Watson my mind today: labor markets

And how ‘bout them Dodgers, hunh? Actually, how about each division’s top team? That’s a lot of winning!

— A partial response to Marx’ claim that managers are expropriating the value produced by the workers while providing nothing themselves: “The study showed that managers didn’t just influence the results their teams achieved, they explained a full 70% of the variance. In other words, if it’s a superior team you’re after, hiring the right manager is nearly three-fourths of the battle.”

— Boudreaux wonders what supposedly-enormous transaction cost prevents firms from offering workers a choice of pay packages – buying more parental time for a lower wage, for instance. One commenter notes their firm does just that, letting workers buy back vacation time. This is also, of course, standard practice in much of academia, where faculty are allowed to reduce their teaching load in exchange for a salary cut – usually funded by a research grant.

— Sumner on how labor market reforms (including cutting unemployment benefits) helped Germany and Israel to lower average unemployment rates and increase economic growth.

— But there appears to be a great deal that only deregulation will not be able to change. A new paper by Berger and Engzell finds correlation between the European-country-of-origin of people in modern US and the level of inequality and intergenerational mobility. Institutions persist for a very, very long time … again. (Homework: How does this apply to the reparations debate?)

— Another new paper by Fone, Sabia, and Cesur finds that higher minimum wages increase property crime arrests – contra expectations – so that “a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion.”

— A history of civil asset forfeiture tells how the British Crown’s attempt to encourage the Royal Navy to enforce trade restrictions and tariffs became so widely used in modern America.

— Summers and Sarin show that wealth taxes will take in much less than their proponents hope.

Legal Immigration Into the United States (Part 13): The California Hourglass Class Figure

Discussions of the impact of immigration on native labor often have a 19th century, quasi-Marxist flavor. Implicitly, they seem to posit a large undifferentiated working class, on top of which sits a small middle, or professional class, itself crowned by a tiny capitalist class. (Today, it would be the absurd “1%.”) With this scheme, the capitalists, employers all, only want cheap labor, of course, and they keep importing immigrants to compete with native workers and thus keep wages down. In the meantime, the latter vacillates between resentment of foreign born wage competition and class solidarity cutting across nationalities and immigration statuses. The middle class, of course, opportunistically sells its political influence to one or the other main classes. Such a class structure is compatible with a good deal of hostility toward immigrants. The larger and/or the more organized, that native working class, the better expressed its hostility toward immigrants, the more likely that hostility will become institutionalized. At the extreme, it turns into the “Herrenvolk democracy” pioneered by the labor union-supported South African apartheid regime. (We are and were nowhere near that point in California. I evoke apartheid to indicate an extreme theoretical destination for such a movement, not by way of prediction.)

But when the class arrangements are not in such a conventional pyramid shape, attitudes toward immigration can be counter-intuitive. Imagine a society where the middle class is both very large and subjectively indistinguishable from a putative capitalist class because every member of the former sees himself as a good candidate for the latter (and correctly so, to a considerable extent). A society where the formal ownership of the means of production is widely dispersed through the mechanism of stock options gifted to employees. Imagine further that what remains of the old middle class has become numerically and socially insignificant. In particular, small merchants have nearly disappeared, replaced by salaried employees of large chains. The old professionals, doctors and lawyers, and the like, have lost their special standing in the close proximity of educated, prosperous mind workers.

At the same time, a combination of vertical mobility in the growth economy for some of the native working class, of physical movement out of the high rent areas associated with prosperity for others, and of increasing immigration, has created a largely foreign-born working class. The combativeness of this foreign working class is impeded  by its low cultural competence and by the fragile legal status of many of its members.

The remarkable thing about this scenario is that few of the remaining native-born appear to feel threatened by immigrant competition. Those who are actually in competition with low qualification immigrants are too immersed in the prominent issue of immigrant numbers to gain a coherent voice. The middle/upper class itself has an immigrant component but that component constructs itself slowly and at a predictable rate because the federal government easily limits via the granting of visas the admission of those not carried by family relationships. Note that this has been largely the case for immigrants from India, China, and Europe.

