The Labour Demand of Firms: An Alternative Conception Based on the Capabilities Approach

The Labour Demand of Firms: An Alternative Conception Based on the Capabilities Approach Abstract The aim of this paper is to offer a theoretical framework for the analysis of labour demand alternative to the neoclassical one, taking as its starting point the conception of the firm that derives from the capabilities or competence-based theories of the organization. After briefly reviewing the essential elements of this approach to the firm, we tackle a range of diverse aspects, such as the link between labour demand decisions and the firm’s strategic planning and its determinants, the characterisation of labour demand as a demand for productive competencies, the consequences that these competencies are embedded in human beings or the relative independence between labour demand decision-making and the process of wage-setting. In general terms, this conception of labour demand allows us to incorporate many of the main peculiarities of labour and the demand for it from a number of different areas of heterodox economics (particularly, from institutional and post-Keynesian economics) and it fits in with the conventional literature on internal labour markets and labour market segmentation. 1. Introduction As is generally known, neoclassical economics constructs its analysis of labour demand based on a very specific conception of the firm, both in terms of its nature and content and in terms of its aims and capabilities. Specifically, in the neoclassical view the firm is ultimately reduced to a mere combination of productive factors to which is added a kind of ‘hidden mind’ with a very specific motivation and very specific cognitive and rational capabilities. Thus, it is presumed that the firm’s activity is guided towards the achievement of a single aim: the maximizing of profit; this means assuming that each and every one of the activities it undertakes is measurable and comparable with the others according to a common scale of value: the extent to which each of them contributes to profit-making. Furthermore, it is supposed that the firm—or the ‘mind’ that controls—has cognitive capabilities that are sufficiently advanced as to make reality known or knowable—there may be ‘imperfections’, such as asymmetries in the information, which mean that this knowledge is subject to the existence of probabilistic risk; however, there is no room for fundamental uncertainty—and it has certain abilities of reasoning that allow it to process this information and apply instrumental rationality. Behind this vision is concealed a deterministic conception of cognition and of reality itself; in particular, the world is conceived as a closed system, characterized by the presence of constant conjunctions of events (Lawson, 2003; Fleetwood, 2006, 2011). The assumptions on which the decision-making model of firms is based lead to a mechanistic and optimizing-driven view of their behaviour—as is the case with human agency (Loasby, 1976)—in which there is no possibility of choice as such but rather a behaviour that is predetermined by the characteristics of the environment and by the defining traits of its production function. In this sense, the analysis of production is based on many assumptions, of which we highlight three. First of all, it is assumed that the firms’ productive activity can be represented by a mathematical function and that this activity depends on just two variables: labour and capital. Second, it is assumed that in the short term, capital remains fixed while labour is entirely variable, and that the production technology is characterized by the existence of flexible technical coefficients. Third, it is assumed that the productive activity, whatever it may be, is affected by the influence of the law of diminishing returns and that the relevant segment of production—which is the outcome of the maximizing conduct of the firm in an environment not subject to uncertainty—is that in which the marginal costs, total costs and variable costs are growing (and the corresponding productivities are decreasing).1 This characterization of production makes it possible to carry out a measurement of the productivity associated with each worker (or with each unit of labour); in turn, this productivity can be converted into monetary value terms by the marginal income associated with the said production. Further, is assumed that the marginal revenue remains constant or falls as production increases; this assumption, which is the consequence of the conception of markets and the price-setting process, enables the theory to claim that the marginal revenue product—and, therefore, labour demand—will also tend to decrease as the amount of labour used increases. At the same time, it is assumed that the only cost to the business of obtaining labour services is wages;2 this, combined with the aforementioned assumptions, determines that the firm—reduced in fact to a technical function of production—may decide (even marginally) the units of labour that it wishes to demand depending on the going wage rate; simultaneously, it is assumed that it is precisely wage variations (in the absence of changes in the function of production or in the prices of the product) that cause changes in the amount of labour demanded. This makes it possible to argue that a change in the wage rate causes a predictable change in the amount of labour demanded and, therefore, justifies the construction of a dependent relationship between the two variables (Fleetwood, 2006). Against this background, the aim of this paper is to attempt to offer a theoretical framework for the analysis of the demand for labour as an alternative to the neoclassical one, taking as its starting point the recognition that reality is essentially open-ended—in which constant conjunction of events are not usually found—as well as a more realistic3 conception of the behaviour of the economic agents within this reality. Consistent with this approach, the aim of the analysis is to attempt to explain the causal processes that underlie labour demand decisions (and their determinants) and to endeavour to do so without necessarily having to resort to explanations of equilibrium and determinism. This implies the need to focus our attention on how the economic agents involved actually arrive at these decisions. Indeed, most of those decisions are adopted in organizational environments, particularly in firms, and hence their internal configuration and the ways in which decisions are arrived at within them take on a central role in our analysis. Consequently, it is necessary to begin with a theoretical approach to the firm that is different from the neoclassical view and consistent with the ontological concept of the open system. In this sense, the first idea of this paper is that the capabilities or competences-based theories of the firm provide a very interesting and promising theoretical framework that has not yet been sufficiently exploited in the specific sphere of labour demand analysis.4 The immediate origins of this approach are usually said to be in The Theory of the Growth of the Firm by Edith T. Penrose (1959), and in recent decades it has seen a significant advance to become one of the dominant perspectives in the literature of strategic management and organizational theory. Moreover, several studies have recently highlighted the compatibility between the competences-based approach and several branches of non-mainstream economics—especially with institutionalism, evolutionary and post-Keynesian economics (Hodgson, 1998B; Dunn, 2000)—as well as its connections with sociology and social psychology (Dobbin and Baum, 2000; Ventresca and Kaghan, 2008; Noteboom, 2009). Further, the use of this view of the firm—which as we will see places knowledge and the learning process at the heart of the characterization of the organization—connects with the traditional literature on internal labour markets and with the proposal of Piore (1979, 1995) appealing to the relevance of cognitive psychology to explain the functioning of economic reality and in particular to construct a theoretical analysis of labour markets. In this context, this paper is organized in two main sections. In the first section, we present in summary form the essential elements of the capabilities approach of the firm, attempting to reveal fundamentally those that are most relevant in order then to construct an analysis of labour demand decision-making. Second, we set out to offer a theoretical framework that can explain the decision-making processes of labour demand in which firms engage and their constraints. To do this, throughout the text we tackle a range of diverse aspects, such as the link between labour demand decisions and the firm’s strategic planning and its determinants, the characterisation of labour demand as a demand for productive competencies, the consequences that these competencies are embedded in human beings or the relative independence between labour demand decision-making and the process of wage-setting. 2. The capabilities view of the firm: an overview The literature on capabilities or productive competencies is very broad and diverse, and it is possible to identify different perspectives with different theoretical origins (Hodgson, 1998B; Augier and Teece, 2007; Dietrich and Krafft, 2012, Part V). In this section, consistent with the rest of the work, we mainly present the essential ideas of the vision closest to institutional and evolutionary economics (and post-Keynesian economics). In addition, we also introduce some conceptual contributions made from the perspective of critical realism; in this regard, although developing a full adaptation of the theory of capabilities to the perspective of critical realism is beyond the scope of this work, we believe that incorporating some of the contributions recently made from this philosophical framework enables a more precise usage of the terminology used in the theory of capabilities and to resolve certain ambiguities or to correct possible ontological errors. The fundamental idea of the capabilities theory is that a firm may be conceptualised as a systematically arranged combination or set of competencies or productive capabilities of a distinct type (Nelson and Winter, 1982; Foss, 1993; Hodgson, 1998B; Augier and Teece, 2007; Teece, 2007). Specifically, one part of these competencies comprises those contributed by the individuals who work for the firm, another part by the ‘institutional content’ of the firm or the ‘institutional elements’ constituting the firm—I will be more precise about this later—and a third part by the organisation’s physical capital. All of these productive competencies are closely interrelated and interdependent (Nelson and Winter, 1982). Indeed, the individuals who form part of the organisation do not merely contribute their effort, but also their knowledge and skills (or part of them) or, to put it another way, their competencies and productive capabilities. The competencies that individuals contribute may be of many kinds: manual skills, technical know-how as to how to produce things, capabilities for conducting R&D, abilities for selling products and services, knowledge about procedures for directing and coordinating the activities of several individuals, etc. To sum up, although some of the competencies that individuals contribute are basically of a physical nature, most of them are a matter of knowledge and skills both practical and intellectual, and are to be found in all areas and at all levels of the firm, from senior management to the lowest levels of the organization (Nelson and Winter, 1982; Teece, 2007). A part of this knowledge and these skills is acquired by individuals outside the firm in which they work, mostly through a combination of the education system and the process of socialization they have gone through, but there is another part of the competencies, perhaps the most relevant when it comes to their application in production terms, which is acquired and implemented fully in the enterprise itself, through experience, learning by doing and interaction within the organization with other individuals and with the group as a whole (Teece et al., 1994; Teece and Pisano, 1994). In fact, if the nature of competencies can be associated with a question of knowledge and skills, this means acknowledging that these can evolve and expand through learning; consequently, the emphasis in the analysis of the firm cannot be on the allocation of competencies that are given a priori, but on their creation, production, adaptation, improvement, etc., from a dynamic and evolutionary perspective (Teece and Pisano, 1994; Hodgson, 1998B; Augier and Teece, 2007; Teece, 2007; Noteboom, 2009). This emphasis on the dynamic development of knowledge occupied a central place in the original vision of the firm by Penrose (1959). It also relates with the conception of economic progress by Marshall (1920)—according to which knowledge and the organisation play a central role as the engine of variation (Loasby, 1989; Langlois, 1992)—and with the vision advanced by Adam Smith of the growth of knowledge through the continuous division of labour5 (Loasby, 2002). In any event, the focus of attention shifts to the study of how competencies are acquired and developed. Hence, in a world in which there is fundamental uncertainty and in which human beings have cognitive limitations, knowledge becomes a social act, at least in part, which is necessarily conditioned or depends on the set of existing ‘institutions’ and, in general, on the ‘social stuff’ with which individuals must interact. This steers analysis to the study of this interaction and its consequences. In effect, human beings begin to relate from birth with a series of social elements including norms, rules, conventions, agreements, codes, laws, precedents, procedures, values, mores, institutions, organizations, social structures and mechanisms. These elements are often associated with the generic term ‘institutions’. Nevertheless, Fleetwood (2014B) has recently proposed encompassing all of these social elements (or ‘social stuff’) under the generic term of ‘socioeconomic phenomena’ (which would replace the generic term ‘institution’), making a conceptual and terminological effort to differentiate the different types of existing phenomena. In this respect, an institution (proper) refers to a concrete type of socioeconomic phenomenon comprising systems of established rules, norms, customs, obligations, mores and values that are (sometimes consciously, but more often unconsciously) internalized within agents as habits and that may transform the plans and actions of these agents through a process of reconstitutive downward causation (Fleetwood, 2014A, p. 15; 2014B, p. 248). In the remainder of this paper, I use the terminology and concepts developed by Fleetwood (2014B)—except where otherwise indicated—trying to distinguish between the different types of socioeconomic phenomena involved in specific instances, in particular when such a distinction is necessary to develop the analysis. Regardless, the important point at this stage of the analysis is that most of these socioeconomic phenomena (at least those of concern in this paper) causally condition, without determining, the thoughts and actions of agents. In this respect, the institutionalist literature has traditionally emphasized that institutions foster the production, reproduction and change of particular habits through a process of habituation and help transmit them to members of the social group who are under their influence (Hodgson, 1998A, 2003). Similarly, Fleetwood (2014B) explains that the socioeconomic phenomena drawn on by agents causally condition the actions of these agents in different ways, sometimes unconsciously, implicitly and tacitly, and other times consciously, explicitly and overtly. In this context, the use and establishment of habits of thought and interpretation plays a key role in the formation of knowledge and the learning process (Hodgson, 1997, 2004, 2008). Likewise, the acquisition of practical skills and reasoning or intellectual abilities is linked to habit-forming. Indeed, habits are thus seen as elements that enable competencies to be constructed and retained among within the individual. These habits are not an observable behaviour or an action as such but rather a ‘disposition, capacity, power, tendency or propensity’ to think or act in a certain manner; in this sense, habits are agential properties located in individuals (Hodgson, 2008; Fleetwood, 2008B, 2014B). Regardless, the habits that guide the construction of an individual’s knowledge and skills—that is, his or her competencies—are conditioned by the current set of institutions and, in general, by the socioeconomic phenomena with which the individuals interact. Naturally, this occurs with the knowledge and skills acquired not only outside the firm but also within it. And what is a firm? A firm is a type of organisation dedicated to undertaking an activity for producing goods or services. An organisation is in turn a socioeconomic phenomenon which differs from others—fundamentally—because it includes the people belonging to it and because it is (typically) created to undertake a specific activity or to attain specific goals. Thus, an organisation is constituted by (Fleetwood, 2014A, 2014B): (a) a set of socioeconomic phenomena that are consciously or unconsciously reproduced or transformed by various agents. Among other functions, these phenomena establish the organisation’s limits, distinguish between members and non-members, establish principles of sovereignty concerning who is in charge, implement chains of command delineating tasks and responsibilities within the organisation, and help to determine how these different activities should be implemented within the organisation (such as how to interpret information, resolve specific problems, and perform specific tasks); (b) people who consciously or unconsciously reproduce or transform these socioeconomic phenomena; and (c) artefacts used to conduct the organisation’s various activities (which, in the case of firms, tend to be designated ‘physical capital’). The socioeconomic phenomena that constitute each firm and that therefore may causally condition the actions of its individual members are prerequisites to any particular cohort of workers. However, workers must necessarily interact with and draw upon these socioeconomic phenomena to develop their activities in the firm. In doing so, the agents reproduce or transform these phenomena and simultaneously reproduce or transform themselves as agents. Therefore, the socioeconomic phenomena are rooted in the actions of agents, although they are irreducible to them6 (Fleetwood, 2014A, 2014B). This produces a constant feedback effect, which is important because it sets up a continuous interactive evolution among the organizational competencies and those possessed by the individuals who form part of it, which in turn allows us to explain the differences observed between the reality of the various firms and their diverging development over time (Chandler, 1962, 1992; Nelson, 1991). Regardless, the recognition that the socioeconomic phenomena that are part of each firm can causally