Unions, organizational form and efficiency

by Henry on March 9, 2007

Tyler Cowen has a “new post”: which clarifies why he objects to pro-union legislation.

Labor-run firms are common in law, book agency, real estate, landscaping, and many other sectors; we even see them in airlines. When labor in charge creates more value, labor starts its own firms or buys out the capitalist or buys greater control rights. Growing capital markets make these evolutions easier all the time. Cooperatives, which are governed by consumers, also are found. Mutuals, non-profits, and yes unionized firms are common too. I heart all of these organizational forms. Keep in mind that if both workers and customers will be better off, yes it probably can happen; it is naive to think that liquidity problems are the major issues preventing workers from enjoying greater control rights. In the short run, the mental model of the left-wing bloggers is a bunch of janitors trying to get better working conditions but opposed by employers. In the longer run what is striking is the competition across different organizational forms. It doesn’t always make sense to give labor residual control rights over capital goods, or the right to halt production.


Which means, if I understand what he’s saying correctly, that Tyler subscribes to an evolutionary efficiency theory of economic organizational form. Specifically, as long as capital markets are given full sway, we can expect that the most efficient organizational form for a given kind of economic activity will emerge through competition with other possible forms. Inferior organizational forms will disappear as better ones (in a given area or sector of economic activity) replace them. Thus, for Tyler, the problem isn’t unions per se. It’s government interference with this efficiency enhancing process of organizational selection, which loads the dice in favour of unionized firms.

But this isn’t, contra Tyler, a simple competitive process in which the best (i.e. most socially efficient) organizational forms win. Capital market investors may have perverse incentives too; there’s some evidence to suggest, for example, that they favour short term returns more than they should. This means that firms which are too responsive to capital market investors may find it hard to commit to reward employees for unobserved effort through, say, long term employment (the firm may have the incentive to fire workers to please capital markets, even when this isn’t in the best long term interests of the firm). On this, see Gary Miller’s Managerial Dilemmas: The Political Economy of Hierarchy (Cambridge 1992) in extenso. Miller argues that it’s necessary partially to firewall organizational decision making from investor influence in order to achieve these efficiencies, and points to some basic results from social choice theory to bolster this claim. Although he doesn’t say this, unions are one means of providing such insulation, and thus, potentially, of solving commitment problems. More to the point, one could plausibly argue that even when union-dominated firms provide such efficiencies, capital market investors are less likely to invest in them (these firms will have lower short term returns because they are forgoing the temptation to boost profits by firing workers in order to achieve long term efficiencies). In technical language, they are more likely to direct their investments to organizational forms that provide a higher residual profit with an inefficient outcome, than organizational forms that have a lower residual profit, but greater social efficiency. Thus, capital markets may under-reward certain kinds of organizational form relative to their economic efficiency, and over-reward others.

This certainly isn’t to say that union-dominated firms will necessarily be more efficient than non-union ones (it depends on the sector, how the union works in practice, and a whole bunch of other factors). It is to deny that unfettered capital markets will necessarily select for efficient organizations. These markets are likely to select instead for organizational forms that maximize investors’ residual profits, which isn’t at all necessarily the same thing as efficiency.

More generally, Tyler’s arguments suggest a vision of the economy, which is pretty common among economists, as one where we can expect efficient organizational outcomes to emerge naturally in the absence of heavy-handed government regulation. This vision really only works if there is something like a perfectly competitive market in institutional forms (see further, Jack Knight, Institutions and Social Conflict). There isn’t any very good evidence to my eyes that there is something resembling such a market. Instead, we see the emergence and persistence of power asymmetries among different groups of actors, which gets translated into institutions that have asymmetric distributional consequences. The correct way to view relations between investors, management and workers, to my eyes, is as a battle over the distribution of resources. The organizational forms that we see emerging are less the product of perfect competition than of these battles, and of the power asymmetries between the various actors involved.

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1

Matt 03.09.07 at 8:09 pm

I’d rather strongly suspect that the model favored by Cowens is one that only really works if there are no transactions costs, but that if it’s costly to switch from one form of organization to another (as it surely would be) the mere fact that another form would be, if you could get it magically, more efficient doesn’t at all mean that it will come about. Of course I’m not certain about this. But the ‘no transactions cost’ assumtion is a very common one in economics and one that’s basically never born out in the real word and is usually a good thing to suspect when a bit of economic reasoning looks like garbage.

