Infrequently in human history, a series of developments arrive that are so startling, so contradictory to our understanding of the world we live in, that they alter forever the landscapes of work and home life. Such was the case with the Industrial Revolution in the late eighteenth and early nineteenth centuries. Now, according to Massachusetts Institute of Technology professors Michael J. Piore and Charles F. Sabel, co-authors of The Second Industrial Divide: Possibilities for Prosperity (Basic Books Inc., 1984), we may have reached another such historical juncture.

The first industrial divide ushered in the reign of mass production, with rigidly defined divisions of labor, standardized products, and large-scale corporations. The new developments portend a shift toward an economy of "flexible specialization," with less hierarchical organizations, more (and more customized) consumer goods, and increased market share for smaller-scale companies.

Piore and Sabel's prognosis is both disturbing and hopeful. The bad news is that the economic turbulence of the past decade is neither temporary nor an aberration.Mass-production society is under siege from forces that are so powerful that the halcyon days of the postwar period have been banished forever. The good news is that out of this constant turmoil may emerge a less rigidified economy: efficient, yet on a human scale, and flexible enough to avoid the extremes of the business cycle. Piore and Sabel caution that nothing is for certain, as the mass producers have yet to mount their final defenses, and small and medium-size companies still need to adapt quickly to the flexible technologies as they become available.

Piore and Sabel's provocative thesis was born, of all places, in a Paris cafe. The two had known of each other's work through mutual friends, but it was at this meeting in 1975 that Piore the economist and Sabel the political scientist began their decade-long collaboration. It led them to Italy, France, Germany, and the United States, where they searched for clues to the industrial transformation in interviews with businesspeople, labor leaders, government officials, and academics.

Their efforts were recognized when both men were awarded the prestigious MacArthur Fellowship, which is given annually to outstanding individuals. And The Harvard Business Review recently reviewed their book, The Second Industrial Divide, describing it as "quite simply, a tour de force. . . . It is a book that could become a landmark."

Piore, 44, and Sabel, 37, fit the image of serious scholars: spectacled, bearded, alternately thoughtful and animated, steeped in Industrial Age history, and yet deeply curious about the world around them. In Piore's MIT office -- lined with books, piled high with papers, with the requisite degree of clutter, a typewriter tucked into one corner and nary a personal computer in sight -- Piore and Sabel were interviewed for INC. by Karl Frieden.

INC.: You have an idea, we gather, that the whole course of economic history may be changing?

SABEL: Well, we believe that the industrial world has entered a crucial period. Mass production, with its hard-and-fast divisions of labor and standardized products, may be giving way to craft production, with its flatter organizational structures and greater variety of consumer goods.

INC.: But mass production has been the dominant mode of production in the twentieth century. Washing machines, televisions, automobiles -- much of what we associate with affluence is provided by mass producers. You're saying that this process is reversible?

PIORE: We dispute the notion that mass production is the one and only path of technical progress. Mass production, with its lower costs per unit of production, supplanted craft production during the first industrial divide in the nineteenth century. But the historical circumstances have changed. On the one hand, new technologies, like the computer, have developed, which have lowered the cost and increased the innovative capabilities of craft production. So you're getting a more dynamic craft system -- what we call flexible specialization.

At the same time, the costs of mass production have increased. A combination of the saturation of demand for mass-produced goods in the wealtheir nations, and more intensified competition for markets from newly emerged Third World mass producers has made the system more unwieldy and increased the cost of stabilizing demand within it.

INC.: So you believe that the mass-production economy as we know it -- with large companies turning out standardized products -- will follow the craft-production economy to the dustbin of history?

PIORE: Actually, mass production never completely displaced craft production. What happened was that craft production was subordinated and limited to certain subsidiary roles. It lost its technological dynamism and was no longer the engine of economic growth. This could happen to mass production. You would still have it, but it wouldn't be the lead element in the economy.

INC.: How is all of this going to play itself out? How will we know when we have crossed the industrial divide?

SABEL: Well, it won't be a specific event. It's sort of like war. A war is seldom decided by one battle: There are a lot of battles, and then finally, there can be a kind of cataclysmic event, the outcome of which is very uncertain until maybe the last hour. The same is true of an industrial divide.There are a whole series of little things that are shaping a new possible course, and eventually, they coalesce. The notion of a divide is not that there's a kind of clock ticking and that you get this sort of change every hundred years or so.