influence the habits and actions of its members means accepting, simultaneously, that the firm has a number of capabilities or skills beyond those provided by its members. For simplicity, I refer to these competencies as ‘organisational capabilities/competencies’ to differentiate them from those contributed by the individuals who belong to the organisation and those deriving from its physical capital. In effect, as noted by Hodgson and Knudsen (2004, p. 290), just as the human body has a life beyond that of its cells, the firm has a life and possesses capacities beyond those of its members. These skills would be associated not only with the ability to combine and coordinate the skills of its workers but also especially with the ability to generate and develop individual skills (Noteboom, 2009). In other words, the firm, through its socioeconomic phenomena, plays a key role in the generation and transmission of individual competencies of those who participate in it. Nelson and Winter (1982) propose the idea that these skills would be associated with or embedded in the routines of the firm. Although the concept of routine occupies a central place in the theory of capabilities, it may be one of the most controversial aspects and has generated the most discussion (Cohen et al., 1996; Dosi et al., 2000; Lazaric, 2000), among other reasons, because of the ambiguity with which the term has been used in the literature (Becker, 2004). Indeed, the term ‘routine’ is often used in colloquial language—and also in much of the literature—to refer to repeated patterns of behaviour. However, although it is true that some confusion still persists, in recent years a certain consensus has seemed to emerge in the literature on capabilities, according to which the term should not be used to refer to performed behaviours but rather to refer to potential behaviours or, in other words, trends or dispositions in organizations (Hodgson, 2008; Knudsen, 2008). Therefore, Hodgson (2008, p. 21) defines a routine as ‘a generative structure or capacity within an organization. Routines are organizational dispositions to energize conditional patterns of behaviour within an organized group of individuals, involving sequential responses to cues’. In this sense, routines would be the organization’s analogue to individual habits (Dosi et al., 2000; Hodgson and Knudsen, 2004; Hodgson, 2008) and would perform a similar function as repositories of knowledge and skills (Hodgson, 2008; Knudsen, 2008). Thus, as habits are associated with the knowledge and learning of individuals, routines would be associated with the knowledge and learning of the organization7 (Hodgson and Knudsen, 2004), becoming ‘stored behavioural capacities or capabilities’ (Hodgson, 2008, p. 19). Identifying the routines with the potential behaviours of organisations rather than with performed behaviours can solve the ontological confusion between dispositions and outcomes, between the potential and the actual, or even between what an entity is and what it does (Hodgson, 2008). However, it is true that this does not eliminate all possible doubts or questions about the concept of routine. For example, the question arises whether the organizations (in this case, firms) may, as such, have similar agential properties as habits or whether these routines are nothing more than habits themselves or simply aggregations of habits. In this sense, Hodgson and Knudsen (2004, p. 289) argue that routines are not exactly habits shared by several individuals who are part of a group but rather are ‘organizational meta-habits, existing on a substrate of habituated individuals in a social structure. Routines are one ontological layer above habits themselves’. Similarly, Hodgson (2008, p. 25) argues that ‘routines are more than mere aggregations of habits, because they also depend on the emergent properties of organization itself, emanating from structured causal relations and interactions between individuals’. Finally, another of the elements that form part of the firm and that characterizes how it functions is its physical capital. This may indeed be regarded as a depositary of part of the productive capacities and knowledge of the firm (Penrose, 1959; Langlois, 1992). As the competencies incorporated in individuals and in the organization display particular traits in terms of their origin, evolution, characteristics, etc., those contained in the physical capital display differentiating features that are worthy of note. Thus, for instance, in contrast to what happens with the acquisition of individual and organizational competencies—which can mutate and improve both abruptly and continuously, through the constant process of learning and the interaction with other individuals and with the socioeconomic phenomena present in the firm and in the environment in general—the competencies incorporated in the physical capital can only be improved, on the whole, in an abrupt manner, by obtaining new equipment that calls for specific investments; furthermore, while individual and organizational competencies can expand simply through use, the fruit of experience and of learning by doing, the competencies associated with physical capital tend to deteriorate through use (Seccareccia, 1991; Lavoie, 1992; Foss, 1993; Hodgson, 1998B). This system of competencies constitutes the ensemble of factors that a firm has at its disposal to carry out its activities of production and distribution; as a result, and as is often emphasised in the literature on strategic management, competencies become the essential element that determine the firm’s competitive positioning (Penrose, 1959; Porter, 1980; Teece, 1982; Prahalad and Hamel, 1990; Teece et al., 1994; Teece and Pisano, 1994; Teece, 2007). In this regard, it is necessary to acknowledge that firms normally engage in many activities of very diverse kinds. Some of these activities are ‘external’ in the sense that they involve other agents8 and the environment; these include some developed in different markets in which the firm participates as a supplier or as a demander. Other activities of the firm are of an ‘internal’ nature, given that they affect the elements that form part of the firm itself. Among the latter, perhaps the most significant is precisely the endeavour to acquire, improve, adapt, coordinate, etc., the firm’s productive competencies (Nelson, 1991; Teece and Pisano, 1994; Hodgson, 1998B). In any event, all of those activities are carried out in real time and in an environment which is transmutable and subject to fundamental uncertainty. This transforms the conception of the relations between the economic agents (and in particular firms) and their environment, as it opens up the possibility that those agents may play a more active role, tending to modify real-world conditions. What this all means is that taking control is highly important, whence comes the need to plan strategically (Dunn, 2002A, 2002B). Strategic planning involves not merely choosing between different courses of action available, but also creating new ones (innovating) and preparing oneself to face and control the impact of unforeseeable events; in other words, strategic planning means not only setting in motion and coordinating the various elements that contribute to production, but also attempting to control as many factors as possible that influence the production and distribution processes with the aim of eliminating or reducing the impact of uncertainty (Galbraith, 1967; Dunn, 2002A, 2002B). Consequently, the need to plan strategically and to take control is not limited to activities in the markets, much less to the imperfect nature of these, but is linked to the nature of the environment and time: it is the fact that the activity of the economic agents carries on throughout historical—and not logical—time and in a context of uncertainty that makes planning necessary (Dunn, 2002A). 3. Labour-demand decisions within the firm 3.1. The link with strategic planning and its determinants As we have seen, firms are normally engaged in many activities, both internal and external, which are normally hard to compare or reduce to a common scale of evaluation. Moreover, these activities take place in historical and not logical time, in an environment that is subject to the existence of fundamental uncertainty. In this context, one may ask how and when labour demand decisions are taken. In this sense, the first aspect which must be borne in mind is that labour demand decisions must be taken before starting (or varying) production—or, more correctly, all of the firm’s activities—and in a context in which this production takes up (real) time. Therefore, labour demand decisions would appear to be necessarily linked to the enterprise’s plans, which are normally established by the members of the organisation’s management team and designed in an environment subject to uncertainty (which calls for strategic planning); indeed, the design of those plans is one more activity of the many that go on within the firm. This connection between labour demand decisions and the firm’s planning has numerous consequences, of which we can only mention some. The first of these is that the content of these action plans (and therefore labour demand decisions) are constrained by the competencies of those who draw up those plans (Teece, 2007) and by their psychological and emotional characteristics—evoking the concept of ‘animal spirits’—since in an environment subject to uncertainty, these play an important role in the decision-making process (Dequech, 2003); what is more, the defining of those plans is not unrelated to the objectives of the various individuals and groups that participate in their design in some form or other, nor is it unrelated to the power configurations within the firm. Second, the content of the plans is not unrelated to the path followed by each firm, as this is constructed through a dynamic process that is dependent upon the past. Third, the content of the plans (and therefore, demand decisions) is also influenced by the intrinsic nature and characteristics of the various activities to be carried out. Thus, for example, the more predictable and stable the volume of activity to be carried out, the easier it is to take labour demand decisions and the more likely it is that this stability will be reflected in the duration of employment relations. Finally, the level of uncertainty in which each of the firm’s activities is conducted has a significant impact on the design of its strategic planning. In this context, the capacity to take control of the various factors that could influence the conduct of the firm’s activities and their results plays a key role, as it contributes to reducing uncertainty and therefore can be reflected in labour demand and its characteristics. Hence, the control over the demand for the product makes it possible to plan the volume of labour demand, the control of prices reduces the impact of variations in labour costs, control of innovation assists in planning of the productive competencies required to carry on the activity, etc. Evidently, this in turn means that the differences in terms of capacity of control among different firms can play out as differences in labour demand decisions. 3.2. Labour demand as a demand for productive competencies In this context, we may ask what the firm needs—or, in other words, what it demands—in order to carry out the activities that have been planned strategically. As we have seen, the firm needs various competencies or productive capabilities, part of which are contributed by individuals. Hence, labour demand appears to be associated with a demand for productive capabilities. As discussed, these competencies may differ widely; although some are essentially physical (such as strength), in general they are of cognitive nature (knowledge and skills, acquired through some type of learning), and so their origin and evolution display a series of particular characteristics that must be taken into account. Thus, for instance, these competencies may differ according to their complexity or the difficulties that human beings experience in acquiring them; this may in turn affect the firm’s chances of incorporating them and the degree to which they can be replaced by others. On the other hand, individual competencies tend to expand simply through use, experience and learning by doing, and then to depreciate or disappear altogether if unused (Seccareccia, 1991; Lavoie, 1992; Foss, 1993; Hodgson, 1998B). Moreover, like any cognitive process, capabilities acquisition by the individual is conditioned by the influence of the socioeconomic phenomena that characterise the different social environments in which this knowledge is produced (Hodgson, 1998A, 2003) and, therefore, it has in its origin a certain character that is specific to the context (Teece and Pisano, 1994). This means that some of the competencies that the firm needs can be acquired by individuals outside the organization, but there are others which, by the very nature and characteristics of the cognitive process—in particular, due to its context-specific character—must be created and transmitted internally (Penrose, 1959; Foss, 1993; Teece and Pisano, 1994; Hodgson, 1998B). Indeed, the firm, through the influence of the set of socioeconomic phenomena that are part of the organization, may be able to create, improve and transmit competencies to the individuals that form part of it and do so more appropriately than if they were acquired from outside the company (Hodgson, 1988, 1998B; Kogut and Zander, 1992; Teece and Pisano, 1994). This is the case, among other reasons, because much knowledge cannot easily be codified or communicated verbally, and so its transmission and learning cannot be based upon a process of formal teaching, but is produced through constructed knowledge and imitation generated by participation in—and interaction with—the other individuals and with the socioeconomic phenomena that are part of the organization (Hodgson, 1988) or in a process of learning by doing; in other words, this is tacit knowledge (Polanyi, 1966) and is of a social character. This fact has a crucial effect on the process of the firm’s demand for labour, as it means that the acquisition of some of the competencies through the market is at times not possible or advisable; on the contrary, the need to create and transmit these competencies internally is one of the raisons d’être of internal labour markets and, in general, of long-lasting labour relations. Furthermore, there are situations in which the incentives of markets may work to the detriment of knowledge transfer and learning (Hodgson, 1988, 1998B; Teece and Pisano, 1994). Meanwhile, the specialization and dispersion of productive knowledge mean that it must be coordinated; in this regard, the socioeconomic phenomena that are part of the firm can prove very useful not just for generating this knowledge, but also as an instrument for coordination, bringing together the competencies more effectively—at least on many occasions—than the socioeconomic phenomena of the market itself9 (Teece, 1982, 1986; Hodgson, 1988; Kogut and Zander, 1992; Teece and Pisano, 1994; Langlois and Foss, 1999; Becker, 2004). All of this suggests that within the enterprise there is an additional productive activity going on, one that is associated with the creation, improvement10 and coordination of productive competencies. As well as affecting the possibilities of replacing these competencies, this fact calls for the creation of internal configurations (such as systematic configurations of job positions, with more or less organised relationships between them) that are capable of producing and passing on these competencies. This idea already played an important part in the earliest theoretical explanations of internal labour markets and labour market segmentation (Doeringer and Piore, 1971; Piore, 1975, 1980; Thurow, 1975). In any case, it is necessary to stress that this is a process with uncertain outcomes, one which takes time and is not independent of the organization’s other competencies or of the socioeconomic environment in general. Moreover, the presence of uncertainty complicates the very awareness of the competencies that the firm needs, because at times, it proves difficult to identify these needs—among other reasons, because sometimes it is difficult to know what relationship each has with the firm’s results in its various activities (Foss, 1993; Teece and Pisano, 1994; Becker, 2004)—and, particularly, to know how these needs will evolve over time, because, among other reasons, reality is transmutable—and therefore useful competencies to develop in this reality can change at any time—and because the capacity for innovation is also a relevant competency. In effect, innovation, understood as the creation of new knowledge or new combinations of knowledge, combined with other elements (such as the need to search for new uses of resources available to the firm that are not being conveniently used), can lead to the appearance of new products and processes and, in general, the diversification of the firm’s activity. This idea was already present in the vision of the firm by Penrose (1959). Furthermore, Penrose (1959) emphasized that a firm’s demand (in both volume and composition regarding the type and characteristics of products) is not provided beforehand but rather depends on the characteristics of production and the firm’s actions (a generally accepted idea within institutional and post-Keynesian economics, for example). In this context, identifying the competencies that a firm ‘needs’ is a difficult task because the characteristics of production and demand are not available and all are interdependent. Finally, the fact that a portion of the competencies contributed by individuals are created within the firm supports the idea, frequently emphasised, for example, from a post-Keynesian perspective, that the supply and demand of labour are interdependent. Indeed, if a large proportion of the competencies that individuals bring to work are created or developed through the learning that occurs in performing their working activities, this means that the ‘quality’ of the supply is also interrelated with the number and characteristics of jobs in an economy (Eichner, 1979). Furthermore, the perspective of labour demand advanced in this paper suggests that a different conception of labour supply is desirable, which recognizes that essential elements constituting the contribution of individuals to work include their capabilities or productive competencies. The cognitive nature of these capabilities must be recognized as well as, therefore, their distinctive features in terms of their origin and evolution. (This recognition would generate a radically different analysis than that afforded by, e.g. the theory of human capital). A conception of labour supply coherent with the vision of labour demand asserted in this paper can be found in Fernández-Huerga, et al., (2017). 