Monday, October 19, 2009

economic origins of institutional persistence

Here is a paper by Suresh Naidu and Noam Yuchtman who explore the possible connection between economic incentives and legal institutions, basically making an economic argument for institutional persistence. They presented it at the Harvard economic history conference a few weeks ago.

Suresh has a Master's from UMass Amherst and a PhD from UC Berkeley.

I found the paper interesting, specifically the idea that institutional persistence can be explained by economic incentives. Essentially, the argument presented in the paper is that British industrial firms in the early- to late-19th century reacted to increased demand for labor by enforcing the Master-Servant laws which were in place until 1874. Furthermore, once the Master-Servant laws were abolished, wage rates increased. This suggests that (similar to Huberman's and Steinfeld's arguments) there are a variety of legal and monetary incentives placed on workers in capitalism to get them to exert the maximum amount of effort desirable from the perspective of the employer. Thus, they are never completely "free" in the legal/politicalsense of the word. For the Master-Servant laws, this entailed various legal threats such as being jailed for contract breach. And the efficiency wage model argues that in order to control the worker, the employer pays them above their reservation wage.

I have some issues with the argument. first, it is unclear what body of theoretical literature in economics Noam and Suresh is drawing on. While they use a game theoretic model to make their argument this is definitely not where the theoretical motivation comes from. I would suggest them to be more explicit here, identifying Steinfeld's arguments and (other legal scholars') that make the interesting case that the legal system inherently contains class (i.e. political/economic) interests. Thus, since the legal system is an instrument of the capitalist class we must reevaluate what it means to have an efficient "free" labor market. Honestly, I think the strongest entry point here is through work by people such as Horwitz, who has written one of the most influential books on American legal history in the last 50 years, arguing for an instrumental conception of law which brings such interesting topics into focus such as how property is socially defined.

Second, it is unclear how universal this argument is, especially if we consider the U.S. case. In the U.S., Master-Servant law disappeared from legal discourse by the turn of the 19th century due to a variety of reasons such as the rise of republican ideology, individualism, and its effects on how people viewed employment relationships. So, as I mentioned above with regard to Horwitz, to what extent can we argue that the various legal constraints on employment were a result of economic incentives of the capitalist class? While I think the argument is strong here as well, it begs the question of what kind of data could be used to show this. It's not as clear as the British case where you have a very clear break-off corresponding to the end of the Master-Servant laws. A variety of legal constraints were placed on the worker all the way up to the New Deal (for example, unions were never legalized/made illegal before this time!) For example, can we say employers used this as an alternative to the wage and that once these legal constraints lessened the wage series sees a break upwards? If not, what methodology may we use to establish Suresh's argument for the U.S. case?

Nevertheless, I found the paper interesting and would welcome ideas on how to approach this question for other countries with radically different institutional arrangements!

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