Tuesday, September 27, 2016

Trying to Wrap My Head Around Trump 1st Take

This is my attempt to wrap my head around the appeal of Donald Trump. I have two different takes on this dealing with what I think are distinctly different sources of support. I'm going to be tying my anecdotal experiences to what I've seen of Trump on TV and what I've read in the news.

My first take on Trump comes from a certain type of business owner I've run into frequently in sales, both in person when I worked in Toledo and around the country when I've worked the phones. This is the type of guy that is going to buttonhole anyone he can to spout right wing propaganda and decorates his office with Ayn Rand books, Republican calendars, and Gadsden flags. Not to mention some of the more unsavory racist stuff I've heard a few of this type spout.

Something I've noticed in doing business with these types is that they always seem to make business very personal. Their business approach emphasizes personal relationships and doing business locally. They're the kind that prefers to do business with a handshake and dislikes the paperwork and formality associated with modern business. They're not the kind to have up to date ERP or CRM systems that are able to extract the maximum value from their knowledge base and business operations. Instead, their approach, which I personally find unprofessional and off-putting, is to try to establish a bond with the people they're interacting with. Their message is always that we're just like each other, sharing similar beliefs, political views, etc. and establishing the bond of being minor common criminals together through expressing anti-PC views, usually tinged with racism and sexism.*

In working with these folks, something I've often heard is how under threat they feel from big business. They often see the competition as unfair, they're firmly grounded in their communities and see the outside competition as an interloper. And they don't know what to do about it; they simply don't have the skill sets necessary to add value to their business beyond their personal relationships and their capital. But they don't see it this way. Instead, for all their talk about free markets, they seem to see business through a prism of personal relationships, while they may feel that they're a pillar of the community locally they seem to assume that all of business runs this way and that they're simply closed off from the important networks and that they'd be a smashing success if only they could get the right contacts.

Trumps rise has strongly reminded me of this kind of person. Trump seems to be this kind of small time operator scaled up massively. For this kind of person I think he confirms their view of business, it isn't the impersonal transactions of the market, using technology to leverage information, or efficiencies gained through careful planning that matter, instead it's the mano-e-mano cut and thrust of one on one deal making and the relationships made through a life time of business that matter. Trump confirms for them that they're right about how the world works, Trump knows the best people and he's successful because of his personal qualities, not because of running a tight business organization. Given these assumptions he must confirm for these folks what they "know" deep down, that they are falling behind because coastal elites have reserved the important networks for themselves and locked people like them out. They're pissed off because they see programs like affirmative action providing an alternate way into these networks that are closed off to them. They want access to these networks and they see Trump shaking things up enough that there might be some openings. Especially if trade is reduced, then those business elites will have to do business with them because they can't turn to Europe or China for suppliers and will have to turn to the small businesses in the US.

Just to make sure it's clear, I don't see all or even most small business owners as thinking this way. In truth, many of them are finding valuable niches in the modern economy. But these businesses are nothing like what I've described above. They tend to be professional, have skilled people able to leverage low cost technology options, and are able to work with people that aren't like themselves. One particular example I remember was a four man shop I walked into that specialized in doing custom work for China. These folks were the polar opposite of the kind of guy that would buttonhole me to talk about whatever Limbaugh has been going on about that day. So it isn't a small business thing, but if you're going to try to build your business on nothing but relationships with people like you its a given that you're never going to be anything but small. We live in a world that big or small you just can't get by acting like a Trump style business; our world no longer has a place for these people. And there's a lot of them and they're really, really mad about the fact that the world has changed to favor people that know how to work in an environment where trust is established through formal agreements rather than through bullshitting in a smoky back room.

Monday, March 14, 2016

What Are Their Self-Interests Anyway?

It has been a long time since I wrote a post. I started a new job as an auditor and that has been leaving me sufficiently occupied to not feel the bug to write. It has also meant this has taken a rather long time to finish writing, I have retained references from before it was obvious Trump would dominate the Republican primary. I must also note that I am not trying to explain Trump here, his appeal does not appear to differ significantly between rural and urban areas, but rather to look at how the Republican Party as a whole may be representing the interests of the people that vote for them and not just the donor class.