3.3. The demand for competencies incorporated in individuals: some consequences of this embedding As observed immediately above, labour demand is, in its origin and essence, a demand for productive competencies. However, it does not concern any type of competency but rather those that are incorporated into human beings. This fact has many consequences, of which we shall highlight two. The first of them is that although what the firm originally needs to handle its various activities are productive competencies, normally these cannot be obtained individually in the markets, but must instead be obtained by hiring—the services of—individual people, each one of which possesses or may possess many competencies. This means that the firm must redesign its demand for competencies to match up with the individuals that provide them and with the various tasks that need to be performed. More specifically, what the firm does is to organize the various activities to be carried out—and map the competencies required to those activities—then include or link them to job descriptions, which may then be assigned to individual employees. In other words, the firm becomes an organized system of job positions, each of which is associated with one or more tasks or activities to be carried out by the employee. The design of the system of job positions is a decision for the senior management of the organization, and so it is conditioned by the competencies and objectives of the individuals who work at the management level—as well as by the socioeconomic phenomena integrated in the firm—and is dependent on the past and changing in time. In summary, labour demand, which is originally a demand for productive competencies, becomes, in a certain sense, a demand for individuals, which has several consequences. First, it is a source of ‘indivisibilities’ (as an individual may have many competencies) and can contribute to the accumulation of an inventory of competencies that gives rise to surplus capacities within the firm. This tendency for surplus capacities to appear is further driven by the fact that the competencies possessed by individuals are of a cognitive nature, since this also means that they tend to increase and/or develop as the productive activity is carried out (Teece, 1982; Loasby, 1998). This idea was already present in the view of the firm by Penrose (1959), who not only recognized the existence of unused productive services that could be provided by the firm’s resources but also emphasized the role that these unused services could play as a motor for growth and the firm’s diversification11—although, as Richardson (1972) emphasized, this possibility is basically concentrated in the development of new activities that require capacities similar to those the firm already has. In addition, it generates the need for many new types of laws, regulations, agreements, codes, conventions, norms, rules, etc.—associated with the socioeconomic phenomena that form part of the firm, or outside the firm—in which the agents draw upon (consciously, in most cases, although occasionally unconsciously) to identify and demarcate which capabilities among all those that individuals possess can be utilized by the firm and which ones cannot. Finally, this design simultaneously throws up a series of relationships among the various job positions in the organization and among these and its physical capital. Some of these relations are flexible, so that jobs can be added or eliminated without altering the company’s internal configuration or the performance of the various activities in which it is engaged, but sometimes these relations are more or less fixed; this once again imposes a certain kind of indivisibility in the productive activity and connects with the view frequently highlighted by post-Keynesian economists that most enterprises tend to be affected by the prevalence of technical coefficients of production that are (quasi-)fixed. The second consequence of the fact that some competencies are embedded in human beings is that in order to put them to work, a certain degree of ‘effort’ (understood in a broad sense) is required, which suggests a substantial difference with respect to the firm’s other competencies (such as those contained in physical capital). In other words, the human activity within a firm does not depend only on knowledge or skills of the individuals who work in it but also on aspects related to their motivation. Clearly, the orthodox view also incorporates this idea in some ways, but it does so starting from a very narrow and particular conception of human motivation, focused on the single objective of utility maximization and essentially egotistical principles that define moral hazard or opportunism12—without including other psychological traits and internal motivation—to the point of converting all potential workers into necessarily lazy, idle and even malevolent people (Spencer, 2004). Confronting this view, it is necessary to acknowledge (as is customary within post-Keynesian economics) that human motivation is a complex phenomenon, which is directed to the satisfaction of a more or less hierarchical system of needs and wants; these needs and wants—which can be material or immaterial—are not always comparable or reducible to a common scale of valuations, nor therefore are they mutually interchangeable (Georgescu-Roegen, 1954; Lutz and Lux, 1979; Eichner, 1985; Lavoie, 1992; Reisman, 2002). From this perspective, it can be seen that it is a severe distortion of reality to suppose that workers will always seek to minimize their effort or that they will behave in a malevolent fashion (Spencer, 2004); further, we may not even assume that the various aims that workers may have will necessarily run counter to the interests and goals of the organization for which they work. Nevertheless, it is true that in some cases the needs and wants of individuals who work in a firm may not coincide with the various objectives that it pursues, although the extent of the divergence may be more or less extreme. Faced with this possibility, the need arises to establish some control instruments or tools (understood in a broad sense) to bring the interests of the workers into line with those of the firm. To do this, different systems of incentives and sanctions can be put in place, particularly through the management of wage rewards;13 however, the conventional literature may have placed too much emphasis on this (Eichner, 1979), as it must not be forgotten that remuneration is not the only external incentive that can apply—work can contribute elements different to wages and may indeed become a means whereby the individual can satisfy his or her non-material needs (Appelbaum, 1979; Eichner, 1979; Kaufman, 1998; Spencer, 2006, 2015)—moreover, external stimuli are not the only drivers of human behaviour (we must admit that behaviour can also be driven internally). In any case, the setting of incentives and sanctions is not the only means the firm can avail itself of to align the workers’ objectives with its own. Indeed, both the identification of the system of needs and wants of each individual and the determination of the levels of aspiration considered satisfactory are cognitive processes and, therefore, are conditioned by the set of socioeconomic phenomena that are part of the environment14 (Hodgson, 1988; Kaufman, 1989). This leaves open the possibility that the firm, through its constituting socioeconomic phenomena, can influence the motivation of the individuals that work for it (in terms of their aims) and, thereby, influence their behaviour15 (Nelson and Winter, 1982; Hodgson, 1988; Kaufman, 1989; King, 2002; Becker, 2004). Moreover, one must also recognize that in itself, setting the level of effort considered to be ‘normal’, ‘acceptable’, ‘desirable’, etc., is in part a cognitive process and that, as such, it is influenced by the socioeconomic phenomena that are part of the organization16 (Seccareccia, 1991; Lavoie, 1992). 3.4. The labour demand decision-making process and its relative independence from the wage-setting process The fact that labour demand decisions are linked to the firm’s action plans means recognizing that, as a general rule, it is the variations in those plans (in their quantitative dimension or in their content and composition) that generally produce variations in labour demand. Indeed, in the real world, those responsible for these decisions are not continually making calculations and evaluating possible new hires. On the contrary, these decisions are generally taken only at certain times. Apart from when vacancies arise in some existing position—that would generate the need to adopt allocation decisions (which will be discussed later) but not decisions about variation in the volume of competences and/or individuals—or when there is a redesign of the system of job positions that creates a new position that is not covered, these decisions tend to arise when the firm’s action plans change and therefore its needs for productive capabilities, either because the content of the activities to be carried out changes (and, as a result, the make-up of the competencies that the firm demands) or, normally, because the expected volume of the various activities to be carried out changes. This last point is usually linked to variations in the expectations of the demand, which generate a change in the overall amount of planned activity. Obviously, this idea connects with the effective demand principle, according to which the level of employment is determined outside the real wage-employment aggregate space (in other words, the conventional labour market). More specifically, fluctuations in expected effective demand spur changes to labour demand plans (implying the important role of uncertainty in these decisions). Furthermore, decisions concerning the volume of planned labour demand—as it happened with the decisions on the strategic planning of the activities of the firm or with the decisions on the design of the system of job positions, with which they are related—are made by specific people within the organisation and therefore are shaped by the competencies and psychological traits of these people, which could influence the development of their understanding of the future or expectations. In any case, this does not mean that wages and wage variations have no influence at all on labour demand decisions, but it does mean that they do not play the predominant role attributed to them in neoclassical economics. Indeed, as we have seen, the assumptions on which the neoclassical analysis of labour demand is based determine that the decisions in this area may be based upon a simple comparison between the income that hiring an additional unit of labour would produce and the cost that this would incur. In other words, each firm decides the units of labour that it wants to demand, depending on the current wage. However, in the real world, it is normally impossible to tackle labour demand decisions on the basis of the procedure whereby one endeavours to match the marginal revenue product and the marginal cost. This is the case not just because the presence of uncertainty hinders in the strict sense the implementation of decisions couched in terms of optimization (Simon, 1976; Hodgson, 1988, 1997; Lavoie, 1992), but also because it is normally impossible to know beforehand—that is, before starting the productive activity—and to quantify on a common scale of value all of the costs and benefits that hiring another worker may produce (as well as not hiring one). Furthermore, in the real world, wages are not set by an ethereal and impersonal labour market, nor are they normally determined in conjunction with and at the same time as determining the amount of labour required. On the contrary, wage-setting is the result of a process of dispute or negotiation of some kind, contingent upon the distribution of power between the parties and the influence of all socioeconomic phenomena that are part of the environment (Robinson, 1937; Appelbaum, 1979; Woodbury, 1987). In effect, the wage decision-making process is shaped by a set of rules, norms, regulations, codes, procedures, precedents and values that constitute the mechanism for determining wages. A mechanism can be defined (Fleetwood, 2014A, 2014B) as a systematic configuration or cluster of socioeconomic phenomena that are consciously and/or unconsciously reproduced or transformed by the agents who rely on those phenomena when conducting their plans and activities (in this instance, the plans and activities related to wage determination). These phenomena contribute to determining what role is played by the various agents in the wage-setting process and how this is played out; in other words, the socio-economic phenomena establish the ‘rules of the game’ that govern the wage-setting process (I use here the term ‘rule’ in a generic or colloquial sense and not as a specific type of socio-economic phenomenon). As such, these phenomena causally condition the plans and activities of the agents who participate in the wage determination process. In fact, another of the activities that the firm must engage in is precisely to participate in the process of setting wage levels in accordance with the current ‘rules of the game’, that is, interacting with the set of socioeconomic phenomena constituting the mechanism for wage determination and with the other agents involved (Fleetwood, 2014B, p. 254). An enterprise’s decisions in this area, as in any area, are strategic decisions (Shapiro and Sawyer, 2003), that is, they are taken in a context of uncertainty and taking into account the different sub-goals of the firm which can influence. This means acknowledging that these decisions are dependent on the past and are taken with a view to achieving as much security and control as possible. In fact, the control over the wage-setting process is usually an important objective for most firms, as it enables their activities to be planned and carried out in a world in which they take up real time and that is subject to fundamental uncertainty. Moreover, these decisions are not independent from the firm’s opportunities of managing the rest of the cost or manipulating the prices of its products. Indeed, another of the elements that partly disconnect labour demand decisions from wages is that wage variations may perhaps be transferred—completely or partially—to price variations.17 In fact, another of the enterprise’s activities is to take part in the process of price-setting according to the ‘rules of the game’ established by the socioeconomic phenomena that form part of the environment, namely, the phenomena that constitute the price-setting mechanism of the market in which the firm operates (Hodgson, 1988; Fernández-Huerga, 2013). According to these ‘rules of the game’, what happens in most modern markets is that one of the parties to the transaction (normally the seller) has the power to set the price marks (Galbraith, 1967; Hodgson, 1988; Tool, 1991; Sawyer, 1993; Jackson, 2007), which does not of course mean that there is total discretionality or that there are not many other determining forces. For this purpose, the firm usually falls back as a guide, in a more or less rigid manner, on some kind of standardized procedure, understood as a method or form that agents use (normally consciously) as a pattern or template for accomplishing a certain action, such as for instance taking as a benchmark some measure of unit costs and adding to that an additional margin (Kalecki, 1954, 1971; Tool, 1991, 1993; Lavoie, 1992; Downward, 2000). The generalized application of this kind of procedure, taken to an extreme, would lead to cost variations (including wage costs) having a knock-on effect on prices, while variations in demand would tend to cause changes in production and therefore in the level of employment. To sum up, then, the foregoing leads to the recognition that there is a relative disconnect—albeit of course not total—between labour demand decisions and wages (Appelbaum, 1979; King, 1990; Seccareccia, 1991; Lavoie, 1992), or at the very least we can say that the type of direct causal relationship that appears in orthodox economics—which is a law-like and causal relationship, based on the supposed existence of event regularities between changes in the demand for labour and changes in wages rates—does not exist (Fleetwood, 2006, 2014C). Indeed, if we accept that the social world (and, in particular, the ‘labour market’) is an open system that is characterized by the frequent occurrence of irregularities in events, then labour supply and demand curves cannot exist, and wages cannot be determined by the intersection between them (Fleetwood, 2006, 2014C). This view is consistent with the notion—emphasised at the macroeconomic level within a number of areas in the economics literature—that the level of employment and nominal salaries are determined separately (King, 1990). 3.5. The process of assigning individuals Finally, labour demand decisions require the selection and assignment of specific individuals to jobs. This is the case, once more, because normally staff assignment does not take place at the same time as wage-setting and determining the amount of labour required. In this regard, the first point that needs to be made is that these decisions are taken by specific individuals within the organisation—as it happens with other decisions related to these, such as decisions on the strategic planning of the firm’s activities, the design of the system of job positions (and its interrelationship with the activities to be performed and the required competencies for these activities), or decisions on the volume of planned labour demand—and are thus shaped by their personal competencies and characteristics. Furthermore, these decisions are made in a context subject to the presence of fundamental uncertainty, and so what usually happens is that the individuals responsible for making these decisions do not know who are all of the individuals that are potentially available to occupy a given job, nor what is their endowment of capabilities and how they will vary over time—among other reasons, because some of them have yet to be created—nor how motivated the individuals are or what their behaviour is like, nor how their effort is likely to evolve, etc. In other words, normally it is not possible to know—in the sense of having perfect knowledge or subject to probabilistic risk—what the contribution of each potential worker will be, either in terms of productive competencies or in terms of effort. On the contrary, many of these aspects can only be revealed—and even then at times only partially—with the passing of time. This connects with the distinction made by Penrose (1959) between the resources available to a firm (including human resources), which are what one can normally buy in markets, and the productive services that can be obtained from them, which are actually the inputs that the firm needs. Knowing in advance the services to be obtained from each resource is an impossible task (among other reasons, because those services have yet to be produced), which makes decisions on resource acquisition difficult. It is in this context where management skills (in a broad sense) acquire their true meaning and relevance and become a crucial element in the operation of the business. In any case, the presence of uncertainty means, first, that agents responsible for making these decisions rely, consciously or unconsciously, on the use of procedures, conventions, precedents, rules or the like, that enable the assignment to be made even if the knowledge obtained may be imperfect (Keynes, 1937; Simon, 1976; Lavoie, 1992). In doing so, agents in turn contribute to reproducing and/or transforming these socioeconomic phenomena. In short, these phenomena constitute the market allocation mechanism and causally determine the actions of the agents in that field. Thus, for instance, if the selection is dealt with in an internal labour market, what normally happens is that there is a set of conventions, procedures, rules and so on, that conditions and guides decision-making in this area and that constitutes the ‘system of promotions or mobility’ of the firm. On the other hand, if one resorts to the external labour market, what tends to happen is that the decision-maker falls back on devices for recruiting such as interviews or tests that can reveal (albeit imperfectly) the individual’s traits or which assess credentials or indirect indicators that can be found in each individual’s resume and background (education, experience, etc.) or are linked to their personal characteristics (age, gender, ethnicity, etc.).18 Second, the presence of uncertainty means that decision-making depends not only on knowledge—always imperfect and fallible—which can be built up about those individuals and their different attributes, but also depends on the confidence—not always numerically quantifiable—which the decision-maker(s) have in this knowledge. What this means is that the source of the knowledge or the way in which it has been constructed influence the decision-making process and its outcomes (Dequech, 1999, 2003, 2006). Thus, for instance, if the person responsible for taking job assignment decisions is faced with a choice between different individuals whose attributes he or she only partially knows and even then imperfectly, the decision-maker may opt for one of them simply because that knowledge comes from personal experience (e.g. because it may be a worker of the same company who formerly held another position) or from persons he or she trusts, such as friends or family members. In fact, the possibility of generating this kind of knowledge and trust is one of the arguments traditionally deployed to justify the existence of long-lasting labour relations and the construction of internal labour markets. This means that labour demand decisions, and in particular those relating to assignment, are not independent from or separable from the individual who supplies this labour (Seccareccia, 1991). 