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If the postman can subcontract his job, does this not imply he's extracting some rent as a result of labour law/union contracts? If not, the postal service can otherwise just cut out the middleman and hire unemployed Al directly, dividing Paul's cut between them.

What happens if Paul hires Al off the street, and Al goes through your mail daily, picks out the stuff that interests him (say credit cards, cheques) and then sub contracts out the fraudulent cashing of them to Bill?

This is one of those flaws in looking at everything from only one perspective. There are legal barriers to this behaviour because Paul has been hired - and presumably signed a contract - to deliver the mail. Not to ensure that the mail is delivered. The premium he's being paid may not just be a magic number from a union contract. Actual pay may be higher than the lowest bidder because the post office is hiring more dependable and trustworthy postmen, or to provide adequate disincentive to stealing mail.

There are issues of liability. What happens if mail is stolen or fails to be delivered promptly? Paul might lose his job, but probably doesn't have enough assets or insurance to recover the costs of fraud from him. Al will disappear into the sunset, pocketing the cash (and failing to pay his share of taxes on it, no doubt).

When you contract out your own job, you'd better not let your employer find out who you subcontracted to, or they'll fire you and hire them. (They might keep you on as a recruiter though.) Persistent cases of this indicate inefficient employers. When companies do this, they're turning themselves from producers into coordinators, and a coordinator can still have value.

Assuming, for the sake of argument, that Al does the job just as well as Paul.  What difference does it make to anyone if Paul outsources the job?  Economically, zero.  What is going on is that Paul is earning massively above the equilibrium wage for a very low skill job. This fact doesn't change whether or not he actually does the work himself.  And Al is otherwise being deprived of that job.  Unions, like minimum wages, are a form of class warfare of the employed against the poor. This is the the real outrage.

The article discusses efforts by other postal workers to get the law changed to ban the practice of outsourcing. Not surprising, as it is clearly exposing the excess compensation they are all benefiting from.  No one is discussing reducing the wages of postal workers.  So, as long as we can't *observe* the amount of rent they are extracting from their arrangement, we don't mind that it is going on.

"The article discusses efforts by other postal workers to get the law changed to ban the practice of outsourcing."

Hey, I'm in favour of that, as long as they extent the privilege to Canada post to allow it to outsource workers outside of the union.

Also, while Neil is probably right that Al isn't going to be paying "his" share of taxes on his money, that doesn't bother me so much because Paul is going to be paying MORE taxes than he should be. The problem is that Paul can't claim a deduction for the amount he pays to Al (because the hiring of AL isn't mandated by his contract of employment so that isn't a deductible expense for tax purposes). So, if his pre-tax income is $200 a day and he (and Al) pay tax at a 25% rate (i.e., his after-tax income is $150) and he pays $100 to Al, Paul is really paying the full amount of the tax on the full (economic) income received by both Paul and Al (i.e., on the full $200).


K said what I was going to say, only a little more bluntly.

I mean K said it more bluntly than I would have said it.

Part of the reason to compensate postal workers fairly is to reduce incentive to profit from their position by theft. Postal workers presumably have to pass background checks etc. CP would probably end up on the hook for any misdeeds of "Al" even though it had no part in his becoming involved in the situation.

"Part of the reason to compensate postal workers FAIRLY is to reduce incentive to profit from their position by theft."

That's a nice theory (although given the number of incidences of mail theft by postal workers in Canada over the last few years - including from my mother in law - query whether it accords with reality), but let's face it, we all know postal workers receive above market wages because we've granted their union a monopoly for the provision of postal worker services. Ironically, by doing so, we probably INCREASE the incentive to profit from theft because we make it harder to dismiss thieving postal workers.

Andrew F: "If the postman can subcontract his job, does this not imply he's extracting some rent as a result of labour law/union contracts?"

Yes, it does. If Canada Post outsources the job, does this same line of reasoning imply that the corporation will be able to extract rents from outsourcing?

Neil, Just visiting: "Actual pay may be higher than the lowest bidder because the post office is hiring more dependable and trustworthy postmen, or to provide adequate disincentive to stealing mail."

This is the idea behind something called "efficiency wage theory," used to explain why workers are paid above-equilibrium wage rates.

K: "Unions, like minimum wages, are a form of class warfare of the employed against the poor."