However, I have been bothered by the re-emergence, more so in comment threads than in articles or blog posts, that right wing voters do not recognize or vote for their own best interest. I have read some excellent writing on how class and race play into this to define interests beyond income but what really jumps out at me regarding the identify of the right wing are maps like this which shows how concentrated Democratic voters are, primarily in urban counties, though the northeast and some other areas are exceptions:

2012 Presidential Election by County.svg
"2012 Presidential Election by County" by Kelvinsong - Own work. Licensed under CC0 via Commons.

This leads me to believe that to understand what is happening in the right wing, and with political polarization more generally, we need to look through the lens of rural vs. urban America. The lenses of class and race, while relevant to these problems, miss many aspects of the urban and rural divide.

Looking through this lens we see very different lived experiences. While Obama could rightly state during his State of the Union Address that the US unemployment rate has been cut in half during his presidency this likely rang hollow to many rural voters. While US urban employment had risen above its pre-recession level by 2014, rural employment remained 3.2 points below its pre-recessionary level in 2015 (page 1 and 2). Furthermore, the period of 2010-2014 marks the first time that rural America as a whole has faced population declines, with a loss of 116,000 people over this period. While overall poverty rates are comparable with past history in rural areas, the poverty rate for children living in rural areas has continued to climb through the recession and recovery, from 21.9% in 2007 to 24.2% in 2009 and to a further 25.2% in 2014 (page 3). Poverty in working age adults has risen from 14.6% in 2007 to 17.6% in 2014 (page 3). This was offset in declines in poverty rates among seniors. (both links in the paragraph are to USDA Rural America at a Glance report)

These statistics reflect a reality that many liberal pundits are missing when they react to Republican statements such as Bush's "The idea that somehow we're better off today than the day that Barack Obama was inaugurated president of the United States is totally an alternative universe," or Kasich's "In this country, people are concerned about their economic future... And they wonder whether somebody is getting something to — keeping them from getting it." A few hours outside their urban liberal bastions lies an America a few hours outside of urban America which has a declining population, job numbers that haven't recovered to pre-recession levels, businesses permanently closed, and at least in some areas (my knowledge is anecdotal) property values which continue to decline. (quotes from MotherJones, also see MSNBC for another liberal article striking the same theme) While these statements do not reflect America as a whole, I have little doubt that many conservative politicians are hearing from supporters who feel everything is getting worse for themselves and for just about everyone like them. They aren't sharing even in the little bit of prosperity being experienced in urban and suburban areas, instead they are in both absolute and relative decline. They feel that people not like them, and from the rhetoric I think this would include urban hipsters and pundits as well as other groups, are receiving all the gains and that they are being left out. In their view, they want to be listened to and important, like they were through most of America's history, and resent being left behind.

In addition to this recent decline, liberals should consider that rural areas, particularly in the south, had very different experiences in the past as well. Liberals tend to hold up the high wage, high security union jobs in the rust belt cities as an ideal to go back to, however, much of the initial de-industrialization came from competition from more rural, and particularly southern and western, areas where companies could pay lower wages and labor had more difficulty organizing. The experiences of these areas was that union-busting and long, hard work for less saved towns and small cities that seemed doomed due to declining employment in agriculture and other resource extracting activities. Many corporations and businessmen who would be decried by liberals for their labor practices are looked at much more positively by people that depend on that plant for the survival of their town.

This translates into support for policies that liberals consistently claim is not in these people's best interests. However, if your interest is in preserving your community, your property, and your way of life it may be entirely consistent to support low taxes on the rich, low wages, and low regulation; after all, these are the policies that attracted to the local factory to your town in the first place. It may seem very likely in these cases that supporting more of the same is the only path forward that would preserve the things these people value most.

