Power in markets

One of the big ideas of right libertarianism is that markets create freedom, as bosses have little power over workers and firms have little power over consumers.
But this isn't true. This new paper (pdf) by Sam Bowles and Herb Gintis shows that unequal power is ubiquitous in market economies.
Some of the power of bosses over workers exists because workers want particular jobs. For example, there are only a few partnerships in City law firms, and this fact gives such firms power over workers.
But, say Bowles and Gintis, bosses' power is more widespread than this. It exists in any job where efficiency wages are paid - that is, where the firm pays above-average wages in exchange for above-average effort. In such firms, bosses have power over workers because the threat of the sack is credible and worrying, as the worker could not get such a well-paid job elsewhere. However, workers don't have symmetric power over bosses, as the threat to leave is not credible.
Unequal power, then, is a feature of markets. The inequality arises largely because bosses are on the short side of the market - they are buyers in a buyers' market.
But it's also a result of unequal wealth; if workers have enough money to just leave jobs and retire, bosses power disappears.
Some of you might think all this trivial. But it has two implications.
First, it's Pareto inefficient.  Small changes in the wage in an efficient wage model make little difference to bosses (the principal), but big differences to workers (agents). Therefore, say Bowles and Gintis, "there must exist some set of small variations away from the equilibrium allocation that improve the utility of both principal and agent."
Secondly, it means the right libertarian ideal of markets as oases of equality and liberty is mistaken. Bowles and Gintis say:

The fact that the exercise of power is ubiquitous in private exchanges shows that it is mistaken to think of society as composed of a political sphere, meaning governments and other bodies with formal powers of coercion, and a private economic sphere in which the exercise of power is absent.

The interesting question is: is it possible to reduce power inequalities in markets without imposing greater coercion, by the state?

Comments

[dsquared]

Surely the answer is, by raising the benefits replacement ratio (this is my big point of disagreement with your Citizen's Basic Income proposal - it means that there is for practical purposes a cap on the replacement ratio at quite a low level, which institutionalises this sort of power relationship).

[Marcin Tustin]

I can think of several ways off the top of my head:
1. Basic income - threat to leave becomes more credible.
2. Privatisation of schools and universal voucher schemes (or similar in higher education) to encourage greater social mobility.
3. Reform of property rights in commercial companies, so that workers have the right to buy out the company. Thus, workers credibly could sack management.
4. Unionisation of workers earning efficiency wages to combat the threat of individual dismissal.

[sanbikinoriaon]

dsquared - could you perhaps explain again in smaller words, for the smaller of brain?

[mat]

Apologies for the lengthy comment.

Markets, as long as the government stays clear, are free. They are oases of liberty. (Where did you get the idea that right-libertarians see them as oases of equality? And, in any case, "equality" is vague.) Anyway... Markets, as places of liberty, are not necessarily free of power, but they *are* free of coercive power. Let's look at your examples:

1. Sure, a boss has "power" when many workers want to work for him. But workers have "power" when many bosses offer him a job. Just as everyone has "power" when they go shopping for food, clothes, houses, legal services, whatever.

2. Sure, efficiency wage workers may fear they won't be able to get high wage jobs elsewhere. But bosses are paying for this "power". So there *is* symmetry. Bosses are paying to overcome moral hazard. Isn't this fair?

3. And why can't workers "just leave"? An efficiency wage worker has probably received a lot of training. Why wouldn't another firm want this worker? The worker doesn't need a pile of money. He just needs to be skilled enough to be able to generate many job offers upon leaving.

Now let's consider the unthinkable in this right-libertarian utopia. What if a boss were to develop too much "power"? If a boss became a monopsonist employing only 10% of the workers who want to work for him, the remaining 90% of workers wouldn't just sit there unemployed. They'd form a competitor, individually or together.

I'd love to agree with you, Chris. I'm approaching the job market just now, and I feel powerless. But then I think about the things I mentioned above.

[dearieme]

"the firm pays above-average wages": the bastards - is there no trick to which these capitalist swine will not stoop? So if you take this generous offer, you might worry a bit that you might find it hard to keep this job or replace it. But experience probably suggests that a CV bearing just such a job on it is probably the best passport to another such job. 'Nothing succeeds like success' as they used to say.

