How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan

Published by EH.NET (November 2005)

Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge: Cambridge University Press, 2004. xv + 333 pp. $30 (paperback), ISBN: 0-521-54674-5.

Reviewed for EH.NET by Thomas N. Maloney, Department of Economics, University of Utah.

Kathleen Thelen, Professor of Political Science at Northwestern University, has written a very ambitious book, examining institutions related to skill development in four countries, tracking changes in these institutions in one country over the course of a century, and embedding this analysis in a rich theoretical context. She wants to understand how these institutions came to be and how they have evolved over time. The American Political Science Association named this book a co-recipient of the 2005 Woodrow Wilson Foundation Award, given to the best book published in the previous year on a topic in government, politics, and international affairs, and I am not going to take a contrarian position in this review. This is an excellent piece of scholarship. It adds substantially to our understanding of labor markets and of economic and political institutions in general.

In the first chapter, “The Political Economy of Skills in Comparative-Historical Perspective,” Thelen lays out her expansive agenda. She provides a very clear and useful discussion of the Beckerian framework of “general” and “specific” human capital investment. She then emphasizes the concrete institutional arrangements that are required to make this system work, including forms of skill certification that make investment in general human capital appealing to young workers. Thelen also examines theories of institutional development and change: “Functionalist” theories that intuit the origins of institutions from the purposes those institutions currently serve, and “path dependent” theories that focus on institutional formation in specific historical episodes, leading to positive feedback and “lock in.” Her empirical work exposes weaknesses in both of these approaches to understanding institutions.

That empirical work is of two types: a cross-national comparison of training institutions in Germany, Britain, Japan, and the U.S. in the late 1800s and early 1900s, and a “longitudinal” analysis of the evolution of German training institutions through the twentieth century. The cross-national comparisons are presented in chapters two (Germany), three (Britain), and four (Japan and the U.S.). Each of these case studies is densely detailed and clearly written. After immersing us in this detailed discussion, though, Thelen reliably pulls our attention back to the larger issues of institutional evolution and the operation of labor markets.

In the German case, the Handicraft Protection Law of 1897 created a system of compulsory artisanal “chambers,” which regulated apprenticeship and skill certification. This law largely removed these issues from the realm of negotiation between firms and workers and was in fact, according to Thelen, intended to thwart the development of unionism around these issues. The law also made participation in apprenticeship appealing to workers by giving them confidence that they would receive useful training that they could demonstrate to potential employers. These chambers were limited to traditional craft skills, though, and the developing industrial sector struggled to create an analogous system of training and certification.

None of the other three countries examined developed such a formal system of human capital investment. In the British case, firms would take on apprentices without much commitment to train them in any particular skills. This led to young workers forgoing apprenticeship for initially better-paying unskilled jobs. In Japan, skilled masters (oyakata) controlled training. They and their apprentices were highly mobile across firms, and employers sought to develop new institutions that would rein in this mobility. Their strategies included internal job ladders, seniority-based promotion, and company unions. U.S. labor markets were always characterized by relatively weak craft traditions. In addition, employers’ imperatives for mechanization and control of the shop floor were greater in the U.S. due to the scale of the market, leading to the “deskilling” of production and reliance on internal labor market policies to develop worker loyalty and reduce turnover.

Thelen’s discussion of these four cases is quite informative and forces us to think more rigorously about how textbook models of human capital investment play out in the world. One thing lacking in her presentation, though, is evidence on the relative performance of the industries she examines. Did Germany’s more formal system of skill certification give it a productivity advantage over other nations, or were these simply alternative methods of organizing work and training, without a clear ranking in terms of performance? In the preface and introduction, Thelen motivates her investigation by noting the persistence of a spectrum of types of economic institutions, from “coordinated” to “liberal market,” even in the context of highly mobile capital. This seems to suggest that we should understand these various forms of skill development as alternatives that are qualitatively similar in terms of their performance. However, in the body of the book, the failure of Britain, Japan, and the U.S. to develop formal skill certification mechanisms as Germany did seems to be treated as just that, a “failure.” Some discussion of economic performance would clarify these conflicting impressions.

These cross-national comparisons, then, give us a sense of the variety of possible training frameworks and the relationship of these frameworks to the political and economic history of each country. The longitudinal examination of the German case (in chapter 5) develops more fully the theme of institutional evolution. Thelen describes how the Nazi era increased the government’s role in skill standardization and certification and extended these practices beyond the traditional crafts. This standardization was important for the flexible allocation of labor during wartime, and the formality of these labor market institutions was useful for incorporating political indoctrination and monitoring into training mechanisms. After the war, the occupying forces saw apprenticeship and training as important tools for keeping young people economically engaged and hopeful, though the Allies also wanted to decentralize power and so promoted the return of the control of training to private organizations.

Thelen’s primary point here is that the tremendous crises of the Nazi era, the war, and postwar reconstruction left the basic mechanisms of skill training in place. Though we might typically expect such events to cause discontinuous change in economic institutions, Thelen argues that people might actually prefer to maintain existing institutional forms in times of crisis as a means of promoting security and order. This is not to say that Germany’s training institutions were rigid and inflexible. Rather, the important changes that did occur were incremental.

This issue of the cumulation of incremental change, though, could use some additional development. Thelen repeatedly emphasizes that the German training system came to be associated with the goals of organized labor even though it was created for the purpose of circumscribing the influence of unions. However, those of us who are not familiar with the German case are left with only a vague sense of this transition.

Thelen’s concluding chapter is not merely a recapitulation of her findings but rather provides important new insights on her topics, especially the broader issues of institutional evolution. She examines how the various institutions in an economy, all shaped by different political and historical contingencies, might come to be complementary over time. She also contrasts evolution in the political context with evolution in the market context. In markets, “losers” will ultimately exit, and positive feedback effects will be preeminent; in politics, individuals who “lose” in the formation of institutions may stick around to help reshape those institutions later on, so positive feedback effects are less dominant.

While all of this work is of very high quality, the theoretical discussion in chapters one and six and the long-term examination of Germany are the most engaging and informative. Though Thelen is not herself an economist, she cites economic historians and labor economists thoroughly and presents penetrating insights on their work. Researchers focused on specific issues of human capital investment, as well as those interested in very large questions about the nature of institutions, will find this book to be a provocative read.

Thomas N. Maloney is Associate Professor and Director of Undergraduate Studies, Department of Economics, University of Utah. His most recent publication is “Ghettos and Jobs in History: Neighborhood Effects on African-American Occupational Status and Mobility in World War I-Era Cincinnati,” Social Science History 29:2 (Summer 2005).