Got a five-year-old in the house? Have him try to pronounce the title of this post. Post it on YouTube.
The title may be mouthy, but the idea is pretty simple. "Supererogatory" means an act exceeding or not enjoined by requirement. If you're a strong swimmer and you see a kid drowning in a still pool, you're bound by ordinary pedestrian morality (at least in the Western cultures most of my readers {according to Google analytics} hail from) to jump in and save him. A supererogatory feat would be to do the same thing except in swiftly-flowing floodwaters where the risk of death to both parties is non-negligible.
Now think about our old pal Jorge, piloting his taco truck across the burning sands. Munger argues convincingly that selling our weary, lost traveler (does he have a name? I can't recall) a 16-oz bottle of water for $10,000 is not euvoluntary since it impinges on a lousy BATNA. Munger also shows that even if it's a non-euvoluntary exchange, the result of not making the trade, regardless of the terms, is yet worse. Jorge has a moral imperative to sell to our wanderer, and an ethical obligation to refrain from taking excessive advantage of an awful situation.
Notice though that Jorge's ethical obligation is entirely conditional on him tooling around the dusty dunes in the first place. Jorge could have done lots of other things with his life. he could have moved to LA and bummed around in Winona's bungalow overlooking Pismo or taken that ski vacation with Kevin Costner and Gary Oldman up in Whistler. But no, Jorge chose to chop that secondhand jitney and set up a kitchen with the finest carnitas y flan in all Oaxaca.
DAVAI DAVAI JORGE DAVAI
Was this initial decision supererogatory? If so, what does it imply about a subsequent decision to junk the taco truck and retire to Tierra del Fuego? Can it be that there are three stages in a firm's life (pre-formation, existence, post-destruction) only one of which imposes moral obligations on owners?
If we accept that existing firms really do bear some responsibilities over their terms of trade (and Munger's critique of Locke is difficult to gainsay in this regard), it seems to follow that there's an instrumental benefit to supporting those qualities, institutions, and sentiments that support and affirm firm creation.
Right? The more opportunities for trade that exist, the fewer skeletons of feckless desert travelers should litter the arroyo.
If firm creation is supererogatory, then bourgeois dignity and low barriers to entry are super-duper-erogatory.
Up up and away.
Showing posts with label theory of the firm. Show all posts
Showing posts with label theory of the firm. Show all posts
Thursday, May 9, 2013
Wednesday, September 5, 2012
Nepotism
Running a business is costly. Hiring good people is a big part of that cost. HR personnel, for all their expertise, still end up making what amounts to bets on new hires. The signals a prospective employee sends are muted by puffery and complicated by misaligned context: just because she may have performed well at her past job as a taco truck driver's assistant doesn't imply that Lupita will fit in well at the UNC deli counter. It's cliche to say that culture matters, but if we take it to mean that "getting on well with coworkers" matters, then it's probably too obvious to bother mentioning. How then can firms reduce costs while hiring people likely to fit in? Easy, hire family and friends. Problem solved, right?
Ha ha, right. In large organizations that enjoy government protection from competition, nepotism is a rent-sharing technique. Assuming some people would rather their friends and family make a comfortable living with fewer labor inputs, a hospital manager might suggest to a golfing buddy that their cousin who just graduated law school find work at the courthouse in return for the County Exchequer's (is that a real job?) youngest's consideration for that phlebotomist position that just opened up. No matter whether those workers are best suited for the positions, since this horse trade maximizes a joint utility function rather than a profit formula, which, in a regulated monopoly is fixed anyway. The question to ask when fretting over whether nepotism is a net benefit or a net cost is what characterizes the nature of the firm under consideration.
Now, in a perfectly competitive industry where the production function components are separable, any deadweight costs of nepotism eat market share. If rents are to be had, and they usually are, then it's unclear who bears the costs. Conditional on the size of the firm and its relationship with government, customers could pay in the form of poor service, taxpayers could pay with wasted marginal tax dollars, co-workers could pay in aggravation or politicians could pay in face. The costs that impinge on customers drive moral outrage towards nepotism, those that impinge on politicians determine the probability of prohibition. Therefore, any whiff of nepotism in direct government employment (at least at the federal level) is relentlessly squashed. Contrarily, in small businesses nepotism isn't merely tolerated, it's often celebrated. No politician is happier than when they're crowing about small, family-owned businesses. How about intermediate cases? How do people feel about nepotism in school districts? Hospitals? State contractors?
