Monday, August 27, 2012

Is Ronald Coase a Euvoluntaryist? (Part 1 of 2)

Of all of the Big Names of 20th Century economics, Coase's work is at once the most widely known and the most widely misinterpreted (even in the peer-reviewed literature!). Ronald Coase wrote two papers so good that subsequent economists have made very successful careers elaborating on his themes. The first, The Nature of the Firm, asks why it is that if the market is so all-fired good, we see firms? The First Welfare Theorem tells us that voluntary trade inevitably produces maximum surplus: it is Pareto efficient. Here at EE, we hold that if voluntary trade meets the conditions for euvoluntary exchange, not only is it economically efficient in the FWT sense, it meets generally accepted standards for fairness and social justice. How is it then that we'd ever see people organizing into firms? If we agree that a just, peaceful society is desirable (and to be sure, this is simply an assumption and may not necessarily be true), then should we not rely on (eu)voluntary exchange as much as possible? Should it not be a maximand?

Not so, says Coase, and with good reason. Bargaining is expensive: it requires time and effort. In a production process, it can be prohibitively wasteful. Let me give you a real-life example from my own experience working in a factory.

I used to make buttons. Like, shirt buttons. There's one remaining button factory in the United States and it stays open mostly because voters get bent out of shape when they discover materiel is produced abroad. Therefore, the Pentagon buys its domestically produced uniform buttons from a factory in a sleepy Connecticut mill town. The production process is something like this: raw melamine is compressed in pill-making machines by worker (A) and loaded into barrels. The barrels are sent to be mashed in a hot press by worker (B). From there, the button rounds are sent upstairs in an elevator that would feel at home in a David Lynch movie to be tumbled in big ol' rollers stuffed with pincushioned golf balls to remove the flashing by worker (C). Worker (D) then takes the cleaned buttons and applies the relevant finish before sending them to workers (E) through (H) to be inspected, sorted, boxed, and shipped. Workers (I) through (T) perform additional duties, from order processing to machine maintenance to, I don't know, ombudsmanning. I didn't really work there long enough to get a feel for what the office workers did, plus I was a third shift press monkey, pretty low in the organization. The point is, I didn't have to sit down and haggle with the pill masher and the flash buster to buy my raw materials and sell my finished product. As a worker (B) (no pun intended), I was spared the costs of repeated negotiation. By organizing as a firm, US Button consolidated all those micro-transactions (even if they would have been purely euvoluntary piecewise) into one larger transaction, namely, "do you agree to work here under the following conditions...?" In economics, this is a component of what we call "economies of scale", that is, for some operations, bigger is better. If the bargaining costs can be trimmed away by absorbing impersonal, anonymous market operations into the firm, then the firm can operate cheaper, which means we get more stuff using fewer inputs. In a liberal industrialized economy, this improves everyone's BATNA, since widely available cheap products help resolve problems of material scarcity. In 1912, my BATNA to toil was starvation or charity. In 2012, it's Skyrim and Cheetos. Now, I'm not saying it's particularly fun being poor, but it's a lot less fatal and more comfortable these days than even a century ago and a big part of that is the huge decline in real prices due in part to the way industry is organized. Because of the forces Coase pointed out in The Nature of the Firm, the world is a more euvoluntary place.

In my next post on Coase, I'll talk a little bit about his other famous paper, The Problem of Social Cost and I'll address how well-defined property rights can help identify space over which agreements can be struck. In the meantime, I'll leave some additional considerations:

  • If modern industry makes us all better off by improving everyone's BATNA, does this imply that labor transactions are necessarily euvoluntary? Why or why not? How do workers move along the euvoluntary spectrum over the course of their careers?
  • Are there some aspects in which modern industry gives people a worse BATNA? Is overabundance of choice (for example) welfare-destroying? Do the extra transaction costs of having to choose from 500 varieties of breakfast cereals at the store impoverish me? How would Coase respond? How would Munger respond?
  • Ceteris parebus, is working in a firm more or less euvoluntary than working on your own? Why or why not? What are the relevant considerations? What are the relevant EE conditions?

No comments:

Post a Comment

Do you have suggestions on where we could find more examples of this phenomenon?