2

Barry 03.09.07 at 8:16 pm

Henry, a possibly personal question – you’re a political science guy. Do you believe that people like Tyler are arguing against unions because of economic theory, or because they just don’t like unions?

3

Henry 03.09.07 at 8:24 pm

Tyler is a friend of mine, and quite the opposite of a hack – while he clearly starts from a quite different place than I do, he’s open to changing his mind as a result of reasoned argument, and has a variety of interesting opinions that most people sharing his broad political persuasion don’t share. Take, for example, his post a few months back on the joys of life in social-democratic Sweden, which provoked apoplexy among some of his regular readers. So I do think that his opinion starts from a set of intellectual priors rather than a basic dislike of unions or the left.

4

David Kane 03.09.07 at 8:32 pm

Henry writes:

Capital market investors may have perverse incentives too; there’s some evidence to suggest, for example, that they favour short term returns more than they should.

Evidence, please. If this is true to a significant extent, then be sure to tell Daniel. He can explain how to turn this insight into lots of money. Go short all the companies who are excessively short term. Go long the companies that aren’t (because they have unions?). Wait a few years. Count the money.

I suspect that Daniel will tell you that it isn’t this easy . . .

5

Barry 03.09.07 at 8:38 pm

Henry, thanks for the reference. I’ll check out that post.

6

Barry 03.09.07 at 8:40 pm

Addendum – in the post referred to above, Tyler says ‘On the other hand, will Ezra (and others) agree that unions are mostly detrimental to the rate of economic growth?’.

Can that be proven?

7

Grand Moff Texan 03.09.07 at 8:44 pm

In the short run, the mental model of the left-wing bloggers is a bunch of janitors trying to get better working conditions but opposed by employers.

Wrong. My mental model isn’t some hackneyed TV cliché. My mental model is my own union. I’ve worked in education for years and our union is the only thing that’s kept us from getting fucked by our employer.

That’s the point.

Without organization most workers have nil leverage in negotiating compensation for their labor. The oligopoly of employment has to be countered by something. That’s the kind of free market tension I would expect free-market advocates to grasp, despite the shallow irony of it all.

I’m a union man for one simple reason: I’m nobody’s bitch. Joining a union is a simple act of self-respect.
.

8

Grand Moff Texan 03.09.07 at 8:48 pm

‘On the other hand, will Ezra (and others) agree that unions are mostly detrimental to the rate of economic growth?’

Whose economic growth? If wages are flat while productivity grows, the people doing the work are being ripped off.

If growth-curves in equities are flatter when union membership is up, I think I’m going to fucking cry.
.

9

Grand Moff Texan 03.09.07 at 8:53 pm

Specifically, as long as capital markets are given full sway, we can expect that the most efficient organizational form for a given kind of economic activity will emerge through competition with other possible forms.

Which is a sadly naïve rendering of Kropotkin’s anarchism. Competition isn’t equal, the participants self-select by buying into common models, and failure doesn’t always lead to accountability.
.

10

Kimmitt 03.09.07 at 9:04 pm

I do buy the evolutionary argument, that structure will respond to the pressures put on it. What I disagree with is that the pressures put onto structure are necessarily toward maximizing increases in productivity, as versus maximizing increases in return to investment.

To start with the jargon:
In the simplest Solow model, using a basic Cobb-Douglas production function, return to capital is proportional to three things: overall productivity, the capital share of income and the ratio of labor to capital. Empirically, we’ve shown that this is a pretty decent approximation of an economy.
Jargon ends.

So, shareholders are happier either when technology is arranged such that capital gets more important in overall production or when there are more people laboring with less capital or when productivity is higher. Yes, productivity is part of the picture, but it’s important to understand that to shareholders, there is a substitutability between productivity and power; that is, either a rising tide that lifts all boats or an increase in the proportion of income that’s capital-dependent gets them what they want.

The former is what we want — nice steady productivity growth that raises living standards. But either is fine for shareholders, so there is no reason to think that a system which caters exclusively to the needs of shareholders will necessarily push toward productivity as hard as a system which is forced to satisfy both shareholders and laborers. This is because parallel reasoning shows us that there is only one thing which will make both capital owners and laborers simultaneously happy — productivity growth.