Now, we can recognize that this was always an unstable equilibrium. In practice companies used these areas as leverage to lower labor standards, environmental regulation, and wages throughout the U.S.; for instance 25 states now have right to work laws removing the comparative advantage that states gained by pioneering these laws. Wage growth has been slow for decades eroding the cost differences between states for low skill manufacturing jobs. Furthermore, international competition has left a very small gap in which these companies can exist, there has to be a reason for these companies to stay in the US rather than seek even lower wages elsewhere but not a need for them to locate in a higher productivity area with more access to specialized skills. For the US as a whole, trying to be a low cost competitor means pay cuts and a much worse quality of life to most of us, but it may be entirely consistent that pursuing this strategy would be in the interest of rural communities having trouble competing in the modern economy.*

But what alternative do rural areas have? Even in the best days their low wage, low tax strategy meant that they never had the revenue necessary to build up the infrastructure, institutions, and human capital necessary to be competitive in the knowledge economy. Due to these deficits in investment as well as the disadvantage of low population density, these rural communities lack the diversity of skilled professionals needed to staff a well managed business as well as lacking the close proximity to related businesses and customers that fosters innovation. A movement back towards unionization, higher wages, and stricter regulation on a nationwide scale threatens the only business model available to these communities, in these conditions what business would choose not to locate near an urban area?

These concerns also tie in with the cultural issues that have become so prominent in Republican rhetoric. This subject deserves a full post on its own, which I may or may not get around to writing, but reading a lot of Rod Dreher (http://www.theamericanconservative.com/dreher/) and Ross Douthat (http://douthat.blogs.nytimes.com/) has caused me to reflect on how modern values are causing great harm to some communities. However, their perspective runs into the fact that, in aggregate, kids these days are doing better on pretty much everything (see Healthcare Triage for the most recent thing I've seen on this). In aggregate, adults are doing better too, crime rates are down and marriages are more stable. My view on this is increasingly shaped by an urban vs rural divide, traditional morality taught how to live life in a small, rural community. The modern norms we see developing through campus protests and other forms of activism are about how to live in a modern, urban setting. But only one of the two sets can be normative across a society as a whole, and as urban and suburban views become more dominant people that live in and prefer small town and rural life naturally feel dislocated and marginalized.

These issues have created a large minority who are left feeling that no one is responding to their problems. Despite net income flows to their communities from government they see the communities they live in crumbling around them. They grew up with an image of small town America being America's true self, they feel dislocated in a country that is increasingly presenting a suburban and urban face to the world. They don't see either government or business responding to their concerns, and they are very, very angry about this especially because they see their version of America as being the true America, and they can point to support going back to Thomas Jefferson for this view. They are looking for someone to blame for their fall from influence, it appears that it has become easy to focus this on outsiders but they also cast blame on moochers in their midst, such as those receiving government assistance. It would be hard for them to admit that there is simply no way to develop these areas and that many of those on government assistance are likely those who feel too closely tied to their community to look elsewhere for work.

This leads to the deep problem however, there is no plausible policy path within US political traditions to help these regions. A report by the St. Louis Fed finds that convergence to the national average income across people is driven by urbanization, they find that non-metros areas converge to a lower income. They state the prospects for non-metro areas very bluntly, "Our results provide evidence that the idea of preserving rural economies while achieving significant gains in per capita income (or slowing divergence) in the long run appears to be far-fetched." (Income Convergence and in the United States, page 12) It is worth noting that things have only gotten worse in rural areas since 2008 relative to the rest of the United States. Most policy paths that could have helped are now no longer possible, I remember back when I was an undergrad taking economics courses hearing about how terrible the employment preserving European Common Agricultural Policy was compared to our efficiency focused policies; however, as I grow older I am forced to reflect on the fact that an awful lot of people desire to live in rural communities and that it is rather peculiar that our socio-economic system has little way of prioritizing how people want to live but instead only what they want to purchase. People feel the political system has failed them because it cannot preserve their communities, they are enraged because they see that the political system is helping many people build and maintain stable communities in urban areas; communities they do not desire to be part of. Ultimately, however, I don't see how the system can respond to their desires. Even a Japan style massive building program would be temporary and it wouldn't stop the kids from wanting to leave. Government can help stabilize urban communities because they ultimately have the density to support the modern, highly complex production process that businesses require to be competitive. Rural areas don't so there is no political fix available.

