Monday, March 29, 2010

documentary on economic interests in the state

(100th post!)

Check out this documentary by UMass Boston professor Tom Ferguson titled, "Golden Rule: The Investment Theory of Politics"

The documentary provides a wealth of historical and contemporary arguments, made by Adam Smith, James Madison, Noam Chomsky, and others, for how economic interests influence state policies. I highly recommend it. For example, I learned that in today's newspapers, 35% of content is news and 65% is advertisements. I also learned that the greatest support for FDR's labor policies came from capital-intensive industries.

Saturday, March 27, 2010

efficiency wage + state n society

In brief, efficiency wage theory argues the following. Employer and employee are playing a game. Employer would like the employee to work harder than she usually does. Thus, the employer offers employee a higher wage in order to entice more effort. The problem is, the employer can always go back on his promise by not paying the higher wage at the end of the day. However, then the next day employee comes into work, she will simply resort to a lower level of effort. Hence, a "commitment problem" exists. Commitment to a higher wage and higher effort can only happen if both sides keep their promises to work hard over a long period of time.

There are many ways of criticizing the efficiency wages literature. Neoclassical and other conservative economists say commitment, in the sense of the above story, simply cannot last, since employee may stop exerting high effort at any time. Also, employer may, at any time, go back on his promise to pay a higher wage for more effort -- and he might just hire a new employee if the previous one quits. Marxists say the employment relationship is not a "game" where commitment must be maintained in the labor process -- the labor process is ultimately about class struggle between the owner of the means of production (employer) and those from whom the employer extracts profits above and beyond their compensation (employee). Historians may point to the fact that other conditions -- sociological, historical, political -- are more important for determining the formation of employment contracts (such as the "efficiency wage" contract) at any given time.

I should add that both the Marxists and Neoclassicals have a separate political issue with the conclusions of the theory, aside from any details of the theory itself. For example, some Marxists don't like the fact that the policy implication of the efficiency wage theory is, higher wages for workers. Marxists are primarily interested in the disestablishment of labor markets and of capitalism itself. Thus, any policy that stresses higher wages still affirms the underlying "good" of capitalism. (Neoclassicals don't like it because they want wages to be determined by market forces -- not "soft" forces such as reputation or loyalty.)

The historical critique is especially powerful because it has a lot of sharp things to say about the famous examples to which efficiency wage supporters love to draw attention. For example, the popular model of welfare capitalism prior to the Great Depression highlights the "high road" labor relations pursued by employers and employees in terms of generous benefits, high wages, and good working conditions in the absence of strong unions. This "commitment equilibrium" broke down during the Great Depression simply because the economic pressures prevented employers from keeping their promises, leading to a forced new equilibrium of a highly unionized workforce and bargaining between employers and employees enforced by the state.

This historical critique of this view (particularly, these are my own thoughts) draws on the fact that there is a long history of state involvement in labor issues prior to the New Deal, and since unions were not legal during this time period, employees were not completely free to bargain. Contracts were therefore not primarily about commitment issues between the employer and employee -- they were about the uncertain legal possibilities faced by employees. Higher wages may have existed for some workers, but they were not the norm in any industry. Nor were they offered in order to induce "commitment", since commitment by labor was not exactly voluntary, given the uncertainty revolving around whether they would be successful in strikes (due to both state enforcement and various legal instruments used against employees during this time). When employment law is understood in a broader legal context, seeing contract formation as an issue of enforcing commitment does not hold up to the legal facts.

To be honest, I sympathize with all three of the critiques. The neoclassicals have it right by saying that commitment is difficult to achieve. Marxists have it right by saying that the employment relationship shouldn't be framed as a problem of forming a risk-sharing contract. Historians have it right by saying that many other factors influence contract formation. I also tend to agree with the main political concern of the Marxists in my view that labor should not be a commodity. The problem is that the efficiency wage view is the dominant view of mainstream economics at this time. The same theoretical framework used to derive efficiency wage equilibria has been used in everything from the evolution of property rights, to calls for the regulation of the financial sector. How to chip away at such a hegemonic theory?

Let's go back to this idea of commitment, the centerpiece of it all. Perhaps the efficiency wage theorists have a point: not everything can be accounted for in a contract. Since the employer can't completely see everything the employee does, in order to entice the employee to do those nonobservable things in a loyal, respectable manner, the employer will have to offer some wage premium. The game theory literature on this says that commitment will occur in the following situation.