The labor movement can reasonably be seen (in part) as a movement which increases the cost of attempting to seize more of the pie, which reorients decisionmakers toward increases in pie size.

11

Sebastian holsclaw 03.09.07 at 9:04 pm

“More generally, Tyler’s arguments suggest a vision of the economy, which is pretty common among economists, as one where we can expect efficient organizational outcomes to emerge naturally in the absence of heavy-handed government regulation.”

I don’t think this is an accurate vision of Tyler. He would say something like “Perverse incentives tend to afflict heavy-handed government regulation at least as much as private markets and government regulation is less sensitive to failure, thus keeping bad policy in place longer.”

12

Kimmitt 03.09.07 at 9:05 pm

(Yes, capital income is actually proportional to the ratio of labor to capital taken to a power less than one, but I’m simplifying anyways and no explanatory power is lost.)

13

Walt 03.09.07 at 9:10 pm

David Kane: Have you ever tried shorting a stock? It’s not, you know, actually a risk-free endeavor.

14

Henry 03.09.07 at 9:12 pm

David – stop (insofar as that is possible – not very far I suspect) being a hack and read the post. The point isn’t that there are free dollar bills waiting for cunning capital providers to pick up. It’s that (a) there are fundamental incentive problems which make it very difficult for investors to make credible long term commitments to workers that would allow for efficient equilibria (Miller’s arguments rest on basic social choice results from Holmstrom, Eswaran and Kotwal and others), (b)that organizations which solve these problems are likely to see a lower residual for investors, even if they are more socially efficient than the alternative, and (c ) that this means that capital markets are likely to prefer socially inefficient forms of organization that maximize investor returns, to socially efficient forms of organization that don’t. This isn’t rocket science.

15

David Kane 03.09.07 at 9:28 pm

Henry,

Always a pleasure to discuss with you too!

You make a specific claim about what investors do and “should” do. I interpreted this “should” in the context of those investors own self-interest. Was that a crazy interpretation? Does having trouble understanding you make me a hack? This is LGF-level discourse.

Now you might claim that the context of the post makes clear to a non-hack that the “should” here is a normative one, expressing a specific vision for how to organize the economy. Fine. But read again what you wrote:

“there’s some evidence to suggest, for example, that they [investors] favour short term returns more than they should.”

What possible “evidence” are you talking about? There is plenty of argument and evidence about investors not always acting “rationally.” For example, many investors trade too often. Their returns would be higher if they traded less. But there is no “evidence” that investors “should” adhere to your moral judgments about the appropriate organization of the economy.

16

Henry 03.09.07 at 9:38 pm

Does having trouble understanding you make me a hack?

No. What makes you a hack is your eagerness to accuse people of fraud on the basis of evidence that could be refuted by three minutes searching around on Google. It strongly suggests that you are less interested in actual argument, than in finding and touting any old crap that seems to support your prior beliefs.

But there is no “evidence” that investors “should” adhere to your moral judgments about the appropriate organization of the economy.

That isn’t the argument here. I’d doubtless be very happy should investors decide to adhere to my moral judgements. But the argument isn’t about moral judgements – it’s about social efficiency (which is what economists are interested in). I’m personally happy to lose some efficiency if it provides for greater equality – but that isn’t the case that is being argued here. Moral judgements (except insofar as efficiency itself bears a moral weight) don’t come into it.

17

radek 03.09.07 at 9:39 pm

Re: Matt in 1,
The argument would matter only if government internvetion can somehow reduce these ‘transaction costs’. Otherwise if there are real prohibitive transaction costs, then switching between institutional forms would not be efficient anyway, once one takes these costs into account.

18

Barry 03.09.07 at 9:39 pm

Posted by Walt: “David Kane: Have you ever tried shorting a stock? It’s not, you know, actually a risk-free endeavor.”

And from my intro to finance, there are some serious pitfalls awaiting, depending on what happens over the course of those ‘few years’. Margin calls can easily be fatal to those without very deep pockets.

19

Grand Moff Texan 03.09.07 at 9:47 pm

On topic, this article might be of interest to the thread.
.