You can get mad and you can block responses to the problems of an increasingly urbanized America trying to adapt to the dominance of multi-national firms, but there just isn't anything to bring back a country dominated by small towns and small businesses so there is nothing for a political party focused on America's small towns and rural areas to do but block and obstruct. The problems these areas face aren't fixable so the party that does nothing is acting in the interests of their constituents by doing the only thing they can, holding back everyone else so they at least lose slower than they would if America's problems were addressed. And with no prospect for better wages in an area whose competitive advantage is low costs, a tax cut may represent the only chance for an increase in real take home pay, so there's some small prospect of improvement there.

*I don't mean for it to sound like all rural areas are suffering. Rural areas blessed with outdoor amenities are doing quite well. In addition to attracting tourists they also attract well educated individuals lucky enough to have jobs that they can do remotely. However, this does nothing for an old coal town or agricultural community, instead it generally means the growth of new areas and the growth of these new communities is likely masking an even sharper decline in the health of older rural communities in the aggregate statistics.

Sunday, July 12, 2015

What is the Inequality for Our Age?

The article, "To Each Age Its Inequality," presents a concept that in broad outline reflects my own view. Underlying economic conditions lead to differing levels of inequality being efficient giving differing economic conditions. The key concept is this:

So, just as in the farming and foraging worlds before it, our fossil fuel world has a “right” level of inequality, and societies that move toward it will flourish, while those that move the other way will not. Successful governments know this and apply taxation and other measures to push economic inequality toward what they hope is the sweet spot.
However I have a major problem with the next passage:

The big question, of course, is just where this sweet spot is. By 1970, the Organization for Economic Cooperative and Development nations had driven post-tax income inequality down into hunter-gatherer territory, averaging just 0.26 on the Gini scale. The economic difficulties of the following decades, however, suggest that this was perhaps too low. Most people apparently thought so, electing governments in the Reagan-Thatcher era that allowed the rich to keep more of their gains.
My issue with this is that while we can be fairly confident that over the millenia agrarian societies had plenty of time to reach their equilibrium levels of inequality the same cannot be said for modern ones. While powerful groups did an excellent job selling low inequality as a source of the problems of the 70s the economic history that I've read focuses on other factors, primarily the oil shock and the beginnings of adjustments to globalization. It does not follow from the fact that various groups in favor of higher inequality successfully sold their ideas to the public that this was in fact the correct diagnosis. It may or may not be, but we lack the evidence to call this one accurately and this particular observation is basically irrelevant to the question as to what inequality is in truth demanded by our age.

To get at this, I suggest we should explore the concept a bit more deeply, and think about what underlying economic factors drive the variance in efficient levels of inequality. This is straightforward enough for pre-modern agrarian societies. Everything I've read on this topic is in agreement that inequality arises because the variance in the productivity of the land is far greater than the variance in the output of individuals. Some societies tried various schemes to reduce this inequality, such as periodic rotation of fields between households, These societies proved less successful because of a second factor, while land could be improved rates of return were very low for investments in early periods. To create incentives for long term investment it was necessary to make land holdings perpetual, if a household could pass down the improvements to subsequent generations then the investment looked more attractive then if the land was likely to be redistributed at some future point. Since the variability in an individual farmer's skills were less important than the variability in the land itself it was inevitable that highly unequal societies would emerge.

The above is of course vastly oversimplified but it is far more difficult to tell a similar story for the modern world. We are still faced with the fact that human ability just doesn't vary that much, while some individuals can pick things up quicker than others with enough time most humans will perform most tasks with relatively similar ability.* Another factor is that unlike with land most plant and equipment used in the modern productive process can be replicated, there isn't a similar dynamic with land where high variance in the productive qualities of plant and equipment would lead those that have it to get high returns.