4. Conclusion Throughout this study we have endeavoured to present the essential elements of an alternative view of labour demand to the neoclassical one, taking as our starting point the conception of the firm derived from the capabilities theory. In general, a firm can be defined as an organisation that is dedicated to undertaking an activity for producing goods or services and that is constituted by: (a) a set of socioeconomic phenomena that are consciously or unconsciously reproduced or transformed by various agents; (b) people (e.g. employees) who consciously or unconsciously reproduce and/or transform those socioeconomic phenomena; and (c) artefacts used to perform the organisation’s various activities (‘physical capital’). According to the capabilities approach, however, a firm can also be considered a systematically arranged combination of competencies or productive capabilities of a different type. Specifically, one part of these competencies consists of the capabilities contributed by the individuals who work for the firm; another part, by the socioeconomic phenomena constituting the firm (and that can directly shape the plans and actions of the individuals within the firm, particularly their productive knowledge); and a third part, by the organisation’s physical capital. In this context, labour demand decisions would appear to be linked to the (strategic) plans of production that a firm may have. This in turn implies, among other things, that labour demand decisions are conditioned by the competencies, interests and psychological traits of those who elaborate those plans, by the nature and characteristics of the activities to be performed, by the past and by the enterprise’s trajectory and by the power and capacity the firm has to gain control over the various factors that could influence the performance of its activities. In order to carry out those activities, the firm demands productive competencies, some of which are supplied by individuals. Most of these competencies are of a cognitive nature, which influences labour demand decisions via a number of routes. Thus, these competencies may differ depending on how complex or difficult to acquire they are, affecting the firm’s chances of incorporating or substituting them. Moreover, the competencies available are influenced by the set of socioeconomic phenomena that form part of the environment in which they have been generated, which is susceptible to producing differences in knowledge. Finally, the competencies that the firm needs may differ in terms of their specificity, that is to say, the need for those competencies may be internally created or developed. Indeed, an important part of the competencies that the firm needs must be produced or coordinated internally, through a process that necessarily takes time and whose results are uncertain. This helps explain the creation of internal configurations that favour the process of production and transfer of capabilities—such as internal labour markets—and leads to the recognition that the characteristics of the labour supply are contingent on the characteristics of the demand, which runs counter to the assumption that they are unrelated. Moreover, the fact that those competencies are possessed by human beings has, among others, two consequences that influence labour demand decisions. The first of these is that the firm must redesign its demand for competencies and the activities to be carried on related to the jobs that may be taken up by the individuals, which is a source of indivisibilities and may contribute to the emergence of surplus capacities. The design of this system of job positions is influenced by the competencies and aims of those who participate in setting it up and also by the past. What is more, its design generates a series of relations between the various jobs and between these and the physical capital, some of which are inflexible. Second, the fact that these competencies are possessed by human beings implies that in order for them to be deployed some effort is required, which implies the recognition that this implementation also depends on aspects related to motivation. This gives rise to the need to set up control instruments that permit the firm to align the workers’ interests with its own, which can be achieved, for example, by designing the wage system or the system of job positions and the rules, procedures and conventions that guide mobility between these positions. In any case, one must also accept that the firm, through the socioeconomic phenomena that partly constitute it, can influence the setting of the level of effort considered normal or acceptable, and can also influence the identification of the ordered configuration of the workers’ aims, in order to bring it more closely in line with the interests of the organization. The fact that labour demand decisions are linked to the firm’s action plans further leads to the recognition that those decisions tend to be activated, in most cases, when those action plans are changed (in quantitative terms or in their content and composition). This fact, which is consistent with the principle of effective demand, does not mean that wages and wage variation do not play some part in labour demand decisions, but it does mean that they do not play the predominant role that is attributed to them in neoclassical economics. This is the case, among other reasons, because in the real world salaries are not determined in conjunction with the amount of labour in an impersonal market. On the contrary, wage-setting is the result of a negotiation process of some kind, conditioned by the set of socioeconomic phenomena that form part of the environment and by the distribution of power between the parties. Finally, labour demand decisions ultimately require the selection and assignment of specific individuals to jobs. Therefore, the most salient point is that such decisions are taken in a context subject to fundamental uncertainty. This leads to the fact that decision-making tends to rely, at least in part, on the use of procedures, conventions, rules, precedents and so on, that make it possible to assign the worker even if the knowledge is imperfect. 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Competitive Strategy: Techniques for Analyzing Industries and Competitors , New York , Free Press Prahalad , C. K. and Hamel , G . 1990 . The core competence of the corporation , Harvard Business Review , vol. 68 , no. 3 , 79 – 91 Reisman , D . 2002 . The Institutional Economy. Demand and Supply , Cheltenham-Northampton , Edward Elgar Google Scholar CrossRef Search ADS Richardson , G. B . 1972 . The organisation of industry , Economic Journal , vol. 82 , no. 327 , 883 – 96 Google Scholar CrossRef Search ADS Robinson , J . 1937 . Essays in the Theory of Employment , London , Macmillan Sawyer , M. C . 1993 . The nature and role of the market , pp. 20 – 40 in Pitelis , C. N . (ed.), Transaction Costs, Markets and Hierarchies , Oxford , Basil Blackwell Seccareccia , M . 1991 . 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(eds.), Rethinking Economics: Markets, Technology and Economic Evolution , Aldershot , Edward Elgar Google Scholar CrossRef Search ADS Tool , M. R . 1993 . Pricing and valuation , Journal of Economic Issues , vol. 27 , no. 2 , 325 – 49 Google Scholar CrossRef Search ADS Ventresca , M. J. and Kaghan , W. H . 2008 . Routines, ‘going concerns’ and innovation: towards an evolutionary economic sociology , pp. 52 – 86 in Becker , M. C . (ed.), Handbook of Organizational Routines , Cheltenham-Northampton , Edward Elgar Google Scholar CrossRef Search ADS Woodbury , S. A . 1987 . Power in labor market: institutionalist approaches to labor problems , Journal of Economic Issues , vol. 21 , no. 4 , 1781 – 807 Google Scholar CrossRef Search ADS Footnotes 1 As indicated by Fleetwood (2014C, p. 1106), the function of labour demand rests on a plethora of suppositions, axioms, assumptions, presumptions, mathematical and technical devices and so on that characterize the orthodox theory of production. Many of these factors have been specifically questioned from different areas of the heterodox literature, particularly from post-Keynesian and institutional economics (Eichner, 1985; Lavoie, 1992; Dunn, 2002A). 2 It is true that neoclassical economics relaxes this and other assumptions on certain occasions, although it always does so after the demand function has been derived. It could be argued that neoclassical theory assumes whatever is necessary to ensure mathematical tractability and to protect its basic principle: wage rates and the quantities of labour demanded are functionally related (Fleetwood, 2006). 3 I use the term ‘realistic’ in the sense of avoiding the use of knowingly false assumptions. This usage does not eliminate the possibility of abstraction and simplification in the process of theorizing or model building. As explained by Fleetwood (2011, p. 23), a model can be both abstract and realistic. 4 The idea of linking the analysis of labour demand with a conception of the firm based on the capabilities approach is not entirely new. Indeed, some elements of this are already to be found in the anthropogenic view proposed by Eichner (1979), although at that time the competences-based theory was not fully developed. See also King (2002, p. 73). 5 As Loasby (2009, 2012, 2014) has repeatedly argued, the entire conception of knowledge as an evolutionary process and of the firm as a system that contributes to the growth of knowledge connects with the conception by Simon (1969) of the architecture of complex systems and, in particular, of the role of ‘quasi-decomposability’ in the evolution of such systems (Loasby, 2009, p. 27). 6 Fleetwood (2014A, 2014B) explains the interaction between agents and socioeconomic phenomena from the particular perspective of critical realism and more specifically from the morphostatic-morphogenetic approach developed by Archer (1995, 2003). However, the essential elements that characterize this agency-structure (or agency/institutions) model are compatible—especially when certain terminological ambiguities are eliminated (Fleetwood, 2008A)—with the view of many institutional and post-Keynesian economists, such as Hodgson (1998A, 2003, 2006), Fernández-Huerga (2008) and even Lavoie (1992). 7 The analysis of how routines emerge and evolve—and therefore how organizations ‘learn’—is very broad and diverse, though as Hodgson (2008) himself acknowledges, also incomplete. For a first approximation, see Becker (2008) or Noteboom (2009). 8 Among the activities developed by companies, some involve the establishment of some type of economic relationship with other companies. In this sense, Richardson (1972) lays the foundation for the development of a theory of inter-firm relations that, using the concept of capabilities as a starting point, is often considered a logical extension of the Penrose view of the firm. 9 Here, the implication is not that the coordination of competencies within the firm is always better than it is through other alternative means. Indeed, this possibility is conditioned by many factors, such as the type of competencies to be coordinated—for example, the degree of similarity and complementarity among them, using the terminology of Richardson (1972)—the rate of change or innovation that these competencies may be subject to (which connects to the degree of uncertainty) or the consequences that these changes may have for the firm’s other competencies and for the internal organization of the firm (Langlois, 1992). 10 The idea that a process of ‘improvement’ of productive competencies is produced (or can be produced) within a firm merits two comments. First, this statement does not mean that necessarily and in all cases will be produced an ‘improvement’ in the strict sense of the word or that the process is linear and continuous. In a world fraught with fundamental uncertainty, knowledge is imperfect and fallible; in addition, in an environment subject to change that is moreover unpredictable, the competencies that result in productive solutions that are satisfactory for one environment could cease to be so when the environment changes (Dosi and Egidi, 1991; Hodgson, 1997). Second, when the process of ‘improvement’ of the competences is mentioned, reference is made, in any case, to its applicability to production, and not necessarily to its consequences on other areas of the human being (e.g. autonomy, self-esteem, self-fulfilment). Specifically, there may be knowledge or attitudes that are positive for the productive activity (in particular, for the interests of the firm) and that nevertheless limit the capacities of human beings to be and to do in other areas. See Spencer (2015) or Fernández-Huerga, et al., (2017) for an initial analysis of the connections between work and the possibilities of being and doing of human beings. 11 Specifically, Penrose (1959) emphasized the role that managers could play in this process, noting that there were managers who could discover new forms of using existing resources or new combinations of resources in response to the ‘visions’ of the firm’s existing opportunities; these ‘visions’ are cognitive constructions and can vary from some individuals to others. 12 It is true that orthodox economics can include behaviour guided by objectives other than self-interest (e.g. altruism, justice). Nevertheless, it is usually done in such a way that those objectives appear as comparable and reducible to some kind of individual ‘benefit’ or ‘satisfaction’—through the comparison of ‘income’ and ‘costs’, among other reasons to be able to apply conventional analytical tools—obscuring therefore the essence of human motivation as a process directed towards the satisfaction of a complex system of differentiated material and immaterial needs (Lutz and Lux, 1979; Fernández-Huerga, 2008, 2012). 13 For example, see Bewley’s intriguing analysis (1999). 14 In fact, the set of socioeconomic phenomena present in the environment, not only within the firm but also associated with other organisations (such as schools, universities or even the family), actively participate in creating and communicating ideas, attitudes and, in general, competencies that (ideologically) educate individuals to prepare them to work in ways that reflect the interests of firms (Fleetwood, 2011, 2014A). 15 This is consistent with the concept of bureaucratic control developed by the theory of labour market segmentation, in particular by the approach arising from radical political economics (Edwards, 1979; Gordon et al., 1982). 16 In general, we must emphasize that the connections between the firm’s objectives, employee motivation, the design of incentives or control instruments and the very process of the development and evolution of competencies within the firm are complex. In this sense, it is crucial to develop a set of socioeconomic phenomena that shape the patterns of behaviour within the firm to foster the maintenance, development and implementation of the capabilities that have proven effective, in addition to others, to identify and react to problems and opportunities that may arise. Naturally, managers play a key role in this process, in both its creation and its possible modification (Barnard, 1938; Drucker, 1955). In this sense, there are different management styles that can lead to different results, depending on the context in which the firm unfolds, as explained by Burns and Stalker (1961) in their distinction between mechanistic and organic systems of management. 17 Of course, this idea is also reflected in orthodox economics, albeit from a different ontological perspective and methodology. In particular, it is usually included as one of the Marshall-Hicks conditions for determining the elasticity of labour demand. However, these conditions assume a considerably larger role because they become essential assumptions to ensure event constancy and systemic closure. Thus, without these conditions, the existence of a labour demand curve as such could not be sustained (Fleetwood, 2006). 18 All of this leads to the selection process being conducted through ‘screening’ of some kind (Thurow, 1975; Dugger, 1981), so that even if there is an excess of labour supply this does not necessarily produce an adjustment (decrease) in wages that would, as the case may be, empty the market, but rather the credentials or characteristics required to occupy the job are what are adjusted (augmented). © The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Cambridge Journal of Economics Oxford University Press

The Labour Demand of Firms: An Alternative Conception Based on the Capabilities Approach

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Oxford University Press
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© The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.
