------------ EH.NET BOOK REVIEW --------------  
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).  
  
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