Since it can be taken as a given that any firm could acquire both people and the plant and equipment necessary to perform economic tasks with similar efficiency as existing firms we are left with intangibles as being the driving force behind the efficient level of inequality. Firms do differ with respect to their internal culture, the efficiency of their organization, and factors such as reputation and market position. These are the factors that lead firms that are otherwise similar to experience greatly different returns. The question that arises is what does this imply for the efficient level of inequality? In my opinion, I see the differences as arising primarily from the bottom up, emerging from the solutions reached by workers within the firm to gradually become institutionalized in the practices of the firms they work for. But this is contained within structures of property rights which evolved to create incentives for the development of land in agrarian societies, with something of an overlay to encourage agrarian land owners to transition their wealth into property, plant, and equipment instead of agricultural land, and not to create incentives for the development of the intangibles necessary for success in the market.

Given the extent to which our property laws continue to resemble those of the agrarian era rather than those that would create incentives for those traits needed in modern market economies, my view is that current property laws tend to lead societies to have much greater levels of inequality than would be ideal for a market economy. While competition between societies is resulting in some experimentation towards more efficient forms of organization they power granted by current law allows those with that power to exploit openings, such as the economic turmoil of the 1970s, to reassert their historical dominance and roll back the evolution towards more efficient forms of economic organization. Over time, competition between societies will decrease the power of these groups but this is likely to be a very slow evolution, just like the transition from the egalitarian world of the foragers to agrarian societies was very slow. But I see power structures that give outsize influence to owners to be essentially similar to that of agrarian societies that tried to rotate their fields to make people more equal, an inefficient set of institutions that will cause these societies to decline and to eventually be replaced by societies that recognize that underlying economic conditions have changed and that society must reflect the underlying more egalitarian requirements created by modern systems of production if they are to flourish.

* I realize this is a fairly strong statement, and there are obviously tasks where some trait is hugely beneficial, but most workplace tasks are of the type that any individual performing them repetitively for a long enough period of time will perform similarly. Of course, since some tasks are valued far more than others those that take to them easily will tend to get the high valued tasks to perform and leave others for the lower valued tasks; opportunities are just never given for these slower individuals to perform high value tasks.

Tuesday, June 23, 2015

Some Brief Thoughts on the Team Production Theory of the Corporation

I wanted to briefly react to Justin Fox's post on the team production theory of the firm. His contrast between the shareholder and team production view of the firm, and the recognition that the broad acceptance of the shareholder view of the firm is of recent vintage, provides a great short overview of the topic.

These are topics we spend a great deal of time on in my business ethics classes. The focus was on the stakeholder theory of the firm rather than the team production theory, but the idea that the shareholder value theory of the firm is not efficiency maximizing is a common element. There are very good reasons to think that the shareholder value theory of the firm fails to maximize value for any of the interested members of the firm, whether employees, customers, neighbors, or, at least in the very long run, shareholders.

My problem with these conceptualizations is that while the behavior of institutions like boards of directors does show that the interests of other stakeholders have some impact, this impact is generally fairly minor or lasts for only a short period. Doubtlessly, the period when norms involving strong stakeholder interests dominated in the immediate aftermath of WWII and the Great Depression involved great gains for corporations and widely held prosperity. But this period lasted for only a generation, the norms that held this consensus together quickly unraveled as those shaped by these experiences lost their influence. In the long run, formally and explicitly granted rights, such as those governing corporate control, will always win out against informal rights; no matter how effective those informal rights. Since shareholders are granted ultimate control they will always come out ahead in the long run, no matter how inefficient this outcome is.

No large organization can ever function effectively when control is vested in external elites who are not part of the day to day operation of that organization. The problem faced by business in the modern market economy has close parallels to the issues faced by aristocratic societies before democratization. When a group is run for the benefit of a few, no matter what norms seek to impose good behavior on them and how honestly they try to act for the betterment of the group, the reality is that their interests necessarily diverge from those of the other members of the organization. Elites try to make their interests appear invisible, either by claiming their interests are natural or identical to those of the organization they are influencing, but historically it has always been obvious that once their power is limited that their interests diverged sharply from the interests of others.