I am describing here a vertically asymmetrical hourglass class structure with a large upper component, a possibly larger lower component, and not many in-between. To the upper component, the lower immigration-based masses comprise so many hewers of wood and drawers of water. What’s more, they do not compete in the same rental markets or in the same leisure areas (In my local terms, the middle/uppers do mountain biking in the redwood forests while the working stiffs go to the Boardwalk.)

Some immigrants from poor areas bring with themselves a superior capacity for high density occupancy of humble housing premises, even for downright crowding. They don’t’ stop property values from rising. The more of them there are, the lower the prices of services that the uppers must consume in large quantity because they spend a great deal of time at work. The same work situation that motivates Google to offer its employees decent free food at all hours insures that there will be a high demand for providers of common services. Even low-level tech Google employees don’t do their own laundry! (Personal observation.)

In that labor situation, you would expect little prejudice against immigrants and a high willingness to open the gates to more of them. Note, that illegal immigrants, specifically, make the best helots because they are often in no situation to complain or to demand anything. Or, they are simply not clear as to what their rights are, or what’s prudent in this connection. A “sanctuary” state, promoting a defense of all immigrants couched in the language of generosity, is what you would expect to arise here, and even flirtations with the notion of open borders. I have just described northern-central California today, of course. Other high-tech nodules across the country conform.

[Editor’s note: In case you missed it, here is Part 12]

Legal Immigration Into the United States (Part 8): Culture, Immigration, and Culture

Immigrants, Language and Income

The culture of their country of origin immigrants carry with them may have consequences for the speed of their integration and for their ability to assimilate. In turn, immigrants may cause a variety of changes in American culture. Language is central to both types of cultural effects.

Current immigrants frequently have inferior earning capabilities because they are less educated on the average than are the native born. This is not the only disability they bring with them. Often, usually, their command of the English language is limited. This linguistic deficiency has consequences beyond the economic sphere. The continued poverty language incompetence fosters also retards their assimilation.

Many on the right declare themselves concerned with immigrants’ eroding influence on wages. Most of us are interested in the speed with which immigrants assimilate. Both phenomena depend to a large extent on immigrants’ competence in the English language. Linguistic competence influences the ease and speed of immigrants’ assimilation in the long run. In the short and middle run, it’s a direct determinant of income. Immigrants vary widely on a continuum of this crucial variable, from a superior command English, to no English at all.

The English language is special. Much of the world has English as a first language or as normal language of instruction in schools. A second tier includes English as a second language in its schools or, more often, in some of its schools. English is the first second language in the world. Middle class people everywhere learn English. In many countries though most people have no systematic interaction with the English language. The disadvantages of not knowing the common language of the country where one lives are so great that it’s a sort of miracle that so many even try to ignore those by moving to the US equipped with no knowledge of English. It makes sense then mentally to divide immigrants into the US in two broad categories according to their mastery of English as they land.

Silicon Valley is teeming with prosperous Indians, many of whom are actual immigrants. (There is a kind of optical illusions at work here though: Many Indians are on temporary, H-1B and F-1 visas. Indian immigrants who are not successful just go home, soon to be replaced by others. They leave little trace.) The Indian real immigrants can themselves be subdivided in two economic classes. Some spread all over the US where they utilize family connections to manage hotels and retail businesses. The Indians in Silicon Valley belong largely to another breed. Almost all are graduates from two dozen elite Indian engineering and management schools of higher learning. They are solidly middle class by upbringing although many arrive poor because of the steep income gradient between India and the US. My Indian wife – who knows I know not how, but who does know – assures me that all, or nearly all of the latter, belong to the lofty Brahman caste. (This is a case where class and caste correspond, far from a universal given.) They are people who could aspire to a good job back home in India where, however, their economic futures and their horizons would remain limited because India keeps being India. They all seem to arrive, amazingly, with a strong work ethic and with excellent work habits.

