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.

* As I gain greater knowledge and experience of the private sector I am coming increasingly to appreciate how our institutions serve to recreate the dependency networks upon which the power of gentry and nobility rested in previous ages. I am increasingly moving against the idea that market institutions resulted in modern problems, rather the preservation of many of the rights and obligations of the landed class in modern law regulating capital creates a clash between values rooted in status and dependency and markets which function best when status distinctions are eliminated and people are given equal voice in their dealings with each other. Modern structures governing capital, however, violate democratic and market norms and provide perpetual rights to individuals disproportionate to the contribution they make in the success of the organizations they contribute to while disregarding the claims of other individuals that participate in these organizations. This seems to me to be a perpetuation of status and the bundle of property rights from a previous era rather than the bundle of rights that would be institutionalized in a society that started with market assumptions.

** My MBA program did emphasize the role of management in the formation of these institutions. Based on the organizations I've been a part of my belief is that the role of management in these changes is greatly exaggerated. Business tends to overemphasize the role and importance of leadership and fails to deal in a meaningful way with the more inchoate and difficult to attribute contributions made by employees as a collective. There is a great deal of great man of history feel to business thinking and far too little appreciation for institutional development and the organic development of cooperation in groups. The incentives facing the writers of business publications and of business schools training students for participation in business leading to this bias are sufficiently obvious that I doubt I need to belabor the point.

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