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0309-166X
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Abstract

Abstract The aim of this paper is to offer a theoretical framework for the analysis of labour demand alternative to the neoclassical one, taking as its starting point the conception of the firm that derives from the capabilities or competence-based theories of the organization. After briefly reviewing the essential elements of this approach to the firm, we tackle a range of diverse aspects, such as the link between labour demand decisions and the firm’s strategic planning and its determinants, the characterisation of labour demand as a demand for productive competencies, the consequences that these competencies are embedded in human beings or the relative independence between labour demand decision-making and the process of wage-setting. In general terms, this conception of labour demand allows us to incorporate many of the main peculiarities of labour and the demand for it from a number of different areas of heterodox economics (particularly, from institutional and post-Keynesian economics) and it fits in with the conventional literature on internal labour markets and labour market segmentation. 1. Introduction As is generally known, neoclassical economics constructs its analysis of labour demand based on a very specific conception of the firm, both in terms of its nature and content and in terms of its aims and capabilities. Specifically, in the neoclassical view the firm is ultimately reduced to a mere combination of productive factors to which is added a kind of ‘hidden mind’ with a very specific motivation and very specific cognitive and rational capabilities. Thus, it is presumed that the firm’s activity is guided towards the achievement of a single aim: the maximizing of profit; this means assuming that each and every one of the activities it undertakes is measurable and comparable with the others according to a common scale of value: the extent to which each of them contributes to profit-making. Furthermore, it is supposed that the firm—or the ‘mind’ that controls—has cognitive capabilities that are sufficiently advanced as to make reality known or knowable—there may be ‘imperfections’, such as asymmetries in the information, which mean that this knowledge is subject to the existence of probabilistic risk; however, there is no room for fundamental uncertainty—and it has certain abilities of reasoning that allow it to process this information and apply instrumental rationality. Behind this vision is concealed a deterministic conception of cognition and of reality itself; in particular, the world is conceived as a closed system, characterized by the presence of constant conjunctions of events (Lawson, 2003; Fleetwood, 2006, 2011). The assumptions on which the decision-making model of firms is based lead to a mechanistic and optimizing-driven view of their behaviour—as is the case with human agency (Loasby, 1976)—in which there is no possibility of choice as such but rather a behaviour that is predetermined by the characteristics of the environment and by the defining traits of its production function. In this sense, the analysis of production is based on many assumptions, of which we highlight three. First of all, it is assumed that the firms’ productive activity can be represented by a mathematical function and that this activity depends on just two variables: labour and capital. Second, it is assumed that in the short term, capital remains fixed while labour is entirely variable, and that the production technology is characterized by the existence of flexible technical coefficients. Third, it is assumed that the productive activity, whatever it may be, is affected by the influence of the law of diminishing returns and that the relevant segment of production—which is the outcome of the maximizing conduct of the firm in an environment not subject to uncertainty—is that in which the marginal costs, total costs and variable costs are growing (and the corresponding productivities are decreasing).1 This characterization of production makes it possible to carry out a measurement of the productivity associated with each worker (or with each unit of labour); in turn, this productivity can be converted into monetary value terms by the marginal income associated with the said production. Further, is assumed that the marginal revenue remains constant or falls as production increases; this assumption, which is the consequence of the conception of markets and the price-setting process, enables the theory to claim that the marginal revenue product—and, therefore, labour demand—will also tend to decrease as the amount of labour used increases. At the same time, it is assumed that the only cost to the business of obtaining labour services is wages;2 this, combined with the aforementioned assumptions, determines that the firm—reduced in fact to a technical function of production—may decide (even marginally) the units of labour that it wishes to demand depending on the going wage rate; simultaneously, it is assumed that it is precisely wage variations (in the absence of changes in the function of production or in the prices of the product) that cause changes in the amount of labour demanded. This makes it possible to argue that a change in the wage rate causes a predictable change in the amount of labour demanded and, therefore, justifies the construction of a dependent relationship between the two variables (Fleetwood, 2006). Against this background, the aim of this paper is to attempt to offer a theoretical framework for the analysis of the demand for labour as an alternative to the neoclassical one, taking as its starting point the recognition that reality is essentially open-ended—in which constant conjunction of events are not usually found—as well as a more realistic3 conception of the behaviour of the economic agents within this reality. Consistent with this approach, the aim of the analysis is to attempt to explain the causal processes that underlie labour demand decisions (and their determinants) and to endeavour to do so without necessarily having to resort to explanations of equilibrium and determinism. This implies the need to focus our attention on how the economic agents involved actually arrive at these decisions. Indeed, most of those decisions are adopted in organizational environments, particularly in firms, and hence their internal configuration and the ways in which decisions are arrived at within them take on a central role in our analysis. Consequently, it is necessary to begin with a theoretical approach to the firm that is different from the neoclassical view and consistent with the ontological concept of the open system. In this sense, the first idea of this paper is that the capabilities or competences-based theories of the firm provide a very interesting and promising theoretical framework that has not yet been sufficiently exploited in the specific sphere of labour demand analysis.4 The immediate origins of this approach are usually said to be in The Theory of the Growth of the Firm by Edith T. Penrose (1959), and in recent decades it has seen a significant advance to become one of the dominant perspectives in the literature of strategic management and organizational theory. Moreover, several studies have recently highlighted the compatibility between the competences-based approach and several branches of non-mainstream economics—especially with institutionalism, evolutionary and post-Keynesian economics (Hodgson, 1998B; Dunn, 2000)—as well as its connections with sociology and social psychology (Dobbin and Baum, 2000; Ventresca and Kaghan, 2008; Noteboom, 2009). Further, the use of this view of the firm—which as we will see places knowledge and the learning process at the heart of the characterization of the organization—connects with the traditional literature on internal labour markets and with the proposal of Piore (1979, 1995) appealing to the relevance of cognitive psychology to explain the functioning of economic reality and in particular to construct a theoretical analysis of labour markets. In this context, this paper is organized in two main sections. In the first section, we present in summary form the essential elements of the capabilities approach of the firm, attempting to reveal fundamentally those that are most relevant in order then to construct an analysis of labour demand decision-making. Second, we set out to offer a theoretical framework that can explain the decision-making processes of labour demand in which firms engage and their constraints. To do this, throughout the text we tackle a range of diverse aspects, such as the link between labour demand decisions and the firm’s strategic planning and its determinants, the characterisation of labour demand as a demand for productive competencies, the consequences that these competencies are embedded in human beings or the relative independence between labour demand decision-making and the process of wage-setting. 2. The capabilities view of the firm: an overview The literature on capabilities or productive competencies is very broad and diverse, and it is possible to identify different perspectives with different theoretical origins (Hodgson, 1998B; Augier and Teece, 2007; Dietrich and Krafft, 2012, Part V). In this section, consistent with the rest of the work, we mainly present the essential ideas of the vision closest to institutional and evolutionary economics (and post-Keynesian economics). In addition, we also introduce some conceptual contributions made from the perspective of critical realism; in this regard, although developing a full adaptation of the theory of capabilities to the perspective of critical realism is beyond the scope of this work, we believe that incorporating some of the contributions recently made from this philosophical framework enables a more precise usage of the terminology used in the theory of capabilities and to resolve certain ambiguities or to correct possible ontological errors. The fundamental idea of the capabilities theory is that a firm may be conceptualised as a systematically arranged combination or set of competencies or productive capabilities of a distinct type (Nelson and Winter, 1982; Foss, 1993; Hodgson, 1998B; Augier and Teece, 2007; Teece, 2007). Specifically, one part of these competencies comprises those contributed by the individuals who work for the firm, another part by the ‘institutional content’ of the firm or the ‘institutional elements’ constituting the firm—I will be more precise about this later—and a third part by the organisation’s physical capital. All of these productive competencies are closely interrelated and interdependent (Nelson and Winter, 1982). Indeed, the individuals who form part of the organisation do not merely contribute their effort, but also their knowledge and skills (or part of them) or, to put it another way, their competencies and productive capabilities. The competencies that individuals contribute may be of many kinds: manual skills, technical know-how as to how to produce things, capabilities for conducting R&D, abilities for selling products and services, knowledge about procedures for directing and coordinating the activities of several individuals, etc. To sum up, although some of the competencies that individuals contribute are basically of a physical nature, most of them are a matter of knowledge and skills both practical and intellectual, and are to be found in all areas and at all levels of the firm, from senior management to the lowest levels of the organization (Nelson and Winter, 1982; Teece, 2007). A part of this knowledge and these skills is acquired by individuals outside the firm in which they work, mostly through a combination of the education system and the process of socialization they have gone through, but there is another part of the competencies, perhaps the most relevant when it comes to their application in production terms, which is acquired and implemented fully in the enterprise itself, through experience, learning by doing and interaction within the organization with other individuals and with the group as a whole (Teece et al., 1994; Teece and Pisano, 1994). In fact, if the nature of competencies can be associated with a question of knowledge and skills, this means acknowledging that these can evolve and expand through learning; consequently, the emphasis in the analysis of the firm cannot be on the allocation of competencies that are given a priori, but on their creation, production, adaptation, improvement, etc., from a dynamic and evolutionary perspective (Teece and Pisano, 1994; Hodgson, 1998B; Augier and Teece, 2007; Teece, 2007; Noteboom, 2009). This emphasis on the dynamic development of knowledge occupied a central place in the original vision of the firm by Penrose (1959). It also relates with the conception of economic progress by Marshall (1920)—according to which knowledge and the organisation play a central role as the engine of variation (Loasby, 1989; Langlois, 1992)—and with the vision advanced by Adam Smith of the growth of knowledge through the continuous division of labour5 (Loasby, 2002). In any event, the focus of attention shifts to the study of how competencies are acquired and developed. Hence, in a world in which there is fundamental uncertainty and in which human beings have cognitive limitations, knowledge becomes a social act, at least in part, which is necessarily conditioned or depends on the set of existing ‘institutions’ and, in general, on the ‘social stuff’ with which individuals must interact. This steers analysis to the study of this interaction and its consequences. In effect, human beings begin to relate from birth with a series of social elements including norms, rules, conventions, agreements, codes, laws, precedents, procedures, values, mores, institutions, organizations, social structures and mechanisms. These elements are often associated with the generic term ‘institutions’. Nevertheless, Fleetwood (2014B) has recently proposed encompassing all of these social elements (or ‘social stuff’) under the generic term of ‘socioeconomic phenomena’ (which would replace the generic term ‘institution’), making a conceptual and terminological effort to differentiate the different types of existing phenomena. In this respect, an institution (proper) refers to a concrete type of socioeconomic phenomenon comprising systems of established rules, norms, customs, obligations, mores and values that are (sometimes consciously, but more often unconsciously) internalized within agents as habits and that may transform the plans and actions of these agents through a process of reconstitutive downward causation (Fleetwood, 2014A, p. 15; 2014B, p. 248). In the remainder of this paper, I use the terminology and concepts developed by Fleetwood (2014B)—except where otherwise indicated—trying to distinguish between the different types of socioeconomic phenomena involved in specific instances, in particular when such a distinction is necessary to develop the analysis. Regardless, the important point at this stage of the analysis is that most of these socioeconomic phenomena (at least those of concern in this paper) causally condition, without determining, the thoughts and actions of agents. In this respect, the institutionalist literature has traditionally emphasized that institutions foster the production, reproduction and change of particular habits through a process of habituation and help transmit them to members of the social group who are under their influence (Hodgson, 1998A, 2003). Similarly, Fleetwood (2014B) explains that the socioeconomic phenomena drawn on by agents causally condition the actions of these agents in different ways, sometimes unconsciously, implicitly and tacitly, and other times consciously, explicitly and overtly. In this context, the use and establishment of habits of thought and interpretation plays a key role in the formation of knowledge and the learning process (Hodgson, 1997, 2004, 2008). Likewise, the acquisition of practical skills and reasoning or intellectual abilities is linked to habit-forming. Indeed, habits are thus seen as elements that enable competencies to be constructed and retained among within the individual. These habits are not an observable behaviour or an action as such but rather a ‘disposition, capacity, power, tendency or propensity’ to think or act in a certain manner; in this sense, habits are agential properties located in individuals (Hodgson, 2008; Fleetwood, 2008B, 2014B). Regardless, the habits that guide the construction of an individual’s knowledge and skills—that is, his or her competencies—are conditioned by the current set of institutions and, in general, by the socioeconomic phenomena with which the individuals interact. Naturally, this occurs with the knowledge and skills acquired not only outside the firm but also within it. And what is a firm? A firm is a type of organisation dedicated to undertaking an activity for producing goods or services. An organisation is in turn a socioeconomic phenomenon which differs from others—fundamentally—because it includes the people belonging to it and because it is (typically) created to undertake a specific activity or to attain specific goals. Thus, an organisation is constituted by (Fleetwood, 2014A, 2014B): (a) a set of socioeconomic phenomena that are consciously or unconsciously reproduced or transformed by various agents. Among other functions, these phenomena establish the organisation’s limits, distinguish between members and non-members, establish principles of sovereignty concerning who is in charge, implement chains of command delineating tasks and responsibilities within the organisation, and help to determine how these different activities should be implemented within the organisation (such as how to interpret information, resolve specific problems, and perform specific tasks); (b) people who consciously or unconsciously reproduce or transform these socioeconomic phenomena; and (c) artefacts used to conduct the organisation’s various activities (which, in the case of firms, tend to be designated ‘physical capital’). The socioeconomic phenomena that constitute each firm and that therefore may causally condition the actions of its individual members are prerequisites to any particular cohort of workers. However, workers must necessarily interact with and draw upon these socioeconomic phenomena to develop their activities in the firm. In doing so, the agents reproduce or transform these phenomena and simultaneously reproduce or transform themselves as agents. Therefore, the socioeconomic phenomena are rooted in the actions of agents, although they are irreducible to them6 (Fleetwood, 2014A, 2014B). This produces a constant feedback