I think I taught between 200 and 300 Indian immigrants in my MBA career. Not one contradicted this generalization. Of course, this is not a generalization about Indians, but about the self-selected subgroup of Indians that shows up in central and northern California after having been admitted to and survived gruelingly selective schools back home. A couple who self-designated to me, their MBA instructor, as “lazy” would have been considered veritable Heroes of Labor in the old Soviet Union.

All the Indians from this second group are educated in English from an early age. They are used, via reading, movies and the internet, to American English (and to American culture) before they land. Outwardly, their adaptation is seamless. Digression: Except possibly that they may suffer a high rate of failed marriages. They engage in arranged marriages in India, bring their brides to America. Here, the young brides, utterly deprived of the usual Indian female support network and also, I am guessing, with a lesser mastery of English, become terribly unhappy. For this reason alone, I am guessing that Indian immigrants are less well-adjusted overall than are Mexicans who tend to bring everyone who matters with them. This is just a plausible redundant impression I gathered over 25 years. I have no figures in support.

These educated Indians obtain good jobs and they work diligently and intelligently. They are able to progress at work in good part because they express themselves with a clarity seldom achieved by other kinds of immigrants. (This, in spite of some peculiarities of Indian English: “You will go there, is it?”) They are thrifty at first, helped by the shock of finding out that a pound of lentils costs three times more in San Jose than in Kolkatta (personal research – an email to my sister-in-law there). So, they achieve a modest level of prosperity in a relatively short few years. The quick emergence of Indians in other walks of American life unconnected to high technology or to business, including medicine, the law and even journalism, testifies anew to those widespread virtues but all of this success would hardly be possible absent initial fluency in English.

Immigrants of many other different origins also make their way to Silicon Valley in response to the constant demand for high-tech specialists. The Chinese among them are numerous and conspicuous. I had them in my MBA classes for twenty-five years, right alongside the Indians. They gave me the impression of being about as excellently trained as the Indians. My intuition suggests that they were more entrepreneurial, on the whole, or maybe just more individualistic, but they nearly all struggled with English. (“Nearly;” one young Chinese woman had the cheek to correct my mistakes of syntax in class on several occasions.) If your native language does not use verb forms to distinguish between present and past, you can learn to say, “I did it,” instead of “I do it yesterday,” but it must be like a herd of potholes on the road you are traveling.

I suspect that many of the young Chinese immigrants I knew, star students back home, lived lives of frustration in the US because of the language barrier. The frustration runs deeper than a relative inability to get things done. (Though the latter counts too. I can mention it  now because there is probably a statute of limitation: Forty-plus years ago, I wrote a Chinese student’s entire doctoral dissertation; it was very good both in content and in form. Also, the student cooked well.) If you express yourself at the level of a native-born ten-year-old, the unsophisticated foreign language virginal natives treat you like a fairly-gifted ten-year-old. This is pretty conjectural, of course. I would bet on it though! I have discussed this several times over steamed mussels with some favorite Chinese students with whom I had picked and prepared the shellfish; they had no reason to lie to me, not then, anyway.

It’s difficult to generalize about the few visually inconspicuous Europeans who also make it to Silicon Valley. Those who attended my classes were as competent in English as foreigners for whom it is a second language can be. I am guessing they were competent enough to be engineers. For some reason, Russians shone among them. Reminder: I am not indulging here in a devious comparative survey of different national educational systems. Immigration to America dips into different pools in different countries. Perhaps, smart Russians always go to America if they can while equally smart French engineers would rather stay home to continue their leisurely dégustation of blanquette de veau façon Normande.

It’s certain that mastery of English plays a big part in determining immigrants’ incomes as well as their economic contributions to American society. It’s also easy to miss the competence and the high character of those who don’t understand English well. And, as I have said, nothing sounds more like a ten-year-old than a bright foreigner whose English is struggling to reach the second grade level. With a low competence in English, even if it be only spoken English, the best jobs elude you although you would be capable of performing them, language notwithstanding. I believe that millions of immigrants are employed much below their maximum earning capacity solely because of their low linguistic competence. So, while the actual economic contribution of those immigrants is correctly assessed as low, their potential contribution is systematically underrated. This is a problem capable of solutions that are rarely discussed. A merit-based system would easily incorporate such solutions. So would a system of conditional admission linked to progress in English.