20

David Kane 03.09.07 at 9:55 pm

Henry,

Well, with luck we can return to the Lancet on another occasion. In any event, if you think I am just a hack, then there isn’t much point in having a conversation, is there? I will allow Crooked Timber to return to its normal echo chamber in non-Lancet related threads. Enjoy.

21

Matt 03.09.07 at 10:15 pm

Radek- I didn’t argue that government action can reduce transaction costs (though sometimes it can- that’s not too controversial) but rather that transactions costs can explain why you don’t get a natural evolution to more efficient methods of organization. Because of this you can’t infer that a method of organization is efficient because it persists in an area for a long time.

22

radek 03.09.07 at 11:23 pm

Matt, maybe. The story needs more details and you need to be specific as to what “efficiency” means. One set of institutions can be more ‘efficient’ (productive, whatever) than another ex-post, but if the transition costs are prohibitive then that set of institutions may not be efficient ex ante.

23

C. L. Ball 03.09.07 at 11:41 pm

Farrell seems to have gone off the deep end on Kane in #16. When did Kane accusse Farrell of ‘fraud’? Asking for evidence rather than analytical propositions is not an accusation of fraud. Kane came up with a deeply flawed argument, but I don’t see how implying he is incapable of being anything other than a hack encourages serious dialogue.

Clearly, though Kane misses the point. If capital markets irrationally reward short-term gains over long-term gains, then long-term firms will be under-capitalized and therefore unable to perform as well as they could have. It’s a vicious circle.

Re #7, joining a union doesn’t ensure one will be nobody’s ‘bitch’ — it can make one the union’s ‘bitch.’ If an employer is capable of screwing over workers — as GMT says his was — then unions are needed, but that is to say that the employees are the equivalent of most laborers in terms of bargaining power. Most private college faculty did not form unions prior to Yeshiva because they felt they did not need to.

By the same logic, many in the “creative class” or white-collar, non-clerical services are self-employed or principals so they cannot have a union but that doesn’t mean that their ability to bargain for fees and contracts is not asymmetrically disadvantageous compared to their ‘clients.’ It is not surprising then that they form professional associations that seek to create barriers to entry for competitors (e.g., realtors, lawyers).

24

Matt 03.10.07 at 12:57 am

Radek- exactly. Your last point was what I was saying, and that this turns the “evolutionary” argument that Cowens gives into nonsense in at least a large number of cases. We’d need to see evidence _from him_ before we had any reason to think that the area he is interested in is one where the invisible hand will lead us to the most efficient outcome. I rather doubt that’s true here.

25

Henry 03.10.07 at 1:05 am

c.l. ball, there’s some “background context”:http://crookedtimber.org/2006/10/18/floating-the-fraud-balloon/ here which you may not be aware of, and which should explain, I hope, why I don’t have very much respect for David Kane (it isn’t me who was accused of fraud). What bugs me as much as the initial offensive accusation is that he never to my knowledge apologized afterwards or sought to retract his accusation (if I’d done something similar, god forbid, I hope that I’d have apologized abjectly to the offended parties; I’d likely have disappeared entirely from public debate immediately thereafter).

26

david 03.10.07 at 3:20 am

“If capital markets irrationally reward short-term gains over long-term gains, then long-term firms will be under-capitalized and therefore unable to perform as well as they could have.”

A lot of the long-term v. short-term discussion is about those aspects of the capital markets that don’t do much to provide capital to firms in any case. (Doug Henwood is very good on this point). In the worst case, you have stockholders of public companies rewarding management for punishing workers by driving up stock price, which increases executive compensation — but nobody’s using the stock market to raise money. It’s not hard to spin a story where executives screw their workers to raise executive paychecks.

“In the longer run what is striking is the competition across different organizational forms.”

This bit doesn’t seem to correspond to reality, at least not if TC means what I think he means by competition. The deck is stacked.

27

radek 03.10.07 at 3:32 am

Matt, one of us is missing the point. Maybe it’s me. If one arrangment yields 1$ each period off into infinity, with a discount rate of 10% that’s worth 10 $ in PDV term. If a second arrangment yields 2$ then that’s worth 20$ in PDV terms. But if you start with arrangment 1 and the cost to switching to arrangment 2 is greater then 10$ then in fact staying with arrangment 1 is efficient even though it may not look like it if one ignores the transition costs (and presumably it would be the one chosen by investors in an evolutionary setting).