effect, which is important because it sets up a continuous interactive evolution among the organizational competencies and those possessed by the individuals who form part of it, which in turn allows us to explain the differences observed between the reality of the various firms and their diverging development over time (Chandler, 1962, 1992; Nelson, 1991). Regardless, the recognition that the socioeconomic phenomena that are part of each firm can causally influence the habits and actions of its members means accepting, simultaneously, that the firm has a number of capabilities or skills beyond those provided by its members. For simplicity, I refer to these competencies as ‘organisational capabilities/competencies’ to differentiate them from those contributed by the individuals who belong to the organisation and those deriving from its physical capital. In effect, as noted by Hodgson and Knudsen (2004, p. 290), just as the human body has a life beyond that of its cells, the firm has a life and possesses capacities beyond those of its members. These skills would be associated not only with the ability to combine and coordinate the skills of its workers but also especially with the ability to generate and develop individual skills (Noteboom, 2009). In other words, the firm, through its socioeconomic phenomena, plays a key role in the generation and transmission of individual competencies of those who participate in it. Nelson and Winter (1982) propose the idea that these skills would be associated with or embedded in the routines of the firm. Although the concept of routine occupies a central place in the theory of capabilities, it may be one of the most controversial aspects and has generated the most discussion (Cohen et al., 1996; Dosi et al., 2000; Lazaric, 2000), among other reasons, because of the ambiguity with which the term has been used in the literature (Becker, 2004). Indeed, the term ‘routine’ is often used in colloquial language—and also in much of the literature—to refer to repeated patterns of behaviour. However, although it is true that some confusion still persists, in recent years a certain consensus has seemed to emerge in the literature on capabilities, according to which the term should not be used to refer to performed behaviours but rather to refer to potential behaviours or, in other words, trends or dispositions in organizations (Hodgson, 2008; Knudsen, 2008). Therefore, Hodgson (2008, p. 21) defines a routine as ‘a generative structure or capacity within an organization. Routines are organizational dispositions to energize conditional patterns of behaviour within an organized group of individuals, involving sequential responses to cues’. In this sense, routines would be the organization’s analogue to individual habits (Dosi et al., 2000; Hodgson and Knudsen, 2004; Hodgson, 2008) and would perform a similar function as repositories of knowledge and skills (Hodgson, 2008; Knudsen, 2008). Thus, as habits are associated with the knowledge and learning of individuals, routines would be associated with the knowledge and learning of the organization7 (Hodgson and Knudsen, 2004), becoming ‘stored behavioural capacities or capabilities’ (Hodgson, 2008, p. 19). Identifying the routines with the potential behaviours of organisations rather than with performed behaviours can solve the ontological confusion between dispositions and outcomes, between the potential and the actual, or even between what an entity is and what it does (Hodgson, 2008). However, it is true that this does not eliminate all possible doubts or questions about the concept of routine. For example, the question arises whether the organizations (in this case, firms) may, as such, have similar agential properties as habits or whether these routines are nothing more than habits themselves or simply aggregations of habits. In this sense, Hodgson and Knudsen (2004, p. 289) argue that routines are not exactly habits shared by several individuals who are part of a group but rather are ‘organizational meta-habits, existing on a substrate of habituated individuals in a social structure. Routines are one ontological layer above habits themselves’. Similarly, Hodgson (2008, p. 25) argues that ‘routines are more than mere aggregations of habits, because they also depend on the emergent properties of organization itself, emanating from structured causal relations and interactions between individuals’. Finally, another of the elements that form part of the firm and that characterizes how it functions is its physical capital. This may indeed be regarded as a depositary of part of the productive capacities and knowledge of the firm (Penrose, 1959; Langlois, 1992). As the competencies incorporated in individuals and in the organization display particular traits in terms of their origin, evolution, characteristics, etc., those contained in the physical capital display differentiating features that are worthy of note. Thus, for instance, in contrast to what happens with the acquisition of individual and organizational competencies—which can mutate and improve both abruptly and continuously, through the constant process of learning and the interaction with other individuals and with the socioeconomic phenomena present in the firm and in the environment in general—the competencies incorporated in the physical capital can only be improved, on the whole, in an abrupt manner, by obtaining new equipment that calls for specific investments; furthermore, while individual and organizational competencies can expand simply through use, the fruit of experience and of learning by doing, the competencies associated with physical capital tend to deteriorate through use (Seccareccia, 1991; Lavoie, 1992; Foss, 1993; Hodgson, 1998B). This system of competencies constitutes the ensemble of factors that a firm has at its disposal to carry out its activities of production and distribution; as a result, and as is often emphasised in the literature on strategic management, competencies become the essential element that determine the firm’s competitive positioning (Penrose, 1959; Porter, 1980; Teece, 1982; Prahalad and Hamel, 1990; Teece et al., 1994; Teece and Pisano, 1994; Teece, 2007). In this regard, it is necessary to acknowledge that firms normally engage in many activities of very diverse kinds. Some of these activities are ‘external’ in the sense that they involve other agents8 and the environment; these include some developed in different markets in which the firm participates as a supplier or as a demander. Other activities of the firm are of an ‘internal’ nature, given that they affect the elements that form part of the firm itself. Among the latter, perhaps the most significant is precisely the endeavour to acquire, improve, adapt, coordinate, etc., the firm’s productive competencies (Nelson, 1991; Teece and Pisano, 1994; Hodgson, 1998B). In any event, all of those activities are carried out in real time and in an environment which is transmutable and subject to fundamental uncertainty. This transforms the conception of the relations between the economic agents (and in particular firms) and their environment, as it opens up the possibility that those agents may play a more active role, tending to modify real-world conditions. What this all means is that taking control is highly important, whence comes the need to plan strategically (Dunn, 2002A, 2002B). Strategic planning involves not merely choosing between different courses of action available, but also creating new ones (innovating) and preparing oneself to face and control the impact of unforeseeable events; in other words, strategic planning means not only setting in motion and coordinating the various elements that contribute to production, but also attempting to control as many factors as possible that influence the production and distribution processes with the aim of eliminating or reducing the impact of uncertainty (Galbraith, 1967; Dunn, 2002A, 2002B). Consequently, the need to plan strategically and to take control is not limited to activities in the markets, much less to the imperfect nature of these, but is linked to the nature of the environment and time: it is the fact that the activity of the economic agents carries on throughout historical—and not logical—time and in a context of uncertainty that makes planning necessary (Dunn, 2002A). 3. Labour-demand decisions within the firm 3.1. The link with strategic planning and its determinants As we have seen, firms are normally engaged in many activities, both internal and external, which are normally hard to compare or reduce to a common scale of evaluation. Moreover, these activities take place in historical and not logical time, in an environment that is subject to the existence of fundamental uncertainty. In this context, one may ask how and when labour demand decisions are taken. In this sense, the first aspect which must be borne in mind is that labour demand decisions must be taken before starting (or varying) production—or, more correctly, all of the firm’s activities—and in a context in which this production takes up (real) time. Therefore, labour demand decisions would appear to be necessarily linked to the enterprise’s plans, which are normally established by the members of the organisation’s management team and designed in an environment subject to uncertainty (which calls for strategic planning); indeed, the design of those plans is one more activity of the many that go on within the firm. This connection between labour demand decisions and the firm’s planning has numerous consequences, of which we can only mention some. The first of these is that the content of these action plans (and therefore labour demand decisions) are constrained by the competencies of those who draw up those plans (Teece, 2007) and by their psychological and emotional characteristics—evoking the concept of ‘animal spirits’—since in an environment subject to uncertainty, these play an important role in the decision-making process (Dequech, 2003); what is more, the defining of those plans is not unrelated to the objectives of the various individuals and groups that participate in their design in some form or other, nor is it unrelated to the power configurations within the firm. Second, the content of the plans is not unrelated to the path followed by each firm, as this is constructed through a dynamic process that is dependent upon the past. Third, the content of the plans (and therefore, demand decisions) is also influenced by the intrinsic nature and characteristics of the various activities to be carried out. Thus, for example, the more predictable and stable the volume of activity to be carried out, the easier it is to take labour demand decisions and the more likely it is that this stability will be reflected in the duration of employment relations. Finally, the level of uncertainty in which each of the firm’s activities is conducted has a significant impact on the design of its strategic planning. In this context, the capacity to take control of the various factors that could influence the conduct of the firm’s activities and their results plays a key role, as it contributes to reducing uncertainty and therefore can be reflected in labour demand and its characteristics. Hence, the control over the demand for the product makes it possible to plan the volume of labour demand, the control of prices reduces the impact of variations in labour costs, control of innovation assists in planning of the productive competencies required to carry on the activity, etc. Evidently, this in turn means that the differences in terms of capacity of control among different firms can play out as differences in labour demand decisions. 3.2. Labour demand as a demand for productive competencies In this context, we may ask what the firm needs—or, in other words, what it demands—in order to carry out the activities that have been planned strategically. As we have seen, the firm needs various competencies or productive capabilities, part of which are contributed by individuals. Hence, labour demand appears to be associated with a demand for productive capabilities. As discussed, these competencies may differ widely; although some are essentially physical (such as strength), in general they are of cognitive nature (knowledge and skills, acquired through some type of learning), and so their origin and evolution display a series of particular characteristics that must be taken into account. Thus, for instance, these competencies may differ according to their complexity or the difficulties that human beings experience in acquiring them; this may in turn affect the firm’s chances of incorporating them and the degree to which they can be replaced by others. On the other hand, individual competencies tend to expand simply through use, experience and learning by doing, and then to depreciate or disappear altogether if unused (Seccareccia, 1991; Lavoie, 1992; Foss, 1993; Hodgson, 1998B). Moreover, like any cognitive process, capabilities acquisition by the individual is conditioned by the influence of the socioeconomic phenomena that characterise the different social environments in which this knowledge is produced (Hodgson, 1998A, 2003) and, therefore, it has in its origin a certain character that is specific to the context (Teece and Pisano, 1994). This means that some of the competencies that the firm needs can be acquired by individuals outside the organization, but there are others which, by the very nature and characteristics of the cognitive process—in particular, due to its context-specific character—must be created and transmitted internally (Penrose, 1959; Foss, 1993; Teece and Pisano, 1994; Hodgson, 1998B). Indeed, the firm, through the influence of the set of socioeconomic phenomena that are part of the organization, may be able to create, improve and transmit competencies to the individuals that form part of it and do so more appropriately than if they were acquired from outside the company (Hodgson, 1988, 1998B; Kogut and Zander, 1992; Teece and Pisano, 1994). This is the case, among other reasons, because much knowledge cannot easily be codified or communicated verbally, and so its transmission and learning cannot be based upon a process of formal teaching, but is produced through constructed knowledge and imitation generated by participation in—and interaction with—the other individuals and with the socioeconomic phenomena that are part of the organization (Hodgson, 1988) or in a process of learning by doing; in other words, this is tacit knowledge (Polanyi, 1966) and is of a social character. This fact has a crucial effect on the process of the firm’s demand for labour, as it means that the acquisition of some of the competencies through the market is at times not possible or advisable; on the contrary, the need to create and transmit these competencies internally is one of the raisons d’être of internal labour markets and, in general, of long-lasting labour relations. Furthermore, there are situations in which the incentives of markets may work to the detriment of knowledge transfer and learning (Hodgson, 1988, 1998B; Teece and Pisano, 1994). Meanwhile, the specialization and dispersion of productive knowledge mean that it must be coordinated; in this regard, the socioeconomic phenomena that are part of the firm can prove very useful not just for generating this knowledge, but also as an instrument for coordination, bringing together the competencies more effectively—at least on many occasions—than the socioeconomic phenomena of the market itself9 (Teece, 1982, 1986; Hodgson, 1988; Kogut and Zander, 1992; Teece and Pisano, 1994; Langlois and Foss, 1999; Becker, 2004). All of this suggests that within the enterprise there is an additional productive activity going on, one that is associated with the creation, improvement10 and coordination of productive competencies. As well as affecting the possibilities of replacing these competencies, this fact calls for the creation of internal configurations (such as systematic configurations of job positions, with more or less organised relationships between them) that are capable of producing and passing on these competencies. This idea already played an important part in the earliest theoretical explanations of internal labour markets and labour market segmentation (Doeringer and Piore, 1971; Piore, 1975, 1980; Thurow, 1975). In any case, it is necessary to stress that this is a process with uncertain outcomes, one which takes time and is not independent of the organization’s other competencies or of the socioeconomic environment in general. Moreover, the presence of uncertainty complicates the very awareness of the competencies that the firm needs, because at times, it proves difficult to identify these needs—among other reasons, because sometimes it is difficult to know what relationship each has with the firm’s results in its various activities (Foss, 1993; Teece and Pisano, 1994; Becker, 2004)—and, particularly, to know how these needs will evolve over time, because, among other reasons, reality is transmutable—and therefore useful competencies to develop in this reality can change at any time—and because the capacity for innovation is also a relevant competency. In effect, innovation, understood as the creation of new knowledge or new combinations of knowledge, combined with other elements (such as the need to search for new uses of resources available to the firm that are not being conveniently used), can lead to the appearance of new products and processes and, in general, the diversification of the firm’s activity. This idea was already present in the vision of the firm by Penrose (1959). Furthermore, Penrose (1959) emphasized that a firm’s demand (in both volume and composition regarding the type and characteristics of products) is not provided beforehand but rather depends on the characteristics of production and the firm’s actions (a generally accepted idea within institutional and post-Keynesian economics, for example). In this context, identifying the competencies that a firm ‘needs’ is a difficult task because the characteristics of production and demand are not available and all are interdependent. Finally, the fact that a portion of the competencies contributed by individuals are created within the firm supports the idea, frequently emphasised, for example, from a post-Keynesian perspective, that the supply and demand of labour are interdependent. Indeed, if a large proportion of the competencies that individuals bring to work are created or developed through the learning that occurs in performing their working activities, this means that the ‘quality’ of the supply is also interrelated with the number and characteristics of jobs in an economy (Eichner, 1979). Furthermore, the perspective of labour demand advanced in this paper suggests that a different conception of labour supply is desirable, which recognizes that essential elements constituting the contribution of individuals to work include their capabilities or productive competencies. The cognitive nature of these capabilities must be recognized as well as, therefore, their distinctive features in terms of their origin and evolution. (This recognition would generate a radically different analysis than that afforded by, e.g. the theory of human capital). A conception of labour supply coherent with the vision of labour demand asserted in this paper can be found in Fernández-Huerga, et al., (2017). 