This is why I find the current property laws governing corporations so troubling. Similar to how aristocratic land ownership lent special privileges and influence to aristocrats under the ancien regime property rights concerning corporate property grant rights and privileges to those that own enough corporate property to exert control. They can circumvent campaign finance laws, speak with the corporations voice to claim broad support, and furthermore can protect themselves and their wealth and station through limited liability laws.

The solution to this isn't terribly difficult. It is simply to grant explicit and formal rights regarding control of the corporations they work for to labor as part of our laws governing corporations. Shareholders, can, and should, retain voting rights and rights regarding residual returns. But unless labor is granted an equal voice I do not see how any stable solution is possible to the problems of governing a corporation. While I admit this is radical the more I learn about business the more inescapable I find this conclusion; the same logic driving democratization of states ultimately holds for firms. I also see no reason to think this would deter investment, aside from an initial downward valuation as control premiums get wiped out, shareholders adjust to lower total returns, and shareholders overreact (yeah, this would be very costly short term, but so is democratization and since this is ultimately an adjustment of claims to wealth and income value is ultimately redistributed not destroyed). In the longer run, however, investors would continue to receive cash flows, incentives to create new businesses would increase since shareholder power would be diluted in more mature businesses, and incentives throughout large organizations would be improved as control comes to align more closely with the interests present in a corporation. But without this change, no matter what the normative appeal or positive benefit a different conception of the corporation has, I do not see how corporations will do anything in the long run but serve shareholder interests since their formal claims to control are given primacy and other claims have little force in law.*

* At least not beyond some minor rights at the margins. But other interests can hardly be said to have much in the way of rights governing control of a corporation in the US; other jurisdictions differ. There are also some situations where specific corporations have granted specific rights, or distributed stock in ways to give other stakeholder groups a capital stake, but these are exceptions to a general rule.

Sunday, June 21, 2015

The Taboo of Discussing Hours and the Alleged Skills Shortage

[Edit: Added links I meant to go with the original post}

In sales, an effective technique is to identify your prospect's pain point and to offer a solution to their problem. The idea is that while there can be multiple benefits your product offers getting someone to switch requires identifying a real problem that they currently have and fixing it.

So when economists question (I'm also reacting to Matthew Yglesias) why aren't we seeing wages go up among high skill workers if there is a skills shortage my thought is that maybe this is indicating that the pain point for high skill employees* isn't their wage level. Instead, my experiences with being in an MBA program and speaking with other people who would be considered high skilled is that generally the concern is with the long hours and level of commitment required. High skill employees are generally relatively satisfied with their income levels, their unfilled needs lie elsewhere.**

This is a major problem for employers since one of the main traits that employers are looking for is a willingness by the employee to be exploited. They tend to phrase this as a willingness to do what it takes, employees as family, a corporate culture where employees work hard and play hard, or "some overtime required," but the bottom line is that the employer expects the employee to be their dependent and to subordinate the employee's goals to the business's goals. Intense pressure to keep labor costs down, even if a business is incredibly profitable already, limits an employer's ability to differentiate itself by offering easy hours.

These limitations are reinforced by a set of beliefs which regards not wanting to take on additional work as laziness, an attitude of entitlement which regards the demands of an employment contract as being unlimited in return for a wage, and a general view that someone that objects to ever increasing demands on their time as an undesirable employee. By defining a good employee as one who does what it takes and making this a minimal qualification for most any high skill jobs employers render themselves unable to attract people talented on other dimensions, employers want employees that will let them run their business a certain way and put business priorities first and what employees really want is an employer that respects them and their priorities outside work; the goals of each group are mutually incompatible.