Do you think that, absent minimum wages and unions, prices would decrease, consumers would be better off, and corporate profits would remain unchanged? How much of the rents taken away from Postman Paul would go to, say, residents of small northern towns, and how much would be captured by other interest groups (senior management or, if CP was a private corp, shareholders)?

"Do you think that, absent minimum wages and unions, prices would decrease, consumers would be better off, and corporate profits would remain unchanged?"

Well, if we accept that minimum wages and unions have any impact on wages, than presumably either consumers would be better off or corporate profits would increase (or both) in their absence.

"How much of the rents taken away from Postman Paul would go to, say, residents of small northern towns, and how much would be captured by other interest groups (senior management or, if CP was a private corp, shareholders)?"

I don't know, but the prospect that others might capture (or recover) those rents doesn't strike me as a compelling reason to provide legal protection to Postman Paul to do so.

Nick: "K said what I was going to say, only a little more bluntly."

Anonymity.  Shameful, yet liberating.


Frances: That is up to us.  We, the citizens of Canada, decide how we want to govern.  

In the case of Paul and Al, I think our government should pay the equilibrium wage (i.e. we should give the job to whomever has the greatest utility for it at whatever rate he/she is willing to do it) and spend the remaining $15 or so as we find most fair and useful to our common good:  needed programs, a citizen's dividend, a tax cut, whatever *we* decide.  I cannot comprehend why we should give it all to Paul.

As far as rents go, I think it is generally the job of governments to eliminate them (monopoly rents, natural or unnatural) or collect them (land rents and the ones that can't be eliminated) and use them for our common purposes.  Collecting rents is virtuous because 1) they  don't accrue to anyone by virtue of their skill or hard work so no one has any intrinsically greater claim on them than anyone else; and 2) eliminating them has zero cost to economic output.  It's all upside.

So, I don't think that eliminating unions and minimum wages eliminates collection of rents.  But minimum wages etc. don't just transfer rents to employees.  They also eliminate jobs/wages for those whose productivity is below the minimum wage level.  And they don't distinguish between unearned  rents and profits that accrue to exceptionally skilled owner/managers.

Consider the owner of a piece of land, the value of which derives from its optimal use as a corner store.  If we raise the minimum wage by $1/hour, the rental value of the land will decrease by about $500/month (it takes one employee 16 hours/day to run the store).  Raise the minimum wage enough and the employee will eventually collect the entire rent - all at no cost to the economy.  But lots of less productive land will in the mean while have gone out of production and lots of jobs will be lost - as will lots of less monopolistic businesses and less productive jobs.

The answer is to tax the land rent directly for our collective good, and not randomly from sites that happen to be most suitable to low wage production.  And to go after other sources of rent.  And to distribute the proceeds fairly to all the citizens, not just the ones lucky enough to work for high monopoly rent employers (like Canada Post).

Somehow these questions always become "programme X vs nothing".  But programme X sucks, and there are countless better alternatives that we could choose to stop ignoring.  It's just a choice.

I want to clarify the above: "I don't think that eliminating unions and minimum wages eliminates *private* collection of rents." i.e. yes I do think corporate profits would go up (and poor people would have more jobs and low wage workers would make less and the economy would be more productive) if we just eliminated minimum wages and unions, and didn't do anything else.  But it's a false dilemma.

K: "I do think corporate profits would go up (and poor people would have more jobs and low wage workers would make less and the economy would be more productive) if we just eliminated minimum wages and unions, and didn't do anything else. But it's a false dilemma."

Presumably it's a false dilemma because it's possible to eliminate monopoly profits and introduce pure competition?

Given the substantial number of industries with limited competition (banking, utilities, cable, media, education, health care etc) it would seem that the burden of proof is on those who figure it's possible to make industries more competitive and eliminate rents.

The danger with simply eliminating unions and minimum wages is that we risk simply transferring rents rather than eliminating them.


Ofcourse he should be able to outsource the job, supposing we believe the job being done is homogeneous, and the contractor performs as a perfect substitute.

The real question is, if Postman Paul is able to find someone who is willing to do his job for less, why can't the postal company find that same person who is doing it for less, and hire him instead of going through Postman Paul. Are we trying to convince ourselves that Postman Paul is in the human resources business?

No. Postman Paul is taking advantage of a market inefficiency created by his union. Due to non-competitive reasons, Postman Paul is in a position to collect an above market wage for the job, whereas his contracted labouror is unable to obtain this wage (or even the job) on his own. But if he is performing the job as a perfect (or even adequate) substitute, why shouldn't he be able to obtain the job on his own?