Employer offers a higher wage to employee at the conclusion of employee's week on her job as long as employee works harder than she would have otherwise. Suppose employer contemplates cheating employee. Clearly, the employer would gain in this scenario [A]: employer pays for cheap but may end up getting a lot of effort out of employee if she believes in the employer. However, there is a caveat [B]: if employee is cheated, she is less likely to work harder in the following periods, leading to lower profits for the employer. :(
CRUCIAL: Commitment by employer will be ensured as long as benefits to employer of [A] are less than the costs to employer of [B]. That is, commitment is ensures as long as employer doesn't have a real economic interest in cheating the employee, especially if the worker will screw the employer in later periods if employer cheats her.
And now we reach the clincher, the real nail in the coffin that drives home a central point of some of the most central works of legal history of the last 35 years: in what scenarios might we imagine the costs of [B] declining? That is, how can we disrupt this equililbrium? Let's see...

[B] If employee is cheated, she is less likely to work harder in the future. But what if costs of enforcing her to work harder in following periods was low enough?

If costs of enforcing her to work harder in following periods was low enough...

Sounds awfully like eminent domain law, doesn't it? Here's a little quiz: how much were mill owners in western New York paid for disruption of water flow caused by the building of the Erie Canal?



Thursday, March 25, 2010

return of the blog

I won't try to make any excuses for my absence, except in saying that I have reached a lull in an otherwise hectic semester. But through the course of my travails I've come across many articles and thought, "I really should write about this!" Unfortunately, I've either now forgotten about the articles or can't remember where the links are. I should have starred them on my Google Reader...

Anyway, the return of this blog, indeed its 99th post, will be marked by an interesting challenge that has occupied me along various dimensions over the last four (or so) months. I am already aware of a few solutions, but I'm working on finding my own. It is, of course, related to a possible dissertation topic -- caveat lector.

The problem is simply stated. Why does the state act in the interests of capital? Capitalists don't, in general, occupy positions of power in the government. How could they be capitalists if they did? So, capitalists must influence outcomes through some other means. Most people immediately think of money. Both republicans and democrats receive large campaign contributions from pharmaceutical companies, financial institutions, and oil companies (to name a few examples). Money surely affects government policy -- on the left and right of the political spectrum. Acknowledging that fact is one of the first steps toward realizing that the function of the state itself (and all of the arms of the octopus -- government, law, and so on) is to act in preservation of the underlying economic system.

Framing this question in history is not impossible, but you have to be very sensitive to the context. First of all, to even ask the question, "Why does the state act in the interests of capital", you must assume the state to which you refer is embedded in a capitalist economy. How do you see capitalism? What are its defining traits? Most likely, you will have to engage in debates on whether the area and time period you study is capitalist or not.

Second, history concerns itself with change, but the original question simply requires a static model to answer it (given a state and given capitalist society...). Therefore, you must be prepared to explain the relationship between changes in economics and changes in the law. Third (as if the challenge wasn't daunting enough already!), to borrow the title of this blog, the answer relies critically on being able to imagine the various relationships at work through a (most likely) inadequate set of primary sources! It's easy to look today at policies of the president and say whether they are a good example of the government acting in a particular agent's interests. The the relationship between the economy and the state has varied considerably over time, so there's no quick-and-easy model you can apply to a historical example.

Of course, the other issue is that we're dealing with the law (of all institutions why did I pick this one?!). Let me tell you, after immersing myself in judge and lawyer biographies, court opinions and statutes, as well as employment contracts, it is very easy -- indeed, downright tempting -- to romanticize the law as this great institution striving for equality before the law and justice. The law develops very slowly and the changes are mostly quite subtle. Therefore, without going into your study with some kind of theoretical model, it's very difficult to emerge from your study with a firm grasp on anything.

Anyway, I was going to write a bit more, but I realized it might be too long for a returning post.

I'll conclude with a teaser for following posts, to keep you clicking that "Refresh button" every five minutes in excruciating anticipation of what I will write next. Let me tell you that a promising solution to the above points may actually come from the economic theory of contract design. Taking as our initial starting point the idea that the law is whatever the nobles do in classic kafkaesque style, we question whether employment contracts in the early 1800s (that is, what capitalists designed and then did) can be used to explain changes in labor law. Furthermore, we will see whether framing the problem in this way gets at that ever-elusive problem of connecting the capitalist and legal system dots to make a picture that mom would be proud to stick on the refrigerator.

Until next time!