INC.: Could you be more specific about how the application of technology differs in mass production and craft production?

SABEL: Mass production is characterized by rigidity. It involves the production of standardized commodities, like toothpaste or refrigerators, using single-purpose machines that are built to make that commodity, and only that commodity. The guiding principle of mass production is the breakdown of every task into simple steps, each of which can be performed faster and more accurately be special-purpose machines and semiskilled labor.

Craft production is the reverse. In craft production, skilled workers use general-purpose machinery to turn out a wide and constantly changing assortment of goods for large but constantly shifting markets. It is based on the idea that machines and processes can augment the craftsperson's skill, allowing the worker to embody his or her knowledge in ever more varied products.In its more advanced form, craft production is a strategy of permanent innovation, an accommodation to ceaseless change, rather than an effort to control it.

INC.: So machines in craft production can make more than just one product?

SABEL: That's right. You can think of it almost like a musical instrument. That is, if you have a musical instrument, then you can have a thousand different people play anything, anytime at all, on it. Whereas in mass production, it's much more like a record; you can just play it. One is a way of expressing skill, the other is just a way of reproducing someone else's skill that has been literally grooved into the record.

INC.: So you think we're approaching the point where a rigidly structured mass-production economy will fade as a symbol of industrial efficiency? What will this do to the image of small businesses? Not too long ago, the popular perception of small businesses was that they were marginal enterprises that made money, not through innovation but through hard work, long hours, and self-exploitation.

SABEL: I think small-business people will continue to work long hours and exploit themselves. It's in the nature of these companies to do that, because they get enthusiastic about their work and they have to struggle to survive. But they will also be innovative, have a completely different image of themselves, and be perceived differently in American society.

The opportunities are much greater today for small, dynamic companies. Things are opening up for them. Just as mass production, with its large economies of scale, favored big companies, so flexible specialization, with its batch production, creates new possibilities for smaller companies. Technology will be used in a whole new way by these companies, and their relations with government and labor are probably going to change as well. I think they're facing a series of very big changes, and some of them are already emerging.

INC.: For example?

SABEL: One region we looked at closely was in central and northwestern Italy. In response to upheaval and strikes in the mass-production sector during the 1960s, a network of flexible small and medium-size companies developed, using more and more computer-controlled machines to adapt to rapidly shifting markets.

There was a whole range of new companies set up by middle-level managers or skilled workers from the larger companies. The small companies then began to look for a way to avoid dependency on the big companies they were often supplying, and that way was to develop independent products so that they could go to market themselves. They did this under conditions in which the world market was changing and new technologies were becoming available.

INC.: Did this occur primarily in the high-technology sector?

PIORE: Not at all. The small businesses operated in textiles, specialty steel, precision machine tools, luxury shoes, motorbikes, ceramic building materials, furniture, and industrial instrumentation. They weren't initially in high tech at all; they were in everything else.

SABEL: And now what's happened is that they have exploded into high tech, and there's a great fusion now going on between high tech and these very flexible companies in the traditional industries.

A world-famous example is the textile company, Benetton. The way Benetton works is that they have key stores located in all the fashion centers. As soon as they see what's selling, they've got the technology set up so that they adapt quickly to changing market conditions. For example, they can dye stuff that doesn't have to be dyed until after it's woven; so if they see that a color is taking off, they smash everything into that vat of dye, and two weeks later, it's in the stores.

INC.: Has the growth rate been faster in those regions of Italy where the new entrepreneurial activity is concentrated?

SABEL: Oh, yes, it's very clear. They call this area the Third Italy. It has flourished amid high inflation, labor unrest, and a national government stalemate. It's not just the statistics. When you visit this area you can physically see the boom in the economy.

INC.: In your view, the limits of a mass production-based economy have been reached. The world is perched on the precipice of a vast industrial transformation. What makes you think your crystal ball works better than the others?

PIORE: We don't think the limits have been reached in terms of the technological possibilities of mass production. We think the limits have been reached in terms of the institutional supports that you need for mass-production systems.