For a euvoluntaryist, these are interesting questions. I'd like to know when nepotism stops being euvoluntary and starts being exploitative. What defines the range over which there is moral displeasure with nepotism but no regulation? Do those positions that are regulated enjoy efficient regulation (that is, does the marginal benefit of regulation outweigh the marginal cost)? What forces within a firm might keep the costs of nepotism in check? If government were restrained from offering special favors to industry, how would the problems of nepotism change?
I don't affirmatively know the answers to these questions. This is not an instance where armchair theorizing will shed much light. This is one of those shoe-leather cases where a researcher needs to do the ol' sleeve-roll and investigate up close and personal. Please feel free to share your own stories in the comments.
Ha ha, right. In large organizations that enjoy government protection from competition, nepotism is a rent-sharing technique. Assuming some people would rather their friends and family make a comfortable living with fewer labor inputs, a hospital manager might suggest to a golfing buddy that their cousin who just graduated law school find work at the courthouse in return for the County Exchequer's (is that a real job?) youngest's consideration for that phlebotomist position that just opened up. No matter whether those workers are best suited for the positions, since this horse trade maximizes a joint utility function rather than a profit formula, which, in a regulated monopoly is fixed anyway. The question to ask when fretting over whether nepotism is a net benefit or a net cost is what characterizes the nature of the firm under consideration.
Now, in a perfectly competitive industry where the production function components are separable, any deadweight costs of nepotism eat market share. If rents are to be had, and they usually are, then it's unclear who bears the costs. Conditional on the size of the firm and its relationship with government, customers could pay in the form of poor service, taxpayers could pay with wasted marginal tax dollars, co-workers could pay in aggravation or politicians could pay in face. The costs that impinge on customers drive moral outrage towards nepotism, those that impinge on politicians determine the probability of prohibition. Therefore, any whiff of nepotism in direct government employment (at least at the federal level) is relentlessly squashed. Contrarily, in small businesses nepotism isn't merely tolerated, it's often celebrated. No politician is happier than when they're crowing about small, family-owned businesses. How about intermediate cases? How do people feel about nepotism in school districts? Hospitals? State contractors?
For a euvoluntaryist, these are interesting questions. I'd like to know when nepotism stops being euvoluntary and starts being exploitative. What defines the range over which there is moral displeasure with nepotism but no regulation? Do those positions that are regulated enjoy efficient regulation (that is, does the marginal benefit of regulation outweigh the marginal cost)? What forces within a firm might keep the costs of nepotism in check? If government were restrained from offering special favors to industry, how would the problems of nepotism change?
I don't affirmatively know the answers to these questions. This is not an instance where armchair theorizing will shed much light. This is one of those shoe-leather cases where a researcher needs to do the ol' sleeve-roll and investigate up close and personal. Please feel free to share your own stories in the comments.
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:
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?
Monday, June 4, 2012
Corporate Social Responsibility
There are plenty of ways to raise economists' hackles. Price controls, trade barriers, subsidies, taxes, regulation, if the state has a hand in it, you can bet some economist somewhere has something to say about it.
Corporate social responsibility efforts are another kettle of fish however. Here we have private firms picking up the banner of charity and "giving back" to the community (under the assumption that they've earned their profits illegitimately, perhaps?). Freshwater economists point to firms' fiduciary duty and cry "foul": the responsibility of a firm begins and ends with maximizing share value. Profits are a signal that the firm is producing consumer surplus, that is, delivering value to the customer. This is what the firm specializes in: it is what they do best, and we are all made better off through specialization and trade. If shareholders are interested in charity, it is more efficient to convert dividends into donations to those organizations that specialize in the business of charity.
Is not corporate charity euvoluntary? Investors aren't coerced into buying stock of Home Depot (well-known for building community playgrounds and refurbishing forgotten municipal parks) or Whole Foods (never one to shy away from posting the money they've raised for a hodge-podge of community projects). There's no hint of coercion anywhere, not from the customers, not from the business owners, and not from investors. Customers can just as easily frequent the classic, miserly firms. Owners are constrained by standard competitive forces and the limits of their imagination. And investors? There are plenty of stocks on the NYSE and plenty of no-load index funds available. What's to object to?