The result is a deeply dysfunctional labor market. How can the market price labor efficiently when an individual has no way of knowing how much labor they are selling in a given transaction? While high skill employees are confident that they can meet their minimum salary expectations, they find it much harder to get solid information on how much labor they are selling for this salary. Any source of interview advice will emphasize not asking about how long a workweek is or about vacation and leave policy; too many employers regard it as an automatic disqualification. Employers that are well staffed and don't require long hours are afraid to advertise it for fear of attracting the wrong sort of worker.*** Potential employees also know that employers advertising being one of "the best places to work in X" and to give good work life balance are suspect.**** With all other information sources regarding actual hours worked cut off employees are left trying to piece together the bits of information they can find to help them choose where they want to focus their job search. Problematic for trying to recruit based on the one dimensional measure of salary, one of the key beliefs among most job seekers is that a relatively higher salary for a similar position means more hours. Since this is rarely the pain point among high skilled individuals this means the price signal can't work; since a business won't make any firm statements regarding hours, much less a credible commitment to respect an employees time, the price signal just ends up signalling that a job has potentially undesirable characteristics as it does a higher willingness to pay for the same labor input. Among already employed skilled employees why should they take the risk of jumping to a new employer for a higher wage when their wage isn't their main problem? There is simply too much risk for a marginal 10 or 20% pay bump when what they really want is an extra week's vacation and a 40 hour work week so they can be in time for dinner while still making the same wage they currently are.

There are a number of other issues that I think are leading to broken labor markets. One additional point that I do want to briefly mention is that there is a disconnect between when employers talk about skills and much of what I see in the press. I haven't heard anything from businesses that makes me believe that there is a shortage of trained people with the desired skills, the problem arises from businesses wanting proven talent. This is highly problematic, individuals have no way to respond to these incentives and create additional supply since it requires that an individual gain experience from another employer; something that the other employer has an active interest in NOT providing to an employee who will leave in response to the incentives from another employer. There is no way for the market to respond since the source of supply, the competing employer, gains nothing from the transaction between the skilled employee and the new employer.

Tuesday, June 16, 2015

The Influence of Institutional Disparities on Bargaining Power Between Capital and Labor

Mark Thoma has an excellent column regarding rising inequality and the role that the relative bargaining power of workers and employers plays in this. I am in complete agreement as to his points and to his opinion that market power has not received enough attention.

I do want to drill down further regarding the concept of economic power. To understand the disparity in bargaining power we need to be aware of the institutions and norms which give rise to it. Our institutions and norms are simply not those of a world of "the textbook ideal of competitive markets." Instead our institutions have evolved in a direction that serves to greatly reduce the inherent organizational problems of capital without serving a similar role to reduce similar problems faced by labor. Our institutions make it easy for capital to organize itself in the form of corporations and contain elaborate protections to safeguard the rights of owners of capital against others claiming interests and rights in these corporations. Easily available information on the performance of capital investments similarly serve to reduce coordination and collective action problems among individuals who control capital.

Corporate law is the major culprit in this unequal institutionalization. It is obvious enough why early modern legislatures would have seen it necessary to grant very strong rights to capital in order to induce investors to take capital out of land and put it to more productive uses in the under-capitalized world of the time.* It is less obvious why this continues unremarked in market economies that are far from their agrarian past. The problems facing the modern world, and more narrowly modern businesses, are not those of capital scarcity. Sufficient capital exists to easily replicate any given concentration of property, plant, and equipment. What distinguishes businesses is the quality of their internal institutions, the policies, procedures, norms, knowledge, and other intangible qualities that separate the leaders of an industry from those with similar capital accumulations but lesser results.

In the kind of competition that determines success in modern business it seems obvious that the disproportionate rights granted to the capital interest in an organization leads to inefficient incentives. The intangible elements which lead to business success develop at least as much, if not more, out of the labor element of the productive process rather than from the capital investments of owners. Yet, control in the modern American corporation rests with owners and management rather than the lower levels of organizations where institutional norms generally develop and are then propagated within the organization.**