SABEL: The industrialized world is saturated with the classic goods of mass production. For example, by 1970, 99% of American households had television sets, refrigerators, radios, and electric irons, and more than 90% had washing machines, toasters, and vacuum cleaners. Because of this saturation, it has become more and more difficult to increase economies of mass production through the expansion of domestic markets alone. This has brought the major industrial economies into direct competition for one another's markets and for those of the developing world. This situation has been exacerbated by the transfer of mass-production technology to Third World nations, which now compete for mass-goods markets in the industrialized world.

Thus, in order to maintain growth, you have to include new areas of the world into the mass-production system. To do that would involve opening up Third World markets to mass production, redistributing income through the international monetary system to create the purchasing power there, and changing very complicated power relations between the developed and the developing world. That's one way of extending the mass-production system. Theoretically, you could extend it the same way the postwar system was built up, and some of that is going on, but there are a lot of political obstacles in the way.

INC.: You mentioned earlier the role that new technological developments were playing in reinvigorating craft production and making smaller-batch production more cost-competitive. Could you expand on that?

PIORE: The development of more flexible technologies, such as microcomputers and computer-controlled machinery, has lowered the cost of batch production as compared with either one-of-a-kind customization or mass production. The new kind of numerically controlled machinery is easily reprogrammable for an enormous variety of tasks.

INC.: What are some other examples of flexible machinery?

SABEL: One good example are these flexible steel minimills. There's a perfect case of people, from Big Steel actually, jumping off big steel and deciding that this is the wrong way to do it. This is an interesting case, because the electric-arc furnace technology that these minimills use is actually an old technology, developed for alloys. The technology was available, and they took it off the shelf and began to improve it and adapt it to new uses.

INC.: What about the impact of flexible production on labor relations?

SABEL: The United States had a system of labor relations that was very good for mass production. But once you begin to need constant reorganization, narrowly defined job categories and restrictive work rules get very cumbersome.

INC.: And this is because a more flexible technology requires a more flexible, less hierarchical work environment than mass production does?

PIORE: Yes, and you're moving that way all over the American economy.

SABEL: Flexible technology requires skilled workers. The whole point is that if you have flexible machines, then they can do a lot of things. Skill is the ability to make the machines do a particular thing. It's no good having a general-purpose machine if you have workers who don't know how to do a lot of things with it. Workers have to have the skills to use the nex flexibility in the machines, and they've got to have the ability to communicate quickly with the people who are doing the designing. It won't work otherwise. Rigid shop-floor relations inhibit the necessary degree of communication and participation. It isn't a question of being nice or not nice. It's a question of a different style of work dictated by changed circumstances.

The alternative dream, which no one really believes, is that you have a designer with a computer, and he designs the product. Then he touches a button, and the computer translates the thing to a set of specifications for numerically controlled machine tools. Then the machine builds the product. This sort of thing doesn't exist. And as long as it doesn't exist, to get this flexibility you need a less rigid work environment.

INC.: Has the consumer played any role in these changes? There's a theory, isn't there, that as consumers get more affluent, their tastes splinter, creating demand for more differentiated products.

PIORE: Well, in the 1950s, which was perceived as a great period of affluence in American society, there was an enormous amount of consumerism that was based on having the mass product, whatever it was, and everybody wanting the same thing. And now people want to be unique or different. For me, the turning point was the '60s. When I was an adolescent, everybody wanted to wear the same thing, but in the '60s, everybody wanted to look different. Now, maybe the range over which they wanted to look different was narrow, but it seems to me that's really a question of style, rather than something that emerges with affluence.

INC.: You don't think that greater disposable income in the hands of consumers is causing a mushrooming of the demand for less-standardized products?

PIORE: Listen, there's no question that tastes are changing, that seems indisputable to me. The question is, Why are tastes changing, and what's the relationship of that to production? And I guess what I think is that if mass production well still enormously more efficient than batch production and there was this shift toward changing taste, people would have to pay a very high price in order to indulge in their changing tastes. What has happened is that the cost of indulging individuality has fallen enormously.

INC.: Is it possible that new mass products will emerge, as the automobile or the television did, to capture a new generation of consumers for the mass-production economy?

SABEL: There is a paradox here, because the new sort of mass-production items, like the personal computer or the videocassette recorder, are very easily customized to suit individual taste. These are mass-produced items, but what's happening is that the actual hardware cost is going toward zero. It's getting cheaper and cheaper. All the money is being spent on adding things to it and making it into just the thing you want.

The whole success of products like the VCR is their adaptability. Just compare the VCR to the RCA Videodisc Player. The RCA Videodisc was a hard sell. All you could do was play it; you couldn't record on it. RCA understood it as an extension of television. People turned it on, and they got entertainment. The VCR is such a success story because the whole point is that you can customize the time you want to use it, and all those other things.

INC.: It sounds like the very strengths of mass production are now becoming liabilities.

SABEL: Yes, all the standardization of products, the specialization of machinery, the centralization of resources, the rigidity of work roles, and the clear subordination between the parent company and the smaller supplier companies, they are all becoming an albatross on the mass production system.

INC.: Can we get to some specific numbers? What evidence have you uncovered of a shift away from the mass-production economy? For example, has the small-business share of economic output increased in recent years?

PIORE: The share in the United States, at least, has not been changing dramatically. There has been a small increase in the number of small companies in relation to large companies. But I think what is involved is a change in the role of small and medium-size companies rather than a change in market share. We're moving away from a situation where the small company was typically subordinated to the large company and operated largely at its direction, and we're moving toward a situation where the small company is the dynamic leading edge of the economy. Smaller-scale companies are becoming less dependent on large companies; they are engaging in more cooperative and interactive relationships with larger companies.

INC.: Is it possible that the market share of small and medium-size companies will increase, perhaps dramatically, over the next couple of decades?

SABEL: It's conceivable. There are two things to bear in mind. One is that there is evidence in several countries of a turnaround, an increase in small-business share. This is true in Germany. There has also been a dramatic increase in Japan, not just of small-business market share, but also of the productivity of small business in relation to large companies. So there is some evidence, but you have to be cautious because of problems with data collection and definitions. The other factor is that there's a lot of internal decentralization taking place in large companies.That is, there is the move toward intrapreneurship.

INC.: Is that how large corporations will adapt to flexible specialization?

SABEL: It's a real possibility. There are a lot of ways to retain this flexibility within large companies without necessarily enlarging the share of small business. For this to happen, however, big companies will have to adjust, and they are aware of this. If they persist in maintaining their old culture, people will go off to form their own companies, and the small-business share will go up.But it could well be that the large companies will try to adjust by giving more space to their employees through profit sharing, greater autonomy, and the like. Many companies are already taking steps in this direction.

Nonetheless, as larger companies make their units more autonomous, the boundaries of the company get blurred. And some of these units will go off and become independent companies.

INC.: You are saying, aren't you, that entrepreneurship both inside and outside of large companies is bound to increase.

SABEL: Put it this way: The economic space in which entrepreneurs operate will have to be enlarged. What we now perceive as a sharp choice between the culture of a large company and going into business for onself will become less obvious. So there will be a lot of mixed forms, and the idea of small business itself will lose the kind of clarity that it had when it meant subordination. Anyway you look at it, this transformation means that entrepreneurship is going to grow.

INC.: You seem to focus primarily on the technological changes occurring in the manufacturing sector. Will flexible specialization be limited to industry?

PIORE: Oh, no, it's the same all the way through the economy. We've studied the changes as they occur in the manufacturing sector, but the same thing is happening in retailing, finance, and other service sectors.

INC.: Everyone seems to have an opinion these days on what's wrong with corporations or what part of corporate structure needs to be modified. In what ways do your ideas differ from those of other prominent critics, such as Peters and Waterman in their book, In Search of Excellence?

PIORE: We agree a lot with the other critics. I think we have diverged on distinct points that I would like to stress. We don't agree with the implicit idea in these books that American corporations have become old and are sclerotic. What we think is that the world has changed. It's not that there is a unique corporate form that is perfect for all circumstances; it's that the world of the moment is not the world that American corporations were designed to operate in. Without an analysis of the limits of mass production, these analyses are incomplete.

Second, while we don't doubt that large corporations can adapt to the new environment in ways that other critics are suggesting, we think there is another possible scenario, which involves the emergence of a more independent and innovative small-business sector.

INC.: What sort of advice do you offer companies that want to join the ranks of flexible craft producers?

SABEL: There is a threshold that smaller companies have to cross in order to move from their old methods to flexible specialization. The latter is, by definition, technologically dynamic: You're using the new technologies for controlling inventory, doing your accounts receivable, and producing. Meeting that threshold, taking advantage of the flexibility of the market, is the big challenge now for these companies.

One set of problems that emerges, characteristically, is with companies that were already pretty autonomous, but trapped in their minutia. Then, there is a second set of problems with companies that are more clearly linked into mass production, like the parts suppliers.

PIORE: Many companies think their goal is to find a product that can be mass produced. Their notion is that they will discover such a product, start mass producing it, and then sell out to a large corporation.

INC.: Or become big themselves?

PIORE: Yes, or become big. But generally, the expectation is that they're going to sell out. So they're engaging in all this creative activity, but they see it all as temporary. It's not their real business; it's just what they're doing until they've discovered this mass-production type of product. Part of what's involved in the transition to flexible specialization is the recognition that this is real life; that the chances of finding a product that you can mass produce are becoming smaller and smaller. What the large companies are increasingly looking for in their mergers is the dynamic part of the small businesses.

INC.: What about the small companies that are suppliers to large mass producers? How do they keep their independence and keep innovating?

PIORE: The Italian experience is relevant here. Small-batch production developed in Italy through companies that were satellites to large companies. They were looking for niches in larger markets that would give them some freedom from their monther company. That was a kind of safe strategy in the sense that they held on to their relationship with the larger company and the mass-production end of their business. At the same time, they looked for little niches and developed within the space where craft production could actually grow.

INC.: Yes, but how do small companies go about getting ideas for new products or for changes in their use of technology?

PIORE: One important thing is to get outside your company. You get dynamism, you find market niches, and you get ideas by traveling -- that is, looking at other companies, moving around, going to trade fairs, looking at new equipment. You can almost judge the difference between a dynamic and a nondynamic company by how much the management in these small companies gets outside their own company.

Flexible craft production involves thinking about the productive process in a different way from mass production -- it is really a different way of looking at the world. Mass production gets its charge by breaking down the production process further and by developing ever more specialized equipment.By contrast, the dynamic of flexible craft production is to think of new products that can be made that weren't made before.That is, to enlarge the repertoire of products and enlarge the generality of machines -- to determine how a bundle of resources might be pushed in a direction where it can do something it didn't do before.

INC.: So flexible specialization involves not just a different form of production, but also a different way of looking at consumer demand?

SABEL: That describes it exactly. You need to reeducate consumers as well as yourself. Once you begin to tell the consumer that things are going to change all the time, you have to be able to gear up so that you can produce on short demand. That means a change in the manufacturing process. Companies are responding to blockages in the mass-production system and they're responding by trying to break up the market and find a way of appealing to the consumer with more quality or more particularizing of products. They're using the new technologies in this flexible way to do that.

INC.: One would think that all this would have a great impact on competition.

PIORE: Yes, but not in the traditional sense. What is involved is a shift away from the notion that the market is extremely limited to the notion that the market has all sorts of possibilities, if you can find them and exploit them. The notion of creating new products is that if you're just creative enough, you can find a market. In a sense, supply creates its own demand.

INC.: So mass production -- huge quantities of standardized goods -- limits the imagination as well as the marketplace?

PIORE: Right. For example, we asked one entrepreneur whether he was affected by business cycles. He responded, "No, because I produce 150 new products a year, and some of them are bound to fly." He was very competitive in a technical sense, but I don't know that you would say he had a sense of competition. He had the sense that his business was based on creativity, and he had to constantly come up with new ideas. If he came up with enough new ideas, the thing would work. That's the sense in which successful small businesses compete; they won't be driven so much by this notion that the world is tight and confining and you have to crawl your way to success.

INC.: It seems as if you don't think all forms of competition are equally beneficial to the economy.

SABEL: There is still obviously going to be a huge amount of competition, and what you want to do is two things. You want to encourage people to take risks for new products, but you want to discourage them from trying to get an edge by competing the old way, by cutting corners. In other words, at any one moment, a company could be tempted to say,

"Well, I haven't invented a new product. What I'm going to do is try to take something that's selling well and produce that more cheaply by cutting wages." And, of course, if too many people do that, then the system loses its dynamism. So you want to encourage risk-taking, but you alsowant to discourage competition through squeezing employee wages.