Is Postman Paul creating value, or distorting it? On his own, he is creating it. He is taking advantage of an inefficiency. But, inadvertently, I believe he is exposing that postal workers are paid above market wages.

I think it's very fair to say that at least some of the wage pregmium given to Postman Paul is for his trustworthiness. In that case, it is immoral for Postman Paul to outsource his job because he is violating that trust which he is paid for. i.e. you are paying Postman Paul for his trust, but he is cheating you of what you are paying for!

As for the usual case against unions, in a market with limited competition of producers, why is it unfair for those producers to face a labour market with similar limited competition? I certainly don't think it's unreasonable. And I agree with Frances that the onus is on the other side.

"But what is the moral, practical, philosophical and economic difference between a worker outsourcing his or her own job, and a corporation outsourcing that job?"

Huh? The individual is paying someone to do a job that he is being paid to do. Whereas corporations are legal fictions - they can't do work themselves. If you want to define "outsourcing" as what the postman is doing in your scenario, then corporations cannot, by definition, outsource anything. What you're referring to as outsourcing is simply hiring.

Adam: Two scenarios -

1. Postman Paul hires Unemployed Al to do his job for him, pockets $50.

2. Executive Emily fires Postman Paul, hires Unemployed Al to do his job for him, pockets $50 (bonus pay for increasing corporate efficiency).

It seems to me that the difference between these two scenarios is simply who is capturing the rents.

Now there's another possible scenario:

3. Postman Paul or Unemployed Al is paid a wage rate closer to the market wage rate, lower wages translate into lower prices for consumers, consumers use the postal service more often, economic efficiency is increased, etc.

Scenario (3) is often the one implicit in economic discussions. Yet if we were actually dealing with a situation of competitive markets, where did the rents that Postman Paul is managing to capture come from in the first place?

Sina (and others): "In that case, it is immoral for Postman Paul to outsource his job because he is violating that trust which he is paid for."

Perhaps the post that I should have written about this (but didn't) would have been one about the nature of the firm - when does it make sense for work to be done within a company, when does it make sense for work to be contracted out?

There's an enormous literature on this subject - Coase's The Theory of the Firm etc.

If it's a matter of choose your rentier, then since Postman Paul and/or Unemployed Al likely both high a high propensity to spend their $50, whereas Executive Emily is likely going to save her $50 bonus, are the implication for counter-cyclical policy that the government should pander to unions during during recessions and plutocrats during booms?

Outsourcing the job makes sense from an efficiency perspective. But it doesn't make sense from Canada Post's perspective. They're better off firing Postman Paul and hiring Al to do the job for $75. Postman Paul loses $25 and the taxpayers (as owners of Canada Post) gain $25, and efficiency is unchanged.

That's the difference between the worker outsourcing the job and the corporation outsourcing the job. In the first, the worker comes out ahead. In the second, it's the corporation. In this case, since we collectively own the corporation, having the company contract out is more desirable.

Sina: "in a market with limited competition of producers, why is it unfair for those producers to face a labour market with similar limited competition?"

Consumers pay the cost of monopoly. Therefore we should compensate the employees of the monopolists?

Frances: Proof is a heavy burden. I can't prove any of it. Especially things that haven't been tried, like sane monetary reform.

But I'd be happy to propose ways to bring competition in most of the industries you mentioned (I have made suggestions for banking before on this blog). Many of them (Banking, media, education, health care) aren't even natural monopolies. They are artificial ones created by laws and regulations, and getting rid of them involves reform of that legal framework (deposit insurance, copyright, patent protection, etc). Natural monopolies like utilities may be better off publicly owned in many cases.

And I wouldn't propose to just eliminate minimum wages (maybe lower them a bit given Stephen's observation that they are no better than random transfers to citizens in terms of poverty elimination). I'd want to eliminate them only in conjunction with elimination of welfare and introduction of a citizen's wage. As far as unions go I think many of their powers would be worth eliminating independently of progress against monopolies. Given the kinds of wages/terms they often extract (e.g. $21/hour for a postal worker who doesn't even have to deliver the mail) I have far greater concern about their impact on the poor unemployed than I do about rent transfers to people who are vastly less likely than the average Canadian to be poor.

That's the trouble with the union movement these days. In a proper union, Paul wouldn't undermine his fellow union members in this way. Even if Paul just happens to be a jerk, the union would properly have 'convinced' him to toe the line and just do his job.

