I was intentionally not clear in a recent comment I made on an Acemoglu and Wolitzky paper about the economics of labor coercion. I wanted to elicit first reactions, comments, "flames" of all kind. I didn't receive any of that! So I'm going to elaborate on my point, because I do think it's an interesting one -- if somewhat "out there". Maybe you'll get angrier, or agree with me even more, once you hear me out.
I'm separating out two arguments: one concerning property law and the other concerning labor law. My argument is that the two are remarkably similar in their implications for a story of social definition of property and economic growth.
Historically, under various reasonable use criteria, canal development was given a green light to infringe on the rights small mill owners had over the use of water power from local streams to power their mills. Canals were a diversion of water from these sources and caused much property damage to these mill owners in the process.
In these cases, voluntary Coasean bargaining between the canal projects and the mill owners broke down, but not because transactions costs were too high. Voluntary bargaining broke down because the legal system had developed an ideology that was fundamentally in favor of larger-scale property development in the interests of the community.
Coasean models of eminent domain argue that this rule leads to property values that are lower than the market value of surrounding properties. The reason is that if property rights are unclear for the original owner of the property, there is less incentive to develop your own property, and more of an incentive to develop in outside regions. In other words, you have a misallocation of resources leading to socially suboptimal arrangements.
Imagine for a moment a spectrum of potential wages given to a worker. On the lower end of the spectrum, you have the least amount of money a worker is willing to accept at a job. Call this a reservation wage. Between that reservation wage and the actual wage of the worker, the contract wage, you have a gap. That gap has been interpreted by some to be roughly the amount the worker "has to lose" in their job -- if you increase the gap, the worker may be more obedient. Nevertheless, it's clear in such an analysis that many variables are affecting the worker's property in his or herself -- his or her labor power. How to increase the gap?
Keep the spectrum in your mind again. On the left is reservation wage, the right is the contract wage. If you increase the gap by raising the contract wage, the incentives align and you may elicit more effort out of the worker. That expands the gap from the right. However, you can also increase the gap by lowering the reservation wage. Expand the gap from the left. You might do that by threatening various things if the worker leaves. Deny him or her compensation for the time he or she did work. Or if he or she gets hurt on the job, make it difficult to gain compensation for this as well.
Whatever the method, it's clear that the legal system can actually affect productivity in an extremely active way, and that this was accomplished by altering the value of labor power to match the interests of development. Basically, eminent domain for labor law.
What do you think?