Point being that the mere existance of transition costs does not invalidate the evolutionary argument, only affects which institutional arrangments are the more efficient ones (given the initial distribution of these arrangments). To make the argument that they matter for the failure of the ‘invisible hand’, you basically have to argue that the transition costs are somehow affected by government action, in a way that they cannot be affected by private individuals working with the capital markets. Obviously, one way, as Henry alludes to above, is if the people making the decisions face liquidity constraint which for example may prevent them from borrowing the necessary funds to make the transition. Or if there’s some principle-agent problem which leads managers to maximize current profits (i.e. not pay the transition cost) at the expense of long term ones.

Having said that, my personal intuition is that:
1. Tyler is 70% right and Henry 30% right about the nature of the evolutionary pressure. This is partly because I don’t think you need “perfect competition” in this case, just “enough competition” (but then I am an economist).
2. Pro-union legislation is a very blunt instrument for the purposes of encouraging efficient institutional forms. Even if some firms/workers would be better off with stronger unions but they cannot achieve this result without some help from government, there are undoubtedly firms/workers for which the opposite is true. The effects on these two groups are going to of offset each other and in the end, even if there is market failure, the resultant government failure is probably worse.

But this is an empirical question, one that is very difficult to address with data, so I’m willing to keep an open mind.

28

Matt 03.10.07 at 5:12 am

Here’s the sort of thing I have in mind. Take a store and suppose it would be better “for the customers and the workers” if it were run as a co-op. (I don’t suspect that’s very common but just suppose thta it is for the case.) By better for the customers and workers we mean that it would pareto superior. But, the only way to go from a regular store to a co-op is to get all the customers together to do this. But to do this I’d have to spend a lot of time and money to find the other customers who are interested, to convince them, and so on. It’s not hard to imagine that this time and energy would be more than my expected gain from the store changing from a regular store to a co-op. So, being rational, I don’t do it. This is even more likely if I figure in not just the cost of doing this but the chance of inveting the time and money to convince others and still failing to do so. This doesn’t seem at all an implausible case, but it’s one where the mere fact that a co-op would be more efficient gives us absolutely zero reason to think that it will come about. The world seems to be full of such cases, but if that’s so then the idea that markets will in general evolve towards efficience doesn’t get off the ground. Note that I have never argued that this shows, in any particular case, that government regulation or involvement is the answer. It sometimes is and sometimes isn’t. As you note we’d need emperical work here, work much more careful and well done than anything that’s been linked to by Cowens, to say the least.

29

K. Williams 03.10.07 at 1:49 pm

Matt, in your example, why are you bothering to convert the “regular store” to the co-op? Why aren’t you just starting a co-op? If the benefits to workers and consumers are so great, you shouldn’t have any trouble convincing people to do so. And eventually, as workers and consumers understand how much better off they are at the new place, the old store will lose business, and eventually shut down. That’s the evolutionary process, I assume, someone like Cowen has in mind: less efficient forms eventually closing up shop, as newer and better ones emerge. But it’s evolutionary — it takes time, and it isn’t a case of all the old forms suddenly being converted to new ones.

30

Matt 03.10.07 at 2:03 pm

K- I’m not sure that it makes and difference. There would still be significant transaction costs in finding the people to start the co-op, convincing them, etc. Now, if these are low enough it might well happen. But there’s no reason to assume that they are low enough, even if a co-op would be better if we had it. (And even if the costs are low and it would be better to have a co-op, there’s no reason to think it will happen anyway. Really, these are obvious ideas from evolutionary theory both in biology and in evolutionary game theory. They are not radical ideas and to think that what is better will evolve given time is to expose one’s self as not really knowing how evolution works.)

31

pdf23ds 03.10.07 at 5:49 pm

But matt, the transaction costs in the case of a startup are pretty much sunk costs wrt organizational type, because people start startups all the time for other reasons. When an entrepreneur decides on their new company’s organizational type, they already have a company and some employees.

32

seth edenbaum 03.10.07 at 6:33 pm

All this assumes a unified notion of value. Efficiency denotes forward motion and for what I call a preference for thin sheetock walls and red round tomatoes that taste like cardboard, and at another level for invention over craft.
Imagine a violinist who has to throw away his violin every few years and buy a new one, of an entirely different shape and different intonation. Thats another reason Cowen’s ideas about culture are so bizarre, predicated on invention instead of observation, the language of pop art history “Cubism and Einstein” etc. that makes most art historians cringe.