Anecdote: About twenty years ago, there was a tacit agreement among Anglo employers of casual Mexican labor that Mexicans were hard working and knew how to follow simple orders, but that was it. They were automatically treated as unskilled labor. Myself, with my good Spanish, I never had any trouble finding a tile layer, a carpenter, even an electrician among the day laborers gathering outside Home Depot every morning. The specialized workers I located were not slow to point out that the work I requested was skilled work and must be paid accordingly.

We must thus remember that linguistic disability must keep the wages of non-English speaking immigrants lower than they would otherwise be at a given level of occupational competence and personal ability. Language incompetence must thus also contribute to lower prices although at some cost to productivity.  (Yes, here is the paradox: Each produces little but there are many of them. In the end, we pay less than if they were not here.) The situation of Mexican immigrant entrepreneurs, specifically, tests this idea. Entrepreneurs need to possess at least a fair command of English, if nothing else, to round up customers. The language disability is thus removed or lessened in their case, allowing for a more straight comparison of income with Anglos. It seems to me that immigrant contractors do not bid especially low, or not much lower than their Anglo counterparts. At least, when you ask for bids on a previously described job, you couldn’t guess by bid amounts who is a Hispanic immigrant. It may also be thought that such immigrants  provide a better quality/cost ratio. I don’t know if this intuitive idea, based largely on my private experience, has been examined rigorously anywhere. It’s backed by the likelihood that the self-selected immigrant group possesses some traits of character superior to those found among natural groups, including among members of the host population. I develop this idea in “Why Immigrants are Superior” (referenced elsewhere).

[Editor’s note: in case you missed it, here is Part 7]

Nightcap

  1. How the Brooklyn Bridge was Built Erica Wagner, New Statesman
  2. The rise of India’s right-wing populists Max Rodenbeck, NYRB
  3. Searching for Scythians on the New Silk Road Nicholas Danforth, War on the Rocks
  4. Christianity in Asia was a little strange Soni Wadhwa, Asian Review of Books

O que é socialismo?

Alguns posts atrás fiz uma exposição sobre o que é capitalismo, e também procurei expor e desmistificar alguns equívocos a respeito dele. Nos próximos posts pretendo fazer algo semelhante com o socialismo: explicar o que é e desfazer alguns mitos e equívocos. Falando a respeito de capitalismo, expliquei que esta palavra é utilizada de forma bastante livre, e assim há muitas variedades de capitalismo. Optei por expor um tipo de capitalismo associado ao pensamento de Adam Smith e à tradição liberal, algo que pode ser chamado de liberdade econômica, liberdade de mercado ou liberdade de escolha. O socialismo também aparece em variadas formas. O que exponho aqui é a variedade associada a Karl Marx. Marx foi um historiador, filósofo e sociólogo, mas o que me interessa aqui é principalmente sua teoria econômica.

A teoria econômica de Marx começa com a teoria do valor trabalho. De acordo com esta pressuposição, o que dá valor a um produto é a quantidade de trabalho envolvida na produção. Em outras palavras, o trabalho (trabalho braçal, entenda-se) é a fonte de todo valor. Esta percepção de valor trabalho pressupõe uma ligação entre mais valia e acumulação de capital. Marx argumentou que toda a riqueza é fruto do esforço dos trabalhadores. No entanto, os trabalhadores não recebem um salário correspondente ao valor pelo qual sua produção é vendida. Na percepção liberal, a diferença entre custo de produção e valor de venda é chamada de lucro. Na percepção de Marx, isto é mais valia: os donos das fábricas (ou donos dos meios de produção) enriquecem a custa do esforço dos trabalhadores. Mas esta é uma relação insustentável: para lucrar os empresários precisam pagar aos trabalhadores o mínimo possível, somente o suficiente para garantir a sobrevivência e reprodução dos trabalhadores. Com o tempo, os lucros iriam cair, o capital (ou os recursos de produção) iriam se concentrar em poucas e imensas fábricas (fabricas menores seriam levadas à falência pela competição), haveria dificuldade de transferência de capital (os investimentos seriam cada vez menos rentáveis), o número de desempregados se elevaria, a capacidade de venda cairia, crises cada vez mais profundas e frequentas ocorreriam, todo o sistema iria inevitavelmente chegar ao fim. Uma sociedade socialista, onde os trabalhadores seriam donos dos meios de produção, surgiria.