3.3. The demand for competencies incorporated in individuals: some consequences of this embedding As observed immediately above, labour demand is, in its origin and essence, a demand for productive competencies. However, it does not concern any type of competency but rather those that are incorporated into human beings. This fact has many consequences, of which we shall highlight two. The first of them is that although what the firm originally needs to handle its various activities are productive competencies, normally these cannot be obtained individually in the markets, but must instead be obtained by hiring—the services of—individual people, each one of which possesses or may possess many competencies. This means that the firm must redesign its demand for competencies to match up with the individuals that provide them and with the various tasks that need to be performed. More specifically, what the firm does is to organize the various activities to be carried out—and map the competencies required to those activities—then include or link them to job descriptions, which may then be assigned to individual employees. In other words, the firm becomes an organized system of job positions, each of which is associated with one or more tasks or activities to be carried out by the employee. The design of the system of job positions is a decision for the senior management of the organization, and so it is conditioned by the competencies and objectives of the individuals who work at the management level—as well as by the socioeconomic phenomena integrated in the firm—and is dependent on the past and changing in time. In summary, labour demand, which is originally a demand for productive competencies, becomes, in a certain sense, a demand for individuals, which has several consequences. First, it is a source of ‘indivisibilities’ (as an individual may have many competencies) and can contribute to the accumulation of an inventory of competencies that gives rise to surplus capacities within the firm. This tendency for surplus capacities to appear is further driven by the fact that the competencies possessed by individuals are of a cognitive nature, since this also means that they tend to increase and/or develop as the productive activity is carried out (Teece, 1982; Loasby, 1998). This idea was already present in the view of the firm by Penrose (1959), who not only recognized the existence of unused productive services that could be provided by the firm’s resources but also emphasized the role that these unused services could play as a motor for growth and the firm’s diversification11—although, as Richardson (1972) emphasized, this possibility is basically concentrated in the development of new activities that require capacities similar to those the firm already has. In addition, it generates the need for many new types of laws, regulations, agreements, codes, conventions, norms, rules, etc.—associated with the socioeconomic phenomena that form part of the firm, or outside the firm—in which the agents draw upon (consciously, in most cases, although occasionally unconsciously) to identify and demarcate which capabilities among all those that individuals possess can be utilized by the firm and which ones cannot. Finally, this design simultaneously throws up a series of relationships among the various job positions in the organization and among these and its physical capital. Some of these relations are flexible, so that jobs can be added or eliminated without altering the company’s internal configuration or the performance of the various activities in which it is engaged, but sometimes these relations are more or less fixed; this once again imposes a certain kind of indivisibility in the productive activity and connects with the view frequently highlighted by post-Keynesian economists that most enterprises tend to be affected by the prevalence of technical coefficients of production that are (quasi-)fixed. The second consequence of the fact that some competencies are embedded in human beings is that in order to put them to work, a certain degree of ‘effort’ (understood in a broad sense) is required, which suggests a substantial difference with respect to the firm’s other competencies (such as those contained in physical capital). In other words, the human activity within a firm does not depend only on knowledge or skills of the individuals who work in it but also on aspects related to their motivation. Clearly, the orthodox view also incorporates this idea in some ways, but it does so starting from a very narrow and particular conception of human motivation, focused on the single objective of utility maximization and essentially egotistical principles that define moral hazard or opportunism12—without including other psychological traits and internal motivation—to the point of converting all potential workers into necessarily lazy, idle and even malevolent people (Spencer, 2004). Confronting this view, it is necessary to acknowledge (as is customary within post-Keynesian economics) that human motivation is a complex phenomenon, which is directed to the satisfaction of a more or less hierarchical system of needs and wants; these needs and wants—which can be material or immaterial—are not always comparable or reducible to a common scale of valuations, nor therefore are they mutually interchangeable (Georgescu-Roegen, 1954; Lutz and Lux, 1979; Eichner, 1985; Lavoie, 1992; Reisman, 2002). From this perspective, it can be seen that it is a severe distortion of reality to suppose that workers will always seek to minimize their effort or that they will behave in a malevolent fashion (Spencer, 2004); further, we may not even assume that the various aims that workers may have will necessarily run counter to the interests and goals of the organization for which they work. Nevertheless, it is true that in some cases the needs and wants of individuals who work in a firm may not coincide with the various objectives that it pursues, although the extent of the divergence may be more or less extreme. Faced with this possibility, the need arises to establish some control instruments or tools (understood in a broad sense) to bring the interests of the workers into line with those of the firm. To do this, different systems of incentives and sanctions can be put in place, particularly through the management of wage rewards;13 however, the conventional literature may have placed too much emphasis on this (Eichner, 1979), as it must not be forgotten that remuneration is not the only external incentive that can apply—work can contribute elements different to wages and may indeed become a means whereby the individual can satisfy his or her non-material needs (Appelbaum, 1979; Eichner, 1979; Kaufman, 1998; Spencer, 2006, 2015)—moreover, external stimuli are not the only drivers of human behaviour (we must admit that behaviour can also be driven internally). In any case, the setting of incentives and sanctions is not the only means the firm can avail itself of to align the workers’ objectives with its own. Indeed, both the identification of the system of needs and wants of each individual and the determination of the levels of aspiration considered satisfactory are cognitive processes and, therefore, are conditioned by the set of socioeconomic phenomena that are part of the environment14 (Hodgson, 1988; Kaufman, 1989). This leaves open the possibility that the firm, through its constituting socioeconomic phenomena, can influence the motivation of the individuals that work for it (in terms of their aims) and, thereby, influence their behaviour15 (Nelson and Winter, 1982; Hodgson, 1988; Kaufman, 1989; King, 2002; Becker, 2004). Moreover, one must also recognize that in itself, setting the level of effort considered to be ‘normal’, ‘acceptable’, ‘desirable’, etc., is in part a cognitive process and that, as such, it is influenced by the socioeconomic phenomena that are part of the organization16 (Seccareccia, 1991; Lavoie, 1992). 3.4. The labour demand decision-making process and its relative independence from the wage-setting process The fact that labour demand decisions are linked to the firm’s action plans means recognizing that, as a general rule, it is the variations in those plans (in their quantitative dimension or in their content and composition) that generally produce variations in labour demand. Indeed, in the real world, those responsible for these decisions are not continually making calculations and evaluating possible new hires. On the contrary, these decisions are generally taken only at certain times. Apart from when vacancies arise in some existing position—that would generate the need to adopt allocation decisions (which will be discussed later) but not decisions about variation in the volume of competences and/or individuals—or when there is a redesign of the system of job positions that creates a new position that is not covered, these decisions tend to arise when the firm’s action plans change and therefore its needs for productive capabilities, either because the content of the activities to be carried out changes (and, as a result, the make-up of the competencies that the firm demands) or, normally, because the expected volume of the various activities to be carried out changes. This last point is usually linked to variations in the expectations of the demand, which generate a change in the overall amount of planned activity. Obviously, this idea connects with the effective demand principle, according to which the level of employment is determined outside the real wage-employment aggregate space (in other words, the conventional labour market). More specifically, fluctuations in expected effective demand spur changes to labour demand plans (implying the important role of uncertainty in these decisions). Furthermore, decisions concerning the volume of planned labour demand—as it happened with the decisions on the strategic planning of the activities of the firm or with the decisions on the design of the system of job positions, with which they are related—are made by specific people within the organisation and therefore are shaped by the competencies and psychological traits of these people, which could influence the development of their understanding of the future or expectations. In any case, this does not mean that wages and wage variations have no influence at all on labour demand decisions, but it does mean that they do not play the predominant role attributed to them in neoclassical economics. Indeed, as we have seen, the assumptions on which the neoclassical analysis of labour demand is based determine that the decisions in this area may be based upon a simple comparison between the income that hiring an additional unit of labour would produce and the cost that this would incur. In other words, each firm decides the units of labour that it wants to demand, depending on the current wage. However, in the real world, it is normally impossible to tackle labour demand decisions on the basis of the procedure whereby one endeavours to match the marginal revenue product and the marginal cost. This is the case not just because the presence of uncertainty hinders in the strict sense the implementation of decisions couched in terms of optimization (Simon, 1976; Hodgson, 1988, 1997; Lavoie, 1992), but also because it is normally impossible to know beforehand—that is, before starting the productive activity—and to quantify on a common scale of value all of the costs and benefits that hiring another worker may produce (as well as not hiring one). Furthermore, in the real world, wages are not set by an ethereal and impersonal labour market, nor are they normally determined in conjunction with and at the same time as determining the amount of labour required. On the contrary, wage-setting is the result of a process of dispute or negotiation of some kind, contingent upon the distribution of power between the parties and the influence of all socioeconomic phenomena that are part of the environment (Robinson, 1937; Appelbaum, 1979; Woodbury, 1987). In effect, the wage decision-making process is shaped by a set of rules, norms, regulations, codes, procedures, precedents and values that constitute the mechanism for determining wages. A mechanism can be defined (Fleetwood, 2014A, 2014B) as a systematic configuration or cluster of socioeconomic phenomena that are consciously and/or unconsciously reproduced or transformed by the agents who rely on those phenomena when conducting their plans and activities (in this instance, the plans and activities related to wage determination). These phenomena contribute to determining what role is played by the various agents in the wage-setting process and how this is played out; in other words, the socio-economic phenomena establish the ‘rules of the game’ that govern the wage-setting process (I use here the term ‘rule’ in a generic or colloquial sense and not as a specific type of socio-economic phenomenon). As such, these phenomena causally condition the plans and activities of the agents who participate in the wage determination process. In fact, another of the activities that the firm must engage in is precisely to participate in the process of setting wage levels in accordance with the current ‘rules of the game’, that is, interacting with the set of socioeconomic phenomena constituting the mechanism for wage determination and with the other agents involved (Fleetwood, 2014B, p. 254). An enterprise’s decisions in this area, as in any area, are strategic decisions (Shapiro and Sawyer, 2003), that is, they are taken in a context of uncertainty and taking into account the different sub-goals of the firm which can influence. This means acknowledging that these decisions are dependent on the past and are taken with a view to achieving as much security and control as possible. In fact, the control over the wage-setting process is usually an important objective for most firms, as it enables their activities to be planned and carried out in a world in which they take up real time and that is subject to fundamental uncertainty. Moreover, these decisions are not independent from the firm’s opportunities of managing the rest of the cost or manipulating the prices of its products. Indeed, another of the elements that partly disconnect labour demand decisions from wages is that wage variations may perhaps be transferred—completely or partially—to price variations.17 In fact, another of the enterprise’s activities is to take part in the process of price-setting according to the ‘rules of the game’ established by the socioeconomic phenomena that form part of the environment, namely, the phenomena that constitute the price-setting mechanism of the market in which the firm operates (Hodgson, 1988; Fernández-Huerga, 2013). According to these ‘rules of the game’, what happens in most modern markets is that one of the parties to the transaction (normally the seller) has the power to set the price marks (Galbraith, 1967; Hodgson, 1988; Tool, 1991; Sawyer, 1993; Jackson, 2007), which does not of course mean that there is total discretionality or that there are not many other determining forces. For this purpose, the firm usually falls back as a guide, in a more or less rigid manner, on some kind of standardized procedure, understood as a method or form that agents use (normally consciously) as a pattern or template for accomplishing a certain action, such as for instance taking as a benchmark some measure of unit costs and adding to that an additional margin (Kalecki, 1954, 1971; Tool, 1991, 1993; Lavoie, 1992; Downward, 2000). The generalized application of this kind of procedure, taken to an extreme, would lead to cost variations (including wage costs) having a knock-on effect on prices, while variations in demand would tend to cause changes in production and therefore in the level of employment. To sum up, then, the foregoing leads to the recognition that there is a relative disconnect—albeit of course not total—between labour demand decisions and wages (Appelbaum, 1979; King, 1990; Seccareccia, 1991; Lavoie, 1992), or at the very least we can say that the type of direct causal relationship that appears in orthodox economics—which is a law-like and causal relationship, based on the supposed existence of event regularities between changes in the demand for labour and changes in wages rates—does not exist (Fleetwood, 2006, 2014C). Indeed, if we accept that the social world (and, in particular, the ‘labour market’) is an open system that is characterized by the frequent occurrence of irregularities in events, then labour supply and demand curves cannot exist, and wages cannot be determined by the intersection between them (Fleetwood, 2006, 2014C). This view is consistent with the notion—emphasised at the macroeconomic level within a number of areas in the economics literature—that the level of employment and nominal salaries are determined separately (King, 1990). 