It is not difficult to imagine how laws governing corporations could be changed to more closely conform with the market ideal of equal individuals bargaining from legally equal positions of power freely and without coercion. To a certain extent, the Rhenish model of capitalism already does this, providing some proof on concept. A more complete system would be corporate law which explicitly recognized that employees contribute to an organization in ways not explicitly reimbursed through market income and required that corporations grant employee organizations explicit voting rights and control that grew along with a corporation. As an ideal end point a mature organization would completely extinguish its equity accounts returning capital to investors to be reinvested in new enterprises and leaving control entirely with employees. Current corporate law obviously doesn't allow for this, but it would much more closely resemble the market ideal of the textbooks where capital and labor are equal partners and where the market tends towards a normal rate of return leading investors o continuously seek new and innovative investments in search of higher returns to capital rather than accumulate massive capital stocks in mature blue chip companies.

A second notable institutional disparity is the set of institutions that have evolved explicitly to protect the rights of capital. These are both public institutions, such as the SEC, and private organizations such as the AICPA or the ratings agencies. By providing investors with high quality information, explicit sanctions against violating accepted practices, and making this information readily available these organizations contribute greatly to capital interests overcoming the collective action problems they would otherwise face.

This isn't to say that these organizations aren't enormously beneficial, but why do similar organizations not exist to help labor overcome similar problems? How much better would the labor market function if regular audits were conducted of labor practices and annual reports were made available regarding salary ranges for positions, actual hours worked by position and department, adherence to labor standards, and other characteristics of interest explicitly to labor? What if government organizations existed which regularly policed statements made by companies regarding their efforts to attract the labor the way that the SEC policies registrations of publicly traded corporations?

The disparities in access to information and the relative institutionalization of the interests of both capital and labor are stark and obvious if even a moment's thought is paid to them. Organizations such as labor unions or the NLRB are poor substitutes for the alphabet soup of organizations dedicated to assisting with the efficient allocation of capital. If our society placed a similar priority on the efficient allocation of labor how much more efficiently could our economy allocate resources and how much more closely would it conform to the textbook ideal? Instead, we put up with a situation where capital enjoys disproportionate influence and there is little discussion, or even recognition, that our society has granted capital these rights and that other sets of choices can be made.

Unless something is done at the basic level of institutions I do not see how our economy can be either equitable or efficient. The happy post war period rested on an exceptional set of circumstances, given the unequal distribution of rights in our economic system I do not see how it is possible to reach a stable equilibrium. Instead, the kinds of inefficient disparities we see today, and that we say at the turn of the 19th century, are what I see as the norm. Rights are too unequal for anything else to be the case.

Tuesday, April 28, 2015

Too Much Stuff Means There is a Distribution Problem

Business school has been making me think a great deal about the mismatch between our economic institutions and the actual practice of business. There are many aspects of this which I plan to explore over the summer but one aspect of this is the apparent glut of capital and other goods written about Nick Bunker in this post.

I have to confess, I find the concept of a global oversupply of capital to be incoherent. It can certainly be the case that a nation, or an individual, has more capital then they can possibly use efficiently. But the globe as a whole? How could this be?

The answer, of course, is that its a problem of distribution. If poor people had more capital they would use it more efficiently than rich people that have capital. A poor African like I saw in Zambia could trade their traditional hut with no plumbing for a house with plumbing, let their kid go to school, or possibly invest in a small business. If they had it, they'd put it to good use. Meanwhile, we have a global capital glut because the capital is in the hands of rich folks who are more interested in preserving their capital than putting it at risk. Want to solve the problem? Get it out of the hands of those who don't have a current use for it and into the hands of those that do.

In the context of property rights, I am beginning to see the transition from the feudal era to the capitalist area largely in terms of providing institutions which caused capital to flow from those that sought safety in the form of land to those that were willing to take risks. Our current business friendly regulatory environment has resulted in a social context that is beginning to look more like the feudal era, capital is concentrated in large, mature, stagnant enterprises controlled by people whose goal is to minimize risk rather than maximize growth. If we want to jump start growth we are going to need to rewrite our property laws to get capital back in the hands of risk takers and out of the hands of those that currently have it.

Never thought business school would radicalize me the way it has, but there you go. More on this to come.