No coração da teoria econômica de Marx está o conceito de mais valia: os trabalhadores não recebem o que merecem pelo seu trabalho. Ao invés disso, eles são explorados pelos patrões. Acredito que esta noção de exploração comove muitas pessoas, mas ela não faz o menor sentido. Marx não está dizendo que alguns patrões exploram os trabalhadores. Ele está dizendo que, por definição, todos os patrões exploram os trabalhadores, pois retém na mais valia uma riqueza que não lhes pertence.

A pedra fundamental da teoria econômica de Marx é a teoria do valor trabalho: o que confere valor a um produto é o trabalho que se tem para produzi-lo. Daí que necessariamente haja exploração. Mas a teoria do valor trabalho está certa? Ela corresponde à realidade? Acredito que está bem claro que não: posso ter muito trabalho para produzir uma escultura de palitos de fósforo no meu quintal, e nunca conseguir vende-la, pois ela não tem valor para mais ninguém. Todo o meu trabalho, todo o meu esforço, é inútil e sem valor se eu não estiver produzindo algo que seja do interesse de outra pessoa. Além disso, a revolução marginalista do final do século 19, e particularmente a Escola Austríaca, veio demonstrar que valor é algo subjetivo e sujeito a condições de tempo e espaço.

A questão clássica a respeito de valor é: “porque diamantes, que não alimentam, são tão caros, enquanto que água, que é essencial à vida é tão barata?”. A resposta do valor trabalho é que dá muito trabalho conseguir diamantes, enquanto que água literalmente cai do céu. Mas esta resposta é incompleta: em alguns lugares água não cai do céu. No deserto do Saara, morrendo de sede, uma pessoa pode trocar muitos diamantes por copo de água. Em outras palavras, se a teoria do valor trabalho está correta, então há um valor objetivo: é possível calcular com precisão o valor de alguma coisa considerando o trabalho empregado em sua produção. Mas é manifesto que isto não é verdade: produtos tem seu valor afetado por muitas circunstâncias, e o esforço empregado na produção pode não ter qualquer relevância no valor final.

A conclusão é simples: se a teoria do valor trabalho está errada, toda a teoria econômica de Marx está errada. Isto quer dizer que patrões nunca exploram seus empregados? Claro que não! Isto quer dizer apenas que esta exploração não ocorre segundo a explicação de Marx.

As previsões de Marx (salários menores, maior desemprego, crises econômicas recorrentes e profundas) foram desmentidas uma a uma: a Europa do final do século 19, progressivamente marcada pelo liberalismo econômico, experimentou uma prosperidade impar em sua história. Num quadro mais amplo, nações que optam pelo liberalismo econômico prosperam, e principalmente prosperam os trabalhadores. Basta comparar Coreia do Norte e Coreia do Sul, China e Hong Kong, Alemanha Ocidental e Alemanha Oriental, EUA e URSS e assim por diante. Entendo que muitas pessoas se encantam com o marxismo (e como o socialismo) por se apiedarem das condições muitas vezes precárias dos trabalhadores. Porém, não basta ter o coração no lugar certo. É fundamental ter uma compreensão correta da realidade. Caso a exploração dos trabalhadores seja uma preocupação para você, sugiro considerar o capitalismo e esquecer qualquer forma de socialismo.

The minimum wage still bites

Politicians, pundits and activists jumped on a new literature that asserts that there no negative effects of substantial increases of the minimum wage on employment. Constantly, they cite this new literature as evidence that the “traditional” viewpoint is wrong. This is because they misunderstand (or misrepresent) the new literature.