It seems there's a bit of a pickle here (just a lil' gherkin though, not a big ol' kosher dill) for Free-Market Euvoluntaryists. Freedom of association is an important virtue, but efficiency is also good; efficiency is an ingredient in material abundance and is necessary for the amelioration of poverty. We want to see resources finding their way to their highest value use and when voluntary transactions conducted within good institutions, well-defined property rights and the rule of law don't get us there, it can be a little flustering. For those of you taking (or teaching) upper-division econ courses, here is how I might approach the topic with my students.
Questions for discussion:
Corporate social responsibility efforts are another kettle of fish however. Here we have private firms picking up the banner of charity and "giving back" to the community (under the assumption that they've earned their profits illegitimately, perhaps?). Freshwater economists point to firms' fiduciary duty and cry "foul": the responsibility of a firm begins and ends with maximizing share value. Profits are a signal that the firm is producing consumer surplus, that is, delivering value to the customer. This is what the firm specializes in: it is what they do best, and we are all made better off through specialization and trade. If shareholders are interested in charity, it is more efficient to convert dividends into donations to those organizations that specialize in the business of charity.
Is not corporate charity euvoluntary? Investors aren't coerced into buying stock of Home Depot (well-known for building community playgrounds and refurbishing forgotten municipal parks) or Whole Foods (never one to shy away from posting the money they've raised for a hodge-podge of community projects). There's no hint of coercion anywhere, not from the customers, not from the business owners, and not from investors. Customers can just as easily frequent the classic, miserly firms. Owners are constrained by standard competitive forces and the limits of their imagination. And investors? There are plenty of stocks on the NYSE and plenty of no-load index funds available. What's to object to?
It seems there's a bit of a pickle here (just a lil' gherkin though, not a big ol' kosher dill) for Free-Market Euvoluntaryists. Freedom of association is an important virtue, but efficiency is also good; efficiency is an ingredient in material abundance and is necessary for the amelioration of poverty. We want to see resources finding their way to their highest value use and when voluntary transactions conducted within good institutions, well-defined property rights and the rule of law don't get us there, it can be a little flustering. For those of you taking (or teaching) upper-division econ courses, here is how I might approach the topic with my students.
Questions for discussion:
- Do modern Western states actually have free markets in charity or has the state effectively crowded out smaller community organizations?
- For the charitable assistance that the state does provide, is it sufficiently welfare-enhancing? Are there gaps in the provision of assistance?
- If the state has crowded out private charity, and it does do a relatively poor job of making communities better off, is there a role for other organizations to fill the void?
- Specifically, is there an appropriate role for corporate charity: do corporations conduct de facto social responsibility experiments or are they feel-good vanity projects with no feedback and little or no accountability? Where is the substitute for profit and loss signals? How do corporations stack up against organizations that rely strictly on voluntary contributions?
- If state-run transfer programs were discontinued, would you expect specialized private charities to bounce back or is it likely that corporate entities would continue or expand their charitable activities?
I'm not sure I have good answers to all of these questions. Predicting general equilibrium conditions is tricky and we don't have much empirical evidence of how private charities operate in a modern setting absent any current or past state intervention. Institutions are persistent and if corporate social responsibility is already a trope, it may well be here to stay.
Tuesday, November 29, 2011
Magnus Jiborn
The internet is really something.
Found two works by Magnus Jiborn. Here is a book, his dissertation. And then an article.
I found the book particularly interesting. Coercion need not be involuntary. A group of coolees pulling a boat might hire someone to whip laggards. In fact, this theory of the firm has some merit: firms coordinate monitoring team production and enforcement of sanctions, ensuring that in equilibrium there are few violations. See, for example, Steven NS Cheung, THE CONTRACTUAL NATURE OF THE FIRM, JLE, 1983.
It is not far from there to Thomas Hobbes and social contract. The prisoners can get out of their dilemma if they hire a guy with a big sword to punish violations.
Found two works by Magnus Jiborn. Here is a book, his dissertation. And then an article.
I found the book particularly interesting. Coercion need not be involuntary. A group of coolees pulling a boat might hire someone to whip laggards. In fact, this theory of the firm has some merit: firms coordinate monitoring team production and enforcement of sanctions, ensuring that in equilibrium there are few violations. See, for example, Steven NS Cheung, THE CONTRACTUAL NATURE OF THE FIRM, JLE, 1983.
It is not far from there to Thomas Hobbes and social contract. The prisoners can get out of their dilemma if they hire a guy with a big sword to punish violations.
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