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.