What the new literature finds is that there could be no significant negative effects on employment. This is not the same as saying there are no negative effects overall. In fact, it is more proper to consider how businesses adjust to different-sized changes by using various means. Once, the minimum wage is seen in this more nuanced light, the conclusion is that it still bites pretty hard.

The New Minimum Wage Literature

Broadly speaking, the new literature states that there are minimal employment losses following increases in the minimum wage. It was initiated twenty years ago by the works of Alan Krueger and David Card who found that, in Pennsylvania and New Jersey, a change in the minimum wage had not led to losses in employment. This caused an important surprise in the academic community and numerous papers have found roughly similar conclusions.

These studies imply that the demand for labor was quite inelastic – inelastic enough to avoid large losses in employment. This is a contested conclusion. David Neumark and William Wascher are critical of the methods underlying these conclusions. Using different estimation methods, they found larger elasticities in line with the traditional viewpoint. They also pointed out Card and Krueger’s initial study had several design flaws. With arguably better data, they reversed the initial Card and Krueger conclusion.

These critics notwithstanding, let us assume that the new minimum wage literature is broadly correct. Does that mean that the minimum wage is void of adverse consequences? The answer is a resounding no.

This is because of an important nuance that has been lost on many in the broader public. In a meta-analysis of 200 scholarly articles realized by Belman and Wolfson, there are no statistically discernable effects of “moderate increases” on employment. The keyword here is “moderate” because the effects of increases in the minimum wage on employment may be non-linear. This means that while a 10% increase in the minimum wage would reduce teen employment by 1%, a 40% increase will reduce teen employment by more than 4%. A recent study by Jeremy Jackson and Aspen Gorry suggests as much: the larger the increase of the minimum wage, the larger the effects on employment.

If labor costs increase moderately, the strategy to reduce employment may be relatively inefficient. The increase of labor costs needs to reach a certain threshold before employers choose to fire workers. Below such a threshold, employers may use a wide array of mechanisms to adjust.

Adjustment channels

Employers on their respective markets face different constraints. This diversity of constraints means that there is no “unique” solution to greater labor costs. For example, if the demand for one’s products is quite inelastic, labor costs can be passed on to consumers through an increase in prices. While this may not necessarily hurt workers at the minimum wage, it impoverishes other workers who have fewer dollars left to spend elsewhere. This is still a negative outcome of the minimum wage – its just not a negative outcome on the variable of employment.

In other cases, employers might reduce employment indirectly by reducing hours of work. This is an easy solution to use for employers who cannot, for a small increase in labor costs, afford to fire a worker. Even Belman and Wolfson – who are sympathetic to the idea of increasing the minimum wage – concede that increases in the minimum wage do lead to moderate decreases in labor hours. More skeptical researcher, like Neumark and Wascher, find that the effects on hours worked is much larger. Again, the variable affected is not employment measured as the number of people holding a job. However, a reduction in the number of hours worked is a clearly a perverse outcome.

Another effect is that employers might reduce expenses associated with their workers. Even Card and Krueger, in their book on the minimum wage, recognize that employers may opt to cut on things like discounted uniforms and free meals. An employer facing a 5% increase in the minimum wage will see his labor costs increase, but firing an employee means less production and lower revenues. Thus, firing may not be an option for such a small increase. However, cutting on the expenses associated with that worker is an easy option to use. This means fewer marginal benefits and on-job training. Employers adjust by altering the method of compensation.  For example, economist Mindy Marks estimated that a 1$ increase of the minimum reduced by 6.2% the probability that a worker would be offered health insurance.  Again, employers adjust and the effects are not seen on employment. Nonetheless, these are undisputedly negative effects.