[guest]

Marcin Tustin:

"Reform of property rights in commercial companies, so that workers have the right to buy out the company. Thus, workers credibly could sack management."

Care to elaborate? If the company is public, workers can make a takeover bid like anyone else - what's the issue?

"Unionisation of workers earning efficiency wages to combat the threat of individual dismissal."

Huh? Without the threat of individual dismissal, workers would not earn any efficiency wages.

Like mat, I can't see how efficiency wages qualify as an exercise of power. The workers are entering a freely-agreed contract.

[tom s.]

I don't think "efficiency wages" equates to "above-average wages", just "above market-clearing wages". All firms in an economy can pay efficiency wages, but obviously not all can pay above-average wages.

[anon]

tom s.:

Efficiency wages are not necessarily "above market clearing" either. With job entry fees, workers can post a surety which is gradually paid back, so market clearing is maintained. The sort of victimization that young workers experience in some fields (i-banking, law) - working long hours, doing tedious stuff, etc. can serve as an in-kind job entry fee.

[Laurent GUERBY]

Make the employer pay something significant to the state and to the employee when any employee leaves for any reason, including employee own choice.

Should filter out bad (read: inefficient) employers from the market pretty quickly.

[jameshigham]

...Some of the power of bosses over workers exists because workers want particular jobs...

Some of the power is also because they have a different mind set to the worker and are working on their own project, whereas the worker is co-opted to it.

[dsquared]

tom s: I will claim the title of "Pedant of the Week" by pointing out that all firms could pay above-average wages if not all workers were employed by firms.

[Katherine]

"Markets, as places of liberty, are not necessarily free of power, but they *are* free of coercive power" - que? I don't believe that Chris was trying to suggest that employers were press ganging people into working for them (although they can, of course, sack people). Power is still power, and honestly, anyone who thinks that employers don't have power over people looking for jobs or looking to keep their jobs has never had to worry about where the next mortgage payment is coming from.

[mat]

Katherine,

I didn't make the distinction between "power" and "coercive power" to suggest that Chris believes bosses are "press ganging people into working for them".

I made the distinction in order to go on and show that the "power" relationships identified by Chris are actually perfectly legitimate.

Now you're right that I don't have a mortgage. I'm still at uni, and the only 'job' I'm looking for is an i-banking summer internship. But the bosses I'm up against have an enormous amount of power:
1. Many people want to be analysts.
2. Those who become analysts fear losing their high wages.
3. And they won't be able to retire on a pile of money for at least a few years.
However, all this power is legitimate.

Just like in my previous post, let's look at the flip side:
1. Good candidates get many job offers, and can use this power to negotiate higher wages. Bosses aren't the only ones with power. Plus, i-bank bosses are subject to the whims of their clients.
2. Bosses are paying to instill the fear of the sack.
3. Once you've had a job at an i-bank, you have the training and credibility to easily go work elsewhere.

Katherine, no one is forcing you to enter the labour market. No one is forcing you to work for them. You can always start your own business. (Whether the world would want to trade with you is another question.)

[Katherine]

Sorry Mat, but that is a meaningless distinction to make. The fact that you can, in theory, start your own business doesn't negate the fact that in the employment market employers have a great deal of power.

And btw, I don't assume that all power is abused. But it is ridiculous to say that there is none being wielded.

[Pete]

Warning: long post.

Interesting discussion. I'm employed in a US law firm in London, a job which I recently moved to after training at a London firm. I had a lot more power looking for my second job than for my first. But the relationship is still asymmetric.

When I was applying for my first job, my future bosses had a lot of power because:

1. Many people want to be solicitors at an international firm;

2. Most of those people will have invested a lot of time and money in being lawyers by that point and dropping the idea would be traumatic;

3. Those who are trainee solicitors fear losing their job and career prospects before they qualify (takes 2 years);

4. Even once you qualify as a solicitor, you won't make enough to consider retiring early on unless you make partner. The chance of making partner is very small; and

5. There is little to differentiate candidates for the training contracts. One of the key experiences of being a trainee is suddenly becoming more or less fungible after being exceptional at school and uni.

