Applying Barzel: cognition, belief, unions, class

It is a sign of how penetrating book of analysis is that it expands your understanding of matters beyond what the author consider directly in their book. I found that very much to be the case in Prof. Yoram Barzel’s Economic Analysis of Property Rights, which I reviewed in my previous post. So I consider below some applications of his analysis that occurred to me but did not figure in his book.

Consider Barzel’s notion that humans-as-maximisers is perfectly reasonable provided one takes in all applying constraints. Simple concepts of humans-as-maximisers analyse behaviour as if every decision will be fully considered on every occasion—that is, cognition and information are costless. But they are not. Thinking takes time and effort, as does gathering information. So, given such constraints, genuine maximisers will use habits and routines, saving on time and effort.

Moreover, the benefits of cognition depend on one’s capacity to do so. So, the less able one is at thinking, the more one will tend to rely on habits and routines and, in particular, the more one will tend to rely on “piggy-backing” on other folk’s decisions. (Hence John Stuart Mill’s observation that stupid people tend to be conservative: Walter Bagehot famously characterised British politics as the battle between the stupid party and the silly party.) There are all sorts of complexities here, however. Those less able at cognition are still going to tend to be much better informed about their own situation than someone else is. As the saying goes, a stupid man can put on his own trousers better than a wise man can do it for him.
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The nature of the matter being considered is also important. Thus, the effects of of a belief for the believer will generally be much more subject to feedback to the believer than will the effects of implementing said belief on others. So beliefs that operate as status-markers will have much stronger feedback in terms of their status effect than in terms of their implications for other folk. Hence, dramatically increasing the number of folk who traffic in ideas (e.g. expanding higher education) but who are insulated from the consequences of their ideas for others (e.g. by having tenure, by working in tax-paid institutions) will tend to lower the quality of the ideas being trafficked in (in terms of wider social consequences) but, via feedback effects, increase their role as status-markers.

Transaction costs

Expressing a belief is a form of transaction. Barzel makes much of the characteristics of the transaction as being crucial to understanding how folk will behave. So, for example, as wages rise, workers will tend to move towards self-employment since they will be more able to cope with income variability (p.151).

Consider union officials (not an example Barzel uses). Union officials act as negotiation and risk management agents for workers. Union officials will prefer labour remuneration to be centralised (i.e. channelled through mechanisms they deal with) and complex (divided up into lots of allowances, benefits, etc, particularly deferred and contingent benefits). Complexity increases the union officials' importance to workers as managers of complexity and provide specific measures of their performance (in terms of identified allowances gained) while contingency (e.g. sick leave) and deferral (e.g. firm-specific superannuation) encourage workers to stay "in place".

Workers, however, will generally tend to prefer remuneration to be direct (less time-constraining), simple (easy for them to understand and manage directly) and flexible (so they can shift along various margins, such as hours of work, as convenient for them). So, the larger the aggregation of workers in similar situations (e.g. in manufacturing, construction, public service, etc), thereby having fewer coordination problems, the more unionised they are likely to be.

Thus—unless there are countervailing pressures—as the possibilities of employment diversity increase (particularly true for service industries) and wages (or, at least, household incomes) increase generally, workers will have less tolerance for the gap between their interests and those of union officials, whose utility as negotiation and risk management agents will decline. So unionisation will tend to decline (i.e. fewer workers with transact with union officials as their agents) and will do so more in the private sector than in the public sector.

Indeed, to the extent that union officials impede the application of capital to labour, unions will actually tend to reduce overall living standards and wages. Also, unions are, as coercive bodies, effectively substitutes for state action in the provision of various public goods to workers. The more “hostile” or “indifferent” the state, the more utility there is in union action for workers. The more services the state provides which are genuinely useful for workers—and not connected to union membership—and the more competition from other agents for such (e.g. lawyers), the less benefit unions can provide and the less workers will transact with union officials for services.

In Australia, Bill Kelty’s union amalgamations and centralisations aggravated the process, by increasing the distance between officials and members without any significant economies of scale gains—not a single union official position was abolished as a result of the amalgamations. Thus unionisation declined faster in the outlying States, with greater distance and difference between members and the Sydney or Melbourne headquarters.

Such declines in unionisation are not signs that workers are becoming more stupid, or some are more stupid than others, or that they are increasingly deluded. It is a rational response to shifting circumstances.

As Barzel demonstrates with a wide range of examples, transaction cost analysis has the capacity to greatly improve understanding. Classical Marxism missed the implications of marginal analysis, being stuck on the (false) labour theory of value, so all profit is exploitation, loss and risk of loss are, at best, minor issues, etc. Yet avoidance of loss and risk management are crucial to understanding economic behaviour, particularly commercial behaviour.

Marxism (and its Post-Marxism derivatives) also misses the implications of transaction cost analysis. Assuming, for example, that there are no coordination problems for classes so they can be analysed as coherent historical agents. So all capitalists act together, all landlords act together and so on, as coordination is costless—there are no search costs, no information costs, no monitoring costs, no divergent interests. Scarcity (e.g. of capital) can be unproblematically analysed as monopoly.

Which is nonsense, of course. A firm owner has rather more severe conflicts of interest with his or her competitors than with his or her workers (otherwise firms couldn’t exist). Conversely, the power of unions rests on excluding competing workers (known as “scabs”).

But, by assuming that all capital is held by capitalists and that capitalists have no coordination problems, it follows in Marxian economic logic that, since capitalism is very good at generating capital, the power of capitalists will increase against workers who will become poorer and poorer (either relatively or absolutely)—the immiseration thesis. Which is completely false. Capitalism does generate more and more capital, but that capital is held more and more widely. (So capitalists are, if anything, less and less able to coordinate as a group.) Labour becomes more and more scarce vis-a-vis capital. So the value of labour goes up and up via bidding processes as capitalists bid for increasingly scarce labour. So workers become wealthier and wealthier with higher and higher incomes. (Though, clearly, if women enter the workforce in significant numbers and there is large-scale migration, the scarcity effect for labour from growth in capital will be reduced, particularly for lower skilled workers.)

Note that there is nothing here that bars regularities in behaviour based on class. People in similar situations will tend to act in similar ways. Without such regularities in behaviour, society and social analysis would be equally impossible. But class is hardly the only socially significant line of commonality/difference

Of course, since coordination is a public good, the one body able to relatively easily provide that public good is the state. Hence the necessity of state action (or some other coercive body: organised crime is a coercive rival to state action) to produce genuine, systematic exploitation—and the state with the most overweening power (Stalin’s Soviet Union) was the most effectively exploitative, though North Korea is also extremely exploitative. (In developed societies, unions typically come second in power to enforce coordination, hence their utility for enforcing cartels, such as the Australian waterfront.)

These are just some of the ways Yoram Barzel’s transaction cost and property rights analysis can make the social world around us clearer.