Democracy puts the breaks on efficiency and “inventive” genius, at least as defined by Ayn Rand. But since democracy is a culture and culture is collective activity that gives back something else, as continuity allows time for self-reflection. Cowen respects some of the results of this, as examples of complex formalism, but has no understanding of how or why such things are formed. That lack of understanding, and of self-reflection, allows Cowen to make absurd and grotesque arguments such as this about New Orleans:

Instead, the city should help create cheap housing by reducing legal restrictions on building quality, building safety, and required insurance. This means the Ninth Ward need not remain empty. Once the current ruined structures are razed, governmental authorities should make it possible for entrepreneurs to put up less-expensive buildings. Many of these will be serviceable, but not all will be pretty. We could call them structures with expected lives of less than 50 years. Or we could call them shacks.

…Shantytowns might well be more creative than a dead city core. Some of the best Brazilian music came from the favelas of Salvador and Rio. The slums of Kingston, Jamaica, bred reggae. New Orleans experienced its greatest cultural blossoming in the early 20th century, when it was full of shanties. Low rents make it possible to live on a shoestring, while the population density blends cultural influences. Cheap real estate could make the city a desirable place for struggling artists to live. The cultural heyday of New Orleans lies in the past. Katrina rebuilding gives the city a chance to become an innovator once again.

In other words, since cultural flowerings result from social pressure cookers, why not just turn up the heat?
It’s still confusing though since if culture is collective, what’s the role of the individual but as one among others, and at the most in the case of genius first among equals? Why not turn down the heat at Universities in the Northeast during winter, or turn off the AC in UT Austin?

This ties into our last discussion, Henry. What does it mean when people are unaware of the implications of what they say, even though those implications are obvious to others?
And should we be defending social environments defined by “efficiency” when efficiency limits the opportunities (intellectually as well as merely in terms of time allowed) for the self-reflection and that might make such positively absurd arguments as Cowen’s, the ones I quote above, simply less likely?
“Slow down, we’re in a hurry”

This is a discussion among experts on a subject more suitable for generalists; but hyper-specialization is the order of the day and this is the result. Marx was a humanist: economics was still a means to an end. That has devolved into economics and intellectualism in general as an end in themselves, and to eminently rational absurdity.

33

seth edenbaum 03.10.07 at 6:35 pm

I’ll try again
Cowen: “Instead, the city should help create cheap housing by reducing legal restrictions on building quality, building safety, and required insurance. This means the Ninth Ward need not remain empty. Once the current ruined structures are razed, governmental authorities should make it possible for entrepreneurs to put up less-expensive buildings. Many of these will be serviceable, but not all will be pretty. We could call them structures with expected lives of less than 50 years. Or we could call them shacks.
…Shantytowns might well be more creative than a dead city core. Some of the best Brazilian music came from the favelas of Salvador and Rio. The slums of Kingston, Jamaica, bred reggae. New Orleans experienced its greatest cultural blossoming in the early 20th century, when it was full of shanties. Low rents make it possible to live on a shoestring, while the population density blends cultural influences. Cheap real estate could make the city a desirable place for struggling artists to live. The cultural heyday of New Orleans lies in the past. Katrina rebuilding gives the city a chance to become an innovator once again.”

34

engels 03.10.07 at 9:25 pm

Sweet Jesus, did Cowen really write that?

35

radek 03.10.07 at 10:14 pm

Matt, what you’re describing is a case of “coordination failure”. A pretty unconvincing case of it. In those situation there’s usually two Nash equilibria which basically says that it either happens or it doesn’t (I know. Sometimes economics is a way of restating the obvious). The reason why it’s unconvincing is that if the co-op set up is truly Pareto superior then it wouldn’t be hard to transition.

If you wanna go from no-store to co-op and you got access to a capital market you go from no-store to propriatorship then to co-op. You borrow money to set up the store (no-store to store) and run it as a propriatorship. Then offer an incentive for your consumers to join in as co-owners, say giving them a sufficient member-only discount (if the coop set up is truly more efficient then such a discount will exist so that both you and your consumers are better of). Then you got your co-op.