3.5. The process of assigning individuals Finally, labour demand decisions require the selection and assignment of specific individuals to jobs. This is the case, once more, because normally staff assignment does not take place at the same time as wage-setting and determining the amount of labour required. In this regard, the first point that needs to be made is that these decisions are taken by specific individuals within the organisation—as it happens with other decisions related to these, such as decisions on the strategic planning of the firm’s activities, the design of the system of job positions (and its interrelationship with the activities to be performed and the required competencies for these activities), or decisions on the volume of planned labour demand—and are thus shaped by their personal competencies and characteristics. Furthermore, these decisions are made in a context subject to the presence of fundamental uncertainty, and so what usually happens is that the individuals responsible for making these decisions do not know who are all of the individuals that are potentially available to occupy a given job, nor what is their endowment of capabilities and how they will vary over time—among other reasons, because some of them have yet to be created—nor how motivated the individuals are or what their behaviour is like, nor how their effort is likely to evolve, etc. In other words, normally it is not possible to know—in the sense of having perfect knowledge or subject to probabilistic risk—what the contribution of each potential worker will be, either in terms of productive competencies or in terms of effort. On the contrary, many of these aspects can only be revealed—and even then at times only partially—with the passing of time. This connects with the distinction made by Penrose (1959) between the resources available to a firm (including human resources), which are what one can normally buy in markets, and the productive services that can be obtained from them, which are actually the inputs that the firm needs. Knowing in advance the services to be obtained from each resource is an impossible task (among other reasons, because those services have yet to be produced), which makes decisions on resource acquisition difficult. It is in this context where management skills (in a broad sense) acquire their true meaning and relevance and become a crucial element in the operation of the business. In any case, the presence of uncertainty means, first, that agents responsible for making these decisions rely, consciously or unconsciously, on the use of procedures, conventions, precedents, rules or the like, that enable the assignment to be made even if the knowledge obtained may be imperfect (Keynes, 1937; Simon, 1976; Lavoie, 1992). In doing so, agents in turn contribute to reproducing and/or transforming these socioeconomic phenomena. In short, these phenomena constitute the market allocation mechanism and causally determine the actions of the agents in that field. Thus, for instance, if the selection is dealt with in an internal labour market, what normally happens is that there is a set of conventions, procedures, rules and so on, that conditions and guides decision-making in this area and that constitutes the ‘system of promotions or mobility’ of the firm. On the other hand, if one resorts to the external labour market, what tends to happen is that the decision-maker falls back on devices for recruiting such as interviews or tests that can reveal (albeit imperfectly) the individual’s traits or which assess credentials or indirect indicators that can be found in each individual’s resume and background (education, experience, etc.) or are linked to their personal characteristics (age, gender, ethnicity, etc.).18 Second, the presence of uncertainty means that decision-making depends not only on knowledge—always imperfect and fallible—which can be built up about those individuals and their different attributes, but also depends on the confidence—not always numerically quantifiable—which the decision-maker(s) have in this knowledge. What this means is that the source of the knowledge or the way in which it has been constructed influence the decision-making process and its outcomes (Dequech, 1999, 2003, 2006). Thus, for instance, if the person responsible for taking job assignment decisions is faced with a choice between different individuals whose attributes he or she only partially knows and even then imperfectly, the decision-maker may opt for one of them simply because that knowledge comes from personal experience (e.g. because it may be a worker of the same company who formerly held another position) or from persons he or she trusts, such as friends or family members. In fact, the possibility of generating this kind of knowledge and trust is one of the arguments traditionally deployed to justify the existence of long-lasting labour relations and the construction of internal labour markets. This means that labour demand decisions, and in particular those relating to assignment, are not independent from or separable from the individual who supplies this labour (Seccareccia, 1991). 4. Conclusion Throughout this study we have endeavoured to present the essential elements of an alternative view of labour demand to the neoclassical one, taking as our starting point the conception of the firm derived from the capabilities theory. In general, a firm can be defined as an organisation that is dedicated to undertaking an activity for producing goods or services and that is constituted by: (a) a set of socioeconomic phenomena that are consciously or unconsciously reproduced or transformed by various agents; (b) people (e.g. employees) who consciously or unconsciously reproduce and/or transform those socioeconomic phenomena; and (c) artefacts used to perform the organisation’s various activities (‘physical capital’). According to the capabilities approach, however, a firm can also be considered a systematically arranged combination of competencies or productive capabilities of a different type. Specifically, one part of these competencies consists of the capabilities contributed by the individuals who work for the firm; another part, by the socioeconomic phenomena constituting the firm (and that can directly shape the plans and actions of the individuals within the firm, particularly their productive knowledge); and a third part, by the organisation’s physical capital. In this context, labour demand decisions would appear to be linked to the (strategic) plans of production that a firm may have. This in turn implies, among other things, that labour demand decisions are conditioned by the competencies, interests and psychological traits of those who elaborate those plans, by the nature and characteristics of the activities to be performed, by the past and by the enterprise’s trajectory and by the power and capacity the firm has to gain control over the various factors that could influence the performance of its activities. In order to carry out those activities, the firm demands productive competencies, some of which are supplied by individuals. Most of these competencies are of a cognitive nature, which influences labour demand decisions via a number of routes. Thus, these competencies may differ depending on how complex or difficult to acquire they are, affecting the firm’s chances of incorporating or substituting them. Moreover, the competencies available are influenced by the set of socioeconomic phenomena that form part of the environment in which they have been generated, which is susceptible to producing differences in knowledge. Finally, the competencies that the firm needs may differ in terms of their specificity, that is to say, the need for those competencies may be internally created or developed. Indeed, an important part of the competencies that the firm needs must be produced or coordinated internally, through a process that necessarily takes time and whose results are uncertain. This helps explain the creation of internal configurations that favour the process of production and transfer of capabilities—such as internal labour markets—and leads to the recognition that the characteristics of the labour supply are contingent on the characteristics of the demand, which runs counter to the assumption that they are unrelated. Moreover, the fact that those competencies are possessed by human beings has, among others, two consequences that influence labour demand decisions. The first of these is that the firm must redesign its demand for competencies and the activities to be carried on related to the jobs that may be taken up by the individuals, which is a source of indivisibilities and may contribute to the emergence of surplus capacities. The design of this system of job positions is influenced by the competencies and aims of those who participate in setting it up and also by the past. What is more, its design generates a series of relations between the various jobs and between these and the physical capital, some of which are inflexible. Second, the fact that these competencies are possessed by human beings implies that in order for them to be deployed some effort is required, which implies the recognition that this implementation also depends on aspects related to motivation. This gives rise to the need to set up control instruments that permit the firm to align the workers’ interests with its own, which can be achieved, for example, by designing the wage system or the system of job positions and the rules, procedures and conventions that guide mobility between these positions. In any case, one must also accept that the firm, through the socioeconomic phenomena that partly constitute it, can influence the setting of the level of effort considered normal or acceptable, and can also influence the identification of the ordered configuration of the workers’ aims, in order to bring it more closely in line with the interests of the organization. The fact that labour demand decisions are linked to the firm’s action plans further leads to the recognition that those decisions tend to be activated, in most cases, when those action plans are changed (in quantitative terms or in their content and composition). This fact, which is consistent with the principle of effective demand, does not mean that wages and wage variation do not play some part in labour demand decisions, but it does mean that they do not play the predominant role that is attributed to them in neoclassical economics. This is the case, among other reasons, because in the real world salaries are not determined in conjunction with the amount of labour in an impersonal market. On the contrary, wage-setting is the result of a negotiation process of some kind, conditioned by the set of socioeconomic phenomena that form part of the environment and by the distribution of power between the parties. Finally, labour demand decisions ultimately require the selection and assignment of specific individuals to jobs. Therefore, the most salient point is that such decisions are taken in a context subject to fundamental uncertainty. This leads to the fact that decision-making tends to rely, at least in part, on the use of procedures, conventions, rules, precedents and so on, that make it possible to assign the worker even if the knowledge is imperfect. 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Many of these factors have been specifically questioned from different areas of the heterodox literature, particularly from post-Keynesian and institutional economics (Eichner, 1985; Lavoie, 1992; Dunn, 2002A). 2 It is true that neoclassical economics relaxes this and other assumptions on certain occasions, although it always does so after the demand function has been derived. It could be argued that neoclassical theory assumes whatever is necessary to ensure mathematical tractability and to protect its basic principle: wage rates and the quantities of labour demanded are functionally related (Fleetwood, 2006). 3 I use the term ‘realistic’ in the sense of avoiding the use of knowingly false assumptions. This usage does not eliminate the possibility of abstraction and simplification in the process of theorizing or model building. As explained by Fleetwood (2011, p. 23), a model can be both abstract and realistic. 4 The idea of linking the analysis of labour demand with a conception of the firm based on the capabilities approach is not entirely new. Indeed, some elements of this are already to be found in the anthropogenic view proposed by Eichner (1979), although at that time the competences-based theory was not fully developed. See also King (2002, p. 73). 5 As Loasby (2009, 2012, 2014) has repeatedly argued, the entire conception of knowledge as an evolutionary process and of the firm as a system that contributes to the growth of knowledge connects with the conception by Simon (1969) of the architecture of complex systems and, in particular, of the role of ‘quasi-decomposability’ in the evolution of such systems (Loasby, 2009, p. 27). 6 Fleetwood (2014A, 2014B) explains the interaction between agents and socioeconomic phenomena from the particular perspective of critical realism and more specifically from the morphostatic-morphogenetic approach developed by Archer (1995, 2003). However, the essential elements that characterize this agency-structure (or agency/institutions) model are compatible—especially when certain terminological ambiguities are eliminated (Fleetwood, 2008A)—with the view of many institutional and post-Keynesian economists, such as Hodgson (1998A, 2003, 2006), Fernández-Huerga (2008) and even Lavoie (1992). 7 The analysis of how routines emerge and evolve—and therefore how organizations ‘learn’—is very broad and diverse, though as Hodgson (2008) himself acknowledges, also incomplete. For a first approximation, see Becker (2008) or Noteboom (2009). 8 Among the activities developed by companies, some involve the establishment of some type of economic relationship with other companies. In this sense, Richardson (1972) lays the foundation for the development of a theory of inter-firm relations that, using the concept of capabilities as a starting point, is often considered a logical extension of the Penrose view of the firm. 9 Here, the implication is not that the coordination of competencies within the firm is always better than it is through other alternative means. Indeed, this possibility is conditioned by many factors, such as the type of competencies to be coordinated—for example, the degree of similarity and complementarity among them, using the terminology of Richardson (1972)—the rate of change or innovation that these competencies may be subject to (which connects to the degree of uncertainty) or the consequences that these changes may have for the firm’s other competencies and for the internal organization of the firm (Langlois, 1992). 10 The idea that a process of ‘improvement’ of productive competencies is produced (or can be produced) within a firm merits two comments. First, this statement does not mean that necessarily and in all cases will be produced an ‘improvement’ in the strict sense of the word or that the process is linear and continuous. In a world fraught with fundamental uncertainty, knowledge is imperfect and fallible; in addition, in an environment subject to change that is moreover unpredictable, the competencies that result in productive solutions that are satisfactory for one environment could cease to be so when the environment changes (Dosi and Egidi, 1991; Hodgson, 1997). Second, when the process of ‘improvement’ of the competences is mentioned, reference is made, in any case, to its applicability to production, and not necessarily to its consequences on other areas of the human being (e.g. autonomy, self-esteem, self-fulfilment). Specifically, there may be knowledge or attitudes that are positive for the productive activity (in particular, for the interests of the firm) and that nevertheless limit the capacities of human beings to be and to do in other areas. See Spencer (2015) or Fernández-Huerga, et al., (2017) for an initial analysis of the connections between work and the possibilities of being and doing of human beings. 11 Specifically, Penrose (1959) emphasized the role that managers could play in this process, noting that there were managers who could discover new forms of using existing resources or new combinations of resources in response to the ‘visions’ of the firm’s existing opportunities; these ‘visions’ are cognitive constructions and can vary from some individuals to others. 12 It is true that orthodox economics can include behaviour guided by objectives other than self-interest (e.g. altruism, justice). Nevertheless, it is usually done in such a way that those objectives appear as comparable and reducible to some kind of individual ‘benefit’ or ‘satisfaction’—through the comparison of ‘income’ and ‘costs’, among other reasons to be able to apply conventional analytical tools—obscuring therefore the essence of human motivation as a process directed towards the satisfaction of a complex system of differentiated material and immaterial needs (Lutz and Lux, 1979; Fernández-Huerga, 2008, 2012). 13 For example, see Bewley’s intriguing analysis (1999). 14 In fact, the set of socioeconomic phenomena present in the environment, not only within the firm but also associated with other organisations (such as schools, universities or even the family), actively participate in creating and communicating ideas, attitudes and, in general, competencies that (ideologically) educate individuals to prepare them to work in ways that reflect the interests of firms (Fleetwood, 2011, 2014A). 15 This is consistent with the concept of bureaucratic control developed by the theory of labour market segmentation, in particular by the approach arising from radical political economics (Edwards, 1979; Gordon et al., 1982). 16 In general, we must emphasize that the connections between the firm’s objectives, employee motivation, the design of incentives or control instruments and the very process of the development and evolution of competencies within the firm are complex. In this sense, it is crucial to develop a set of socioeconomic phenomena that shape the patterns of behaviour within the firm to foster the maintenance, development and implementation of the capabilities that have proven effective, in addition to others, to identify and react to problems and opportunities that may arise. Naturally, managers play a key role in this process, in both its creation and its possible modification (Barnard, 1938; Drucker, 1955). In this sense, there are different management styles that can lead to different results, depending on the context in which the firm unfolds, as explained by Burns and Stalker (1961) in their distinction between mechanistic and organic systems of management. 17 Of course, this idea is also reflected in orthodox economics, albeit from a different ontological perspective and methodology. In particular, it is usually included as one of the Marshall-Hicks conditions for determining the elasticity of labour demand. However, these conditions assume a considerably larger role because they become essential assumptions to ensure event constancy and systemic closure. Thus, without these conditions, the existence of a labour demand curve as such could not be sustained (Fleetwood, 2006). 18 All of this leads to the selection process being conducted through ‘screening’ of some kind (Thurow, 1975; Dugger, 1981), so that even if there is an excess of labour supply this does not necessarily produce an adjustment (decrease) in wages that would, as the case may be, empty the market, but rather the credentials or characteristics required to occupy the job are what are adjusted (augmented). © The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

Journal

Cambridge Journal of EconomicsOxford University Press

Published: May 23, 2018

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