The only power a candidate has is from getting more than one offer. This is common by the way - the good candidates generally apply to and get offers from most or all of the top 10 firms. Unfortunately there is very little pay differential between those firms: until late last year the pay for trainees and newly qualified associates was identical at the top 10 London firms; the 'market' rate.

To my knowledge, no firm has paid over the odds for a particularly appealing candidate. Thus the fact you could theoretically go to another firm isn't really reflecting itself in market terms.

So going for my first job, my then employer held all the cards, and indeed tended to remind trainees of this on a regular basis once we had started working.

When I made the move to a US firm, getting a job was much easier as points 3. and 5. above fell away: I had specific skills and had already qualified, so I had more bargaining power.

But 1. 2. and 4. still apply: lots of people want to work at US firms as they pay more, the longer you work as a lawyer the harder it is to go do something else (and the more it feels like it would be admitting failure), and once you've taken the job, you're still not looking at early retirement. Added to this is a new:

6. It doesn't look good to have too many career moves in too short a period. So even for an associate who is willing to move, there is a limit to how often you can do that without looking useless: your threat to leave will not be a credible threat to your second employer for at least 2 years.

Thus even when you're more experienced, you have massively less power than your employer: that's the nature of the relationship.

I would also point out that you can't always start your own business. Doing so requires at least a minimum level of starting capital which one may not have. So for practical purposes most people have only two options: live off others, or take paid employment (there are third and fourth options - take to crime, starve - but let's ignore those for now).

Anyway, unless there is a welfare safety net which provides as pleasant a lifestyle as paid employment (perverse incentive) or you have really generous relatives, then you HAVE to work, somewhere. So long as you have to work, then the power your boss has over you is coercive power. And once you've started working, then unless you want to suffer massive disruption to your life, you have to keep on working. If your job's low paid, you have to keep on working until you drop, pretty much. So I think that Chris's basic premise - that markets create at best a flawed freedom - is sound.

But isn't the really interesting question "so what if it's not free?" Doesn't society need a mechanism to incentivise people to do stuff when they'd rather be at home? And if the present mechanism delivers on that, why change it?

Well that's the end of the rant. Oh and mat, good luck in the job hunt - and if you do go into i-banking, be nice to the lawyers, at least until you hit VP level.

[tom s.]

dsquared - I will challenge your claim by pointing out that...

Oh who am I kidding? I've got nothing. You win.

[anon]

"Anyway, unless there is a welfare safety net which provides as pleasant a lifestyle as paid employment (perverse incentive) or you have really generous relatives, then you HAVE to work, somewhere. So long as you have to work, then the power your boss has over you is coercive power."

This is nonsense. A "pleasant lifestyle" is neither an entitlement nor an obligation.

If they had been willing to live frugally and thriftly (saving most of their income) most middle-class people could cash out today and never work again.

[Katherine]

"Most middle-class people could cash out today and never work again".

Well, if you're talking about the basic middle class person with a mortgage of between 3 and 4 times their salary and perhaps an average salary, then there are of course time restraints on whether they could cash out. It would require enough time to save to pay off the mortgage of course, or to have saved enough funds to pay the mortgage payments for the next couple of decades. It would take a thrifty person indeed to save enough money to do so otherwise than over the space of many years. You'd also have to have saved enough to pay all living expenses and bills for the rest of your natural life (since of course you won't be earning any more and paying into a pension), having of course already had enough to pay all those living expenses in the years when you are saving enormously.

Anyone care to work out when this middle class person could actually cash out and never work again, and whether this would constitute "most" (meaning at least 50%, to be generous)? Or could it be that you have shouted out a theoretical extreme case, "anon", without really thinking it through?

[Pete]

anon - Steady on. A pleasant lifestyle certainly isn't an entitlement. But in practice I think there is a reason why we should see it as an obligation.

This is that we tend to care about how we live in comparison with other people. So your lifestyle will be less pleasant if most of the people you know can, without borrowing, afford to enjoy things that are out of your reach. If some of those are things that you grew up enjoying, I think your lifestyle would feel pretty unpleasant to you, even if in objective terms it's pretty nice compared with, say, an Afghan poppy farmer's.

It's also hard to agree that "if they had been willing to live frugally and thriftily" then the middle classes could "cash out and never work again".