Now replace “you” with “a bunch of filthy but capitalistic minded, business savvy hippies, and some granola academics”, (i.e. “a group of initial investors”) and “proprietorship” with “partnership” and you’ve got pretty much how Co-ops in the real world get set up, at least in places where I’ve lived. In places where they don’t get set up it’s probably more because the Co-op arrangment, for whatever reason, is not really better than the standard arrangment.

36

radek 03.10.07 at 10:19 pm

http://www.slate.com/id/2140224/entry/2140206/

(that last paragraph really is one of the dumber things Tyler’s written)

37

engels 03.10.07 at 10:50 pm

This part is just brilliant:

Shantytowns might well be more creative than a dead city core. Some of the best Brazilian music came from the favelas of Salvador and Rio. The slums of Kingston, Jamaica, bred reggae. New Orleans experienced its greatest cultural blossoming in the early 20th century, when it was full of shanties.

Shorter Tyler Cowen (with apologies to Harry Lime)

Don’t be so gloomy. After all it’s not that awful. Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock. So long Holly.

38

Matt 03.10.07 at 10:58 pm

Radek, I think you’re reading things into my argument that are not there (and also acting a bit like I’m stupid, which I don’t much appreciate.) Of course I know that what I described is a coordination problem. But solving coordination problems is often expensive, and this expense is one type of transaction cost that can, in some cases, prevent the creation of a situation that otherwise would be mutually beneficial. That’s all I’m saying. this is not controversial, but it’s enough to show that you can’t infer that if something is efficient it will come into existence. But without that Cowens argument can’t stand on its own.

39

radek 03.10.07 at 11:14 pm

Matt I didn’t mean to imply you’re stupid or anything and if you got that impression I really want to apologize. Sometimes my sense of humor (like stating obvious things as if they’re super important) doesn’t translate well in writing.

Anyway I still disagree because I think there’s a confusion between the particular and the universal. One instance of inefficiency, or just the possibility of it does not invalidate the argument. I think folks in the real world are pretty good at solving coordination problems in many many cases. A bit like, supposedly, if you look in the phone book under “honey bee services for apple orchards” you do find some entries, externalities or not.

And I wasn’t calling you a hippy either, just so you know.

40

radek 03.10.07 at 11:52 pm

Engels I think the second stanza of this song is even more succinct:

http://en.wikipedia.org/wiki/Holiday_in_Cambodia

Having said that I think Tyler’s argument is not that crazy:

1. If you want to revitalize NO you gotta get people to move back. They’re not gonna move back unless rents are cheap, cheaper then they were before Katrina. To make rents cheap you gotta get rid of some regulations which made sense before K but do not in the changed circumstances.
2. Why do we care about NO anyway? A narrow economic argument might say that the benefits are not worth the costs so forget about revitalizing it. But the reason why we care about NO is because it was a vibrant cultural center, a non-narrow-economic benefit. That’s why we want it back.

It’s not so much what he said rather how he said it.

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Matt 03.10.07 at 11:56 pm

I’m glad you were not calling me a hippy as that would really mean war.

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C. L. Ball 03.11.07 at 4:15 pm

Re #25, fair enough — I actually remember that post/thread now.

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Marcus Stanley 03.12.07 at 6:16 am

Seth Edenbaum at #32 was excellent.

First of all, isn’t the point of existing worker-owned collectives like law partnerships that they don’t need to raise outside capital, that they are in effect co-ops funded by the participants? So looking to a conflict between capital markets and workers seems off.

But Henry is right to raise Miller’s excellent (and still under-read) book, because the power of that book is to show that the conflict is general between bosses and employees — managers in general have difficulty making credible committments that maximize the productivity of those being managed. Which type of conflict shows up in e.g. law firms as conflict between the partners and the associates, in spite of the fact that the partners are workers who own the firm. Miller’s book (as the titled shows) is not about a conflict between labor and capital, but at a more fundamental level between managers and subordinates.

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Marcus Stanley 03.12.07 at 6:18 am

Of course, the possible relevance of unions here is that in many cases the inability to make credible committments comes from a power imbalance that unions could help correct.

Or not — it comes down to contingent culture. There is nothing at all automatic about unions being helpful in such a situation.

