Differentiation is a term in system theory (found in sociology.) From the viewpoint of this theory, the principal feature of modern society is the increased process of system differentiation as a way of dealing with the complexity of its environment. This is accomplished through the creation of subsystems in an effort to copy within a system the difference between it and the environment. The differentiation process is a means of increasing the complexity of a system, since each subsystem can make different connections with other subsystems. It allows for more variation within the system in order to respond to variation in the environment. Increased variation facilitated by differentiation not only allows for better responses to the environment, but also allows for faster evolution (or perhaps sociocultural evolution), which is defined sociologically as a process of selection from variation; the more differentiation (and thus variation) that is available, the better the selection. (Ritzer 2007:95-96)
Talcott Parsons is the first major theorist who develops a theory of society consisting of functionally defined sub-system, which emerges from an evolutionary point of view through a cybernetic process of differentiation. Luhmann who studied under Talcott Parsons has adapted Parsons model although changed it in various directions. Parsons regard society was the combined activities of its subsystems within the logic of the cybernetic hierarchy. For Parsons each subsystem (of which his classical AGIL scheme or AGIL paradigm is divided into four) would tend to have self-referential tendencies and the related path of structural differentiation but it would occur in a constant interpenetrative communication with the other subsystems and the historical equilibrium between the interpenetrative balance between various subsystem would termine the relative degree in which the structural differentiation between subsystem would occur or not. In contrast to Luhmann, Parsons would highlight that although each subsystem had self-referential capacities and had an internal logic of this own (ultimately located in the pattern maintenance of each system) in historical reality, the actual interaction, communication and mutual enable-ness between the subsystem was crucial not only for each subsystem but for the overall development of the social system (and/or "society"). In actual history, Parsons maintained that the relative historical strength of various subsystems (including the interpenetrative equilibrium of each subsystem's subsystems) could either block or promote the forces of system-differentiation. Generally, Parsons was of the opinion that the main "gatekeeper" blocking-promoting question was to be found in the historical codification of the cultural system, including "cultural traditions" (which Parsons in general regarded as a part of the so-called "fiduciary system" (which facilitated the normatively defining epicenter of the communication and historical mode of institutionalization between cultural and social system). (For example, the various way Islam has been transferred as a cultural pattern into various social systems (Egypt, Iran, Tunisia, Yemen, Pakistan, Indonesia etc.) depend on the particular way in which the core Islamic value-symbols has been codified within each particular fiduciary system (which again depend on a serie of various societal and history-related factors)). Within the realm of the cultural traditions Parsons focused particular on the influence of the major world-religions yet he also maintain that in the course of the general rationalization process of the world and the related secularization process, the value-scheme structure of the religious and "magic" systems would stepwise be "transformed" into political ideologies, market doctrines, folklore systems, social lifestyles and aesthetic movements (and so on). This transformation Parsons maintain was not so much the destruction of the religious value-schemes (although such a process could also occur) but was generally the way in which "religious" (and in a broader sense "constitutive") values would tend to move from a religious-magic and primordial "representation" to one which was more secularized and more "modern" in its institutionalized and symbolistic expression; this again would coincide with the increasing relative independence of systems of expressive symbolization vis-a-vis cognitive and evaluative lines of differentiation (for example, the flower-power movement in the 60s and early 70s would be a particular moment in this increased impact on factors of expressive symbolization on the overall interpenetrative mode of the social system. The breakthrough of rockmusic in the 1950s and the sensual expressiveness of Elvis would be another example, for the way in which expressive symbolization would tend to increase its impact vis-a-vis other factors of system-differentiation, which again according to Parsons was a part of the deeper evolutionary logic, which in part was related to the increased impact of the goal-attachment function of the cultural system and at the same time related the increased factor of institutionalized individualism, which have become a fundamental feature for historical modernity). Luhmann tend to claim that each subsystem has autopoeitic "drives" of their own. Instead of reducing society as a whole to one of its subsystems, i.e.; Karl Marx and Economics, or Hans Kelsen and Law, Luhmann bases his analysis on the idea that society is a self differentiating system that will, in order to attain mastery over an environment that is always more complex than it, increase its own complexity through a proliferating of subsystems. Although Luhamnn claim that society cannot be reduced to any one of its subsystems, this critics maintain that his autopoeitic assumptions make it impossible to "constitute" a society at all and that Luhmann's theory is inherently self-contradictory. “Religion” is more extensive than the church, “politics” transcends the governmental apparatus, and “economics” encompasses more than the sum total of organizations of production. (Holmes et al. 1983).
There are four types of differentiation: segmentation, stratification, center-periphery, and functional.
Read more about Differentiation (sociology): Niklas Luhmann, Segmentary Differentiation, Stratifactory Differentiation, Center-periphery Differentiation, Functional Differentiation, Code, Understanding The Risk of Complexity, Differentiation and Modern Social Theory, Differentiation: Luhmann's Critique of Grand Theory