The effect may also be observed on the type of employment. Employers may decide to substitute some workers by other types of workers. Economist David Neumark pointed that, subsumed in the statistical aggregate of “labor force” is a shift in its shift. In his article, written for the Employment Policies Institute, he stated that “less skilled teens are displaced from the job market, while more highly skilled teens are lured in by higher wages (even at the expense of cutbacks in their educational attainment)”. Another example could be that a higher minimum wage induces retired workers to return to the labor force. Employers, at the sight of a greater supply of experienced workers, prefer to hire these individuals and fire less-skilled workers. In such case, “total employment” does not change, but the composition of employment is heavily changed. The negative effects are clear though: less-skilled workers are not allowed to acquire new skills through experience.

Conclusion

None of these adjustment mechanisms in response to “moderate increases in the minimum wage” are desirable. Yet, all of these channels would allow us to conclude that there are no effects on employment. To misconstrue the ability of employers to select multiple channels of adjustments other than reducing employment as the proof that the minimum wage has no negative effects is perverse in the utmost. The statement that “moderate increases in the minimum wage has no statistically significant effects on employment” is merely a positive scientific statement with no normative implications whatsoever. If anything, the multiple adjustment mechanisms suggest that the minimum wage still hurts and that is both a positive and normative statement.

Coase’s “Nature of the Firm”: An Anthropological Critique

But is it a good one? Is it even made in good faith? I need help.

From American anthropologist John D Kelly’s The American Game…:

Ronald Coase’s theory of the nature of the firm rescued, for neo-classical economics, the existence of firms or corporations as rational entities […] Markets always come first, and the problem of the existence of firms is depicted as the problem of why a rational manager would rely on employees rather than markets. State planning and private firms are taking over what already exists, integrated by the price mechanism of markets, and are successful to the extent that they lower costs, since there are a variety of costs involved in market transactions. Thus marginalist analysis implies that an equilibrium will always be found between planning structures and integration by price mechanism, especially since, as Coase says in “The Nature of the Firm,” “businessmen will be constantly experimenting, controlling more or less” and “firms arise voluntarily because they represent a more efficient method of organizing production.” The rise of the firm, as Coase imagines it, is always a movement from many pre-existing contracts to a controlling structure, “For this series of contracts is substituted one.” (94)

The emphasis is mine. Kelly continues:

This imaginary fits poorly the situations that were precisely the actual origins of firms, as when banks gave mortgages to planters, or stock markets funded companies of young agents, prepared to cut plantations into captured wilderness for tropical commodities […] usually employing labor moved long distances and disciplined by direct violence. There is more in the universe than Coase’s imagination, more motives for controlling powers of firms than their cost efficiencies. (94-95)

Kelly goes on to give a brief account of 1) how corporations created commodity production out of thin air, 2) how these corporations were tied to European imperialism, and 3) how they used slaves and indentured servants even when it would have been cheaper to hire the locals.

I want to address Kelly’s summary of Coase’s paper (here is a pdf, by the way, in case you want to follow along), mostly because I’ve never read it although I know it’s important, but first I want to make a couple of digressions. Libertarians would more or less answer Kelly’s three charges listed above as follows: 1) yes, and this is a good thing, 2) state-sponsored corporations and private firms are two distinct entities with two very different incentive structures, and 3) see #2. There is also an issue of accuracy in regards to Kelly’s brief summary of world history since 1600. I don’t want to get into the details here, but I do want you to recognize that I am reading Kelly critically. My last digression is simply to point out that libertarians and Weberian Leftists like Kelly have more in common than we think.

To get back to Coase’s paper, and Kelly’s critique of it, I want to highlight one sentence from Kelly’s book in particular and then turn it over to the peanut gallery in the hopes of gaining some insight:

Markets always come first, and the problem of the existence of firms is depicted as the problem of why a rational manager would rely on employees rather than markets.

Is this the puzzle Coase was trying to grapple with in his paper? I ctrl+f’d Coase’s paper (“employe” – not a typo) and couldn’t find anything that actually confirms Kelly’s summary, but it would be an interesting project (if I am right in stating that Kelly’s summary of Coase’s paper is not accurate) to follow this line of thought and delve into Kelly’s insight about the reliance that entrepreneurs/firms have on employees (rather than markets)…