Thursday, March 29, 2012

master and servant, NOT principal and agent

The way that labor economists normally think about employment relationships is in terms of "Principal-Agent Models". The term "Principal-Agent" is meant to classify any set of models in which the Agent's behavior is in some way influential on the profitability of a project, of which the Principal is the residual claimant.

The thing is, the history of employment law in America has not developed according to Principal-Agent law. Principal-Agent law is normally used to describe relationships between, say, a merchant (Principal) and the deliverer of the merchant's goods (Agent). Because the Principal will not get paid unless the Agent gets the goods to the customer on time, it seems natural to think about the legal dimensions of such a relationship using Principal-Agent law.

So what kind of law has historically been applied to employment relationships?

...Wait for it...

Master-Servant law. Traditionally used to define the ambit of the master over his servant in feudal England, this body of law was transported to the U.S. by legal scholars in the late 18th century. By the early 19th century, when industrialization began to develop in the U.S., courts by default applied Master-Servant law to employment disputes.

So labor economists are wrong for talking about labor relationships in terms of Principal and Agent. That's not how contract law thinks about workers and employers! From the early 1800s up until today, (yes, today), employment law is largely defined as the law of Master and Servant. Principal-Agent law is separate and certainly does not deal with labor contracts between employer and employee.

Chalk it up to another reason why labor economics is inherently bourgeois and therefore evil.

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