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paul 03.12.07 at 3:07 pm

Thus, for Tyler, the problem isn’t unions per se. It’s government interference with this efficiency enhancing process of organizational selection, which loads the dice in favour of unionized firms.

Where is this planet on which government interference loads the dice in favor of unionized firms?

(Or are you saying that, according to Tyler, under certain conditions of government interference, unionized firms are in fact the fittest organizations, rendering perhaps unrelated government efforts to prevent unionization an economically inefficient act?)

Just by the way, before Cowen penned those lines about New Orleans, it’s possible that he would be profited from googling “Katrina Cottage”. Cheaper than mass-produced trailers, durable, and far cheaper than trailers sitting unused and unmaintained until they’re junked. (Oh, wait, all of that was the result of government interference.)

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omar shanks 03.12.07 at 3:18 pm

One small point: All law firms (at least in the US) are labor-owned. This isn’t due to any supposed evolutionary efficiency, but because ethical rules prohibit non-lawyers from owning any interest in a law firm. Lawyers must be responsible only to their clients, not to their shareholders. I’m not sure how that plays out in the larger debate. I just wanted to point out that law firms are a special case.

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omar shanks 03.12.07 at 3:22 pm

On the other hand, I suppose you could make the argument that the American Bar Association is one helluva union.

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Seth Edenbaum 03.12.07 at 5:33 pm

We’ve seen what happens when the press collaborates with the powerful. We’ve seen what happens when unions are weakened. Nobody in this country at least would argue that defense attorneys should collaborate with prosecutors.
There’s a logic that says competition exists only between individuals, but it also exists between the individual and the collective, or between different forms of social order. This ties in to the debate between Dawkins and Gould/Lewontin in biology, that makes Dawkins into a hero of the secular Posnerian, right. Indeed the whole logic of memes et al. is not so much liberal as neoliberal, arguing for the power of choice only from within the limits that the larger determinism describes.

But if one is willing to see people as both individuals and aspects of a larger subject, as geeks are aspects of geek culture, with its own codes, norms, and hierarchies, then the role of groups as such, as examples of social units which are themselves aspects of society, is easier to accept.

No one on this site has ever responded to my discussion of a landlady who refused to raise my rent for 12 years, behavior which was common in my old working-class conservative catholic neighborhood. She was acting on what she saw as a principle that one might call “staying down with the joneses,” and I was grateful for it. But again, as above, my point is that individuals don’t make themselves. Language and culture precede us. The web, at least the anglo-american part of it, is self-selected for geekdom, and for an intellectualism predicated and limited by such interests. That’s social construction, and of a variety that privileges expertise over self-knowledge: that is knowledge of a subject as such as opposed to an awareness of that knowledge in context. Cowen’s absurd arguments are only describable as the result of the telescoping of intellectualism that results from increased specialization.

We can see unions as the expression of a collective and see them as in an adversarial relation to individualism. But I’m not going to pay much attention to a libertarian’s description of their role. As with prosecutors and defense attorneys, The senate and the executive, politicians and the press, or art and commerce, individuals and community both have their prerogatives, and both should be respected, and kept strong.

On a final note, the collaborationist logic that has done so much damage when extended into social life comes from the sciences, which privileges the search for truth over the mastery of what are in fact formal adversarial systems.
A trial lawyer needs a sense of irony. A mathematician doesn’t. Seeing intellectualism as an extension of the sciences seems to me a lot more dangerous than seeing it as an extension of legal theater. Seeing it this way may “slow us down” as unions do, but that’s specifically the purpose of the rule of law. To use one of my favorite quotes from one of its founding members: “The ACLU is a conservative institution.”

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Seth Edenbaum 03.12.07 at 6:15 pm

“which privileges the search for truth over the mastery of what are in fact formal adversarial systems.”

By formal adversarial systems I’m referring to law and government. I was specifically trying to avoid[!] discussing science itself, as opposed to its use as anology.

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Rawick 03.13.07 at 11:48 pm

With the early exception of grand moff texan (7 & 8) this discussion has been abstract. In the real world there’s a good deal of slippage, with individuals lost in the cracks. Or, to put in another way, “adjustments” can take a long time relative to the working life of an individual.

In large part unions are about how much blood gets left on the floor while evolution is taking place. A look at the history of the labor movement is illuminating on this point.

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