At any rate, given that this blog had a post on Joseph Heath's 'Filthy Lucre' a while back, I find it surprising the extent to which everyone involved has failed to mention Heath's comments on the 'second best' problem of welfare economics and how it undermines any suggestion that economic theory implies an efficiency gain from the outsourcing of the contract in this instance. But carry on, if 'Filthy Lucre' didn't convince you, I'm sure I won't either.

K: Would you also outlaw business/industry associations and lobby groups? I suspect outlawing unions is impossible as it would likely be a violation of the Charter.

Declan : Isn't Frances' parable of Executive Emily essentially doing just that? The optimality conditions aren't achievable, so pick your rentier?

Declas: by 'doing just that' I mean addressing the second best issue.

Your right, Patrick, I should have made Frances an honourable exception to my comment.

By the way, it's not necessarily a union/non-union issue - here is a (possibly suspect) article from Times of India describing American software programmers outsourcing their own jobs: http://timesofindia.indiatimes.com/biz/india-business/Outsource-your-job-to-earn-more-/articleshow/769493.cms

Patrick: "Would you also outlaw business/industry associations and lobby groups?"

I don't want to outlaw anything.  The existence of unions generally requires lots of supporting laws, including a ban on hiring replacement workers during a strike and the obligation to join the union (collective bargaining) if you work in a unionized work place.  Both of these are obvious devices to extract non-equilibrium wages.  So I am proposing removing restrictions rather than adding new ones.

Frances:

Outsourcing software is extremely difficult.  The development process closely integrates the work of many people, and there is rarely a clear, unequivocal specification.  If someone successfully outsources her/his work that person has great software project management skills.  The employer is likely to be thrilled and will throw more work at that employee, not less.

If someone successfully outsources her/his work that person has great software project management skills. The employer is likely to be thrilled and will throw more work at that employee, not less.

Yes, but. Employees typically sign confidentiality agreements and employment contracts that acknowledge that intellectual property developed is the property of the employer.

What happens if the software being developed is proprietary, or puts a firm at a security risk if it gets into the wrong hands, as may happen if the outsourcing is done surreptitiously and without the proper controls?

K, consumers do indeed pay the cost of a monopoly, but that's not the point I'm trying to make. From the viewpoint of the labour market, instead of a single producer being able to buy labour from a perfectly competitive labour market, it is reasonable for a union to be formed to offset the monopolistic power of the producer. It may not be fair to consumers, but then again neither is the monopoly Canada Post has. It is, however, fair to the labour market which is selling its labour to a single producer.

If our goal is to protect consumers, then we should eliminate the market power on both sides. We should not just single out labour.

In short, you are eager to criticize the union's power, but where is your outrage for the monopolistic power Canada Post has?

On the other hand, it may be the case that we believe there are social benefits to having a monopolistic postal service (or some other industry). If so, then I don't think it is unreasonable for that monopoly to have to buy its labour from a collective union.

"we probably INCREASE the incentive to profit from theft because we make it harder to dismiss thieving postal workers."
Bob Smith

1. Is it really harder to dismiss thieving workers?
2. Given that the job comes with rent - the opportunity cost of being dismissed for thieving (ignoring the real possibility of criminal prosecution) is increased.

But it's a false dilemma.

No, it's a real dilemma. The erosion of the bargaining power of labour is what has allowed increasing economic class separation and all its attendant ills. The other kinds of transfers will never be accomplished because those who would abolish unions would do so in order to increase class distinctions. Unions are the natural outgrowth of worker solidarity and you want to undermine them and their power to "extract non-equilibrium wages" without coming up with some other viable institution for class solidarity.

This type of thinking:

I don't want to outlaw anything. The existence of unions generally requires lots of supporting laws, including a ban on hiring replacement workers during a strike and the obligation to join the union (collective bargaining) if you work in a unionized work place. Both of these are obvious devices to extract non-equilibrium wages. So I am proposing removing restrictions rather than adding new ones.

seems to presuppose that we should allow workers wages to sink to equilibrium...or that doing so is somehow value neutral, or improving.

If you're so concerned about the unemployed poor (as you should be), then advocate for money to be taken from the very rich and given to them.

I'm reposting this comment as Typepad didn't display it the first time. Sorry if it appears twice.

Mandos: "If you're so concerned about the unemployed poor (as you should be), then advocate for money to be taken from the very rich and given to them."

