the same rankings are displayed—only here the modes are grouped by contracting attribibutes. The striking features are: (1) Continuous contracting modes have generally poor product flow attributes and uniformly poor local and system responsiveness attributes; (2) continuous contracting modes are uniformly good in station assignment, work intensity, and local innovation respects; (3) periodic contracting modes have generally good  product flow attributes; and (4) although  some periodic con- tracting modes are good in assignment and incentive respects, no general statements can be made for periodic contracting modes as a group in either of those general categories.


Aggregation to obtain a rail efficiency rating for each mode requires that the relative importance eleven efficiency indicators be addressed. This will obviously vary across industries. Suppose, however, that all are weighted equally and a composite rating is obtained by taking the row sum for each mode. The following rankings then emerge:

Even allowing for the fact that the rankings are very rough, several interesting relations warrant comment:

  1. The Communal-emh mode, which accords workers the greatest degree of job variety and appears to be greatly favored by Marglin,22 is the least efficient Although it is possible to ascribe the nonexistence of the Communal-emh mode to pernicious efforts by vested interests to annihilate it, a more plausible explanation is that the Communal-emh mode is dragged down by its own efficiency disabilities.
  2. The least hierarchical modes, in both contracting and decision-making respects (see subsection 3.4, above), have the worst efficiency properties. By contrast, both the Peer Group and the Authority Relation rely extensively on a decision-making hierarchy—which indeed goes far to explain the superior performance of Hostility to hierarchy thus lacks a comparative institutional foundation. There may be more and less preferred, ty pros of hier- archy; but hierarchy itself is unavoidable unless efficiency sacrifices are made.23
  3. The Communal-emh mode aside, periodic contracting modes have efficiency properties superior to continuous contracting modes.
  4. Modes are listed roughly in the same order as they appeared histor- Although it is possible to argue that later modes displaced earlier modes because the “interests” were determined to stamp out autonomy, an alternative hypothesis is that successor modes have superior efficiency properties to predecessor modes. The progression from Putting-Out to Inside Contracting to the Authority Relation is especially noteworthy in that respect.
  5. Ranking the six modes in terms of power differentials between boss and workers is difficult for lackdf a power metric. One nevertheless has the impression that there is a positive rank correlation between row sum efficiency and power. At the same time, that correlation is less than perfect. (Putting- Out, which accords the boss greater power than does the Peer Group or Federated mode, has worse efficiency properties than both.) The best evidence that power is driving organizational outcomes would be a demonstration that less efficient modes that serve to concentrate power displace more efficient modes in which power is more evenly distributed.

Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.

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