The more you earn, the more you generally spend to maintain your standard of living. Sure, if you can live on 10 grand a year when you're earning 40, you could theoretically retire after 3-4 years' graft - assuming you don't need to buy a home or go on holiday, that you can get 10% or so return on investment, that you don't care about inflation, and that you don't expect to find living more expensive when you're old and doddery.

Even if you make all those assumptions, you're doing a scrooge - being a 'miser'. Extreme saving, like extreme profligacy, is socially unacceptable: you can't afford to socialise with your colleagues; can't afford to dress in accordance with your job; and can't afford to live in the same area as people on a similar income. Yes you can say they've got the choice, but it's quite a significant sacrifice.

So I think the point still stands - if you want to enjoy a standard of living that you, subjectively, think is OK, and if you want to do so for the rest of your life, you have to work.

[mat]

Pete and Katherine,
I don't follow this idea that people "have" to work and are therefore being subjected against their will to the "power" of their bosses. Sure, there is power in the labour market, but it isn't coercive, so I view it as legitimate. (Quite clearly I'm a right-libertarian who cares only about liberty, and not one bit about equality.) Anyway, I think we've seen enough comments under this post. Thanks for the good wishes, Pete.

[mat]

It looks like I signed my previous comment as "Pete". Hmmm, never mind about that.

[tom s.]

mat - Just to flog a dead horse, and despite your last comment, I'm going to add another.

I don't think coercion is a binary thing (market transactions uncoercive, state power coercive).

I prefer to think of it as a continuum of transaction costs. Is the cost of doing something else small or large? As Pete and Katherine make clear, it's hardly ever zero cost to switch jobs. At the same time, you could say that people who are stuck in totalitarian countries just haven't paid the requisite bribes or risk to get out.

My employer certainly has more power over me (closer to coercion) in many circumstances think that my local city council (state institution) - although so far they don't stop me making blogging comments at lunchtime.

[Kevin Carson]

I don't see how they can justify operating from the assumption that the present economy *is* "a market," at least fully so. And if it is not completely a market economy, then arguably the power relationships in the labor market result from non-market elements. I would argue that the prevalence of hierarchy in the corporate economy, at the expense of markets, reflects all sorts of state interventions. The nature of production has been skewed in all sorts of ways by state intervention (see David Noble on the state's role in subsidizing deskilling production technologies, for example, or James O'Connor on the socialization of the cost of many production inputs). The state's credit policies and its enforcement of titles to vacant, unimproved land both weaken the bargaining power of labor.

Saying that the power of employers is "non-coercive" begs the question of whether the labor market is a truly free market. And saying that labor contracts are freely negotiated ignores the framework of rules in which they are negotiated, and Adam Smith's observation that the state tends to regulate relations between workmen and masters in the interests of masters.

Incidentally, I don't see how efficiency wages can overcome moral hazard problems, since moral hazard assumes information assymetry. To be motivated by an efficiency wage, the employee has to believe that the employer is capable of reliably monitoring his effort. And in most large hierarchies, the costs of monitoring are so great that some proxy for effort is instead adopted, like "face-time."

[Katherine]

Mat, I know you want this thread to end, but I must correct a misconception - I never said that the power of employers is "coercive", I said that it exists. Since it exists, I think a distinction between coercive and non-coercive is not terribly meaningful.

[Steve]

Why are unequal economic relationships any different from any other power relationship?

The rich can coerce the poor just as the physically strong can coerce the weak. Unfettered markets just make it easier. Markets only create freedom for those with a concentration of economic power.

The absence of government restraint on physical violence would increase the freedom of the pysically strong but would condemn the rest of us to slavery or worse. That's why we have laws against it.

Similarly, the only way to redress the imbalance of economic power is by laws protecting the rest of us from the abuse of that power by the rich.

[Rob Spear]

Right libertarianism absolutely requires an ideology such as Christianity, which encourages the powerful to perform acts of charity. The problem occurs when the state gains the power to coerce charitable giving - such a state will inevitably use this power to buy and sell political support, and thus become a despotism, being the only power in the land capable of such extravagance.

The loss of Christianity in Europe, with it's emphasis on pragmatic morality, and it's restraint with regard to secular power, is one of the great tragedies of the 20th century.