I do, sort of.  But I don't want to give money to the "poor".  If you stop giving money to them when they are no longer poor, you are creating a welfare trap.  Therefore you need to pay a citizen's dividend equally to everyone.  

The extent to which the rich have become so by monopolizing the commons (and I think this is most of the story), is the minimal extent to which that wealth ought to be expropriated for the public good.  That's why you should fund the dividend directly from rent taxes : principally land and resource taxes, specialized Pigovian taxes, and monetary expansions (at the discretion of the central bank).

Linking rent taxes to a citizen's dividend is the institution of class solidarity that I think you should be looking for. I think it would be a powerful democratizing force and a slippery slope for the rentiers:  A carbon tax, for example, is transparently revenue positive to all those who consume less than their fair share of carbon (those who don't monopolize the commons).  Vote for a carbon tax if you want more money!  It is also a kind of safeguard against inefficient taxation.  If you tax something that is not a monopoly rent, you will get less of it, and citizens/consumers will be able to observe the effects of dead weight losses more directly.

"The erosion of the bargaining power of labour is what has allowed increasing economic class separation and all its attendant ills"

I totally disagree.  Declining bargaining power is just a symptom.  The class separation is due to 1) competition from cheaper foreign labour and 2) competition from systems and technology.  Even you put in place barriers to prevent the first, the second one will get you in the end.  You will never claim your fair share of wealth if you tie your claim to your diminishing labour productivity alone.  You will merely enforce the principle that that is the entirety of your entitlement.  You need to stake a direct claim to the rents.

"The class separation is due to 1) competition from cheaper foreign labour and 2) competition from systems and technology. "

Agreed.

"You need to stake a direct claim to the rents."

This presupposes that the rents are not required. Certainly not all rents are required, but some rents are needed in an industrial economy.

Suppose an industry has increasing returns to scale. Then any non-zero price is too high. Are you going to penalize those firms with high taxes in order to subsidize firms with decreasing returns to scale? Nationalize the auto manufacturers and airlines? Microsoft is never going to charge $0 for software, even though marginal costs are zero. How much would you tax them?

A pharmaceutical company is never going to charge the marginal cost of producing the pill, if it spends billions on RD. You have to have IP, monopolies, patents, and the rest if you are going to run an economy heavily dependent on fixed investment, technologically driven productivity growth, and increasing returns.

I would argue that you get industrial style exponential consumption growth by providing enough rents to the business sector so that they can produce more and more goods at diminishing cost. You can't try to scrap all of this and drive us to a fruit picking economy because that is the one that is easiest to model. You are not going to get mom and pop auto manufacturers and mom and pop pharmaceutical firms truck and bartering with each other in perfect competition.

Firms are valued substantially above their tangible book value, the difference being the market power of the firm. The rate of interest is charged on that market value, not on the marginal cost of buying one more unit of capital equipment. That means that the cost of "replacing" the firm is higher than the actual cost of assembling the same amount of stuff that does the same thing, as you would need to spend additional money to obtain the same market power.

In order to get the productivity growth, you need to offer firms IP, patents and protection from competition so that the innovation is converted to market power which is converted into profits that justifies the innovation ex-post.

But labor has no natural market power. There needs to be some other compensating mechanism to allow them to charge more than the minimum price required to get someone to do the same job. Unions are an attempt to obtain this power. There are other attempts -- professional organizations that limit membership, etc. An economy only has a middle class when labor manages to translate some of the rents earned by capital into higher income for labor so that it can afford to purchase the additional output. It's only at that point that you can actually realize the technological change as exponentially increasing consumption.

That means you need some coercion to prevent a firm from replacing a worker with the cheapest possible one who does the same job, just as pharmaceutical firms demand coercive protection from competitors who would sell drugs at the production price, or Microsoft demands protection from those who would produce copies of the same software for near zero cost.

It's not a question of fairness but of economic stability. If this is how prices are set on the production side when we move past the berry-picking economy, and if we want to live in a post-berry picking economy, then you have to allow for wages in excess of marginal product just as you allow for prices in excess of marginal cost. Removing those protections for labor and not capital leads to deflationary pressure and ultimately liquidation. Removing those protections from both capital and labor just pushes us back into the berry picking economy. I'm not advocating for strong industrial policies per se -- there is a middle ground somewhere, but "no rents" is not a viable option.

And K is IMO pushing the false equivalence between trade and technological change so beloved of our