One of the ways you can do that is through community norms -- you just don't treat workers in a certain way. You don't make them bear the cost like that. The reason is not just humanitarian.It comes from a recognition that the character of the whole systems of flexible production depends on putting obstacles in the way of this other form of competition.

Unions can also play a big role in this by standardizing wages. Of course, small-business people hate unions in the United States, because they associate them with the unions in mass production, where they impose rigid job rules. But there are lots of constructive ways in which unions can operate, and have operated, even in the United States. The basic idea is to set limits to competition without destroying internal flexibility, and that's the kind of thing you have to bargain out with whoever is representing labor.

INC.: Are you suggesting that complete flexibility for entrepreneurs is counterproductive?

PIORE: Yes, although the basic point is that flexibility is not anarchy. It has a certain structure to it. The emphasis on flexibility can go awry. People will say, "Let's tear this down because it's not flexible, let's tear that down because it's not flexible." But you've also got to devise the structure in which that flexibility is going to occur -- to determine what the limits of flexibility will be.

SABEL: We can build a system that is efficient at producing an ever-changing variety of goods as opposed to producing one thing at the lowest possible price. And it turns out that such a system doesn't mean the absence of constraint.Flexibility is perfect freedom in the sense of the total absence of constraint. But paradoxically, what we're arguing is that in order to be flexible, you've got to create a community in which some things are constrained. Creating that community involves the redefinition of a lot of the existing institutions. That's our message: You've got to be flexible, because that's where the world is going.

INC.: Does this explain your ambivalent feelings toward the term entrepreneur?While you've used the word freely in this interview, it hardly appears at all in your book.

PIORE: The reason is that the term entrepreneur has come to be associated with the image of the Lone Ranger. Our image of successful small-business people is that they are creative and independent individuals. They have many of the characteristics typically associated with the term entrepreneur. But they are also very dependent on the community structure they operate in, on a network of relationships with other people who are like them, on their employees, and so on. This facet of small business has little to do with the image of the Lone Ranger. They do not ride in from nowhere on a horse into a community.

INC.: So it's really a tempered sense of individualism that you're advocating?

SABEL: That's right. In fact, the Lone Ranger story is kind of fascinating. Don't forget that the Lone Ranger himself had a sidekick, Tonto, and it's interesting to see what they called each other. Tonto means "fool" in Spanish, so the Lone Ranger called his Indian assistant a fool. But Tonto's name for the Lone Ranger was Kemo sabe, which can be interpreted as meaning, "he who doesn't know." And in a sense, we think this relationship correlates with our concept of an entrepreneur. Even the Lone Ranger couldn't get by alone, and in fact, had to rely on help from someone with whom he was so deeply connected that they could insult each other in this sort of amicable way. That's our idea of how this works, but it's hard in American culture to get this idea of interdependence, of community. Americans hate to think of themselves as dependent on others. Perhaps they are afraid it will be used against them.

INC.: What specific role do you foresee for government in all this?

PIORE: For one thing, I think there will be a switch from an emphasis on Washington as the central governmental element in the economy to the state and local governments. One way of looking at it is to go down the list of things that businesses need to get an operation going. They need physical infrastructure; they need certain kinds of roads and sewers; they need an educational system that provides a certain type of trained manpower; they need a zoning system that provides locations that are properly situated in relationship to each other. Well, these are the functions of state and local government.

INC.: Are you optimistic about these institutional changes?

SABEL: I think that the need for the changes will become widely recognized at a certain point. They will be seen as the way to solve problems, get over the hump, and take advantage of the possibility of new markets. People will recognize the need to eliminate the wrong kinds of competition and increase the possibility of taking the right kinds of risks. And because it is very likely that the changes will happen, society is much more open. I mean that the institutions like the government -- especially at the state and local levels -- and the trade unions are much more open to recasting the relationship between independence and community, if only because of the way they've been battered around by the failures of the old system. It is a real moment of openness, and small business doesn't have to be afraid.

CORRECTION-DATE: November, 1985

CORRECTION:

The photographer's credit for "A Second Industrial Revolution" (September, page 26) should have been Steve Liss.