The Knowledge Economy at the turn of the Twentieth Century: the Emergence of Hierarchies

The knowledge economy is nothing new. As Chandler’s (1977) classic study documents,improvements in communication technology (e.g. mail via railways, thetelegraph, and later the telephone) played a key role in the emergence of the modernAmerican corporation in the late 19th century and the start of the 20th century. Thesetechnological changes revolutionized the organization of production thereby changingthe demand for skilled and unskilled agents by creating a new class of professionalsalaried managers and a class of blue collar workers under their supervision. In thispaper we present a simple equilibrium theory based on Garicano and Rossi-Hansberg(2005) in which organization is endogenous and depends crucially on the state ofcommunication technology. With this theory we are able to study the emergence ofhierarchies and the implications for the demand for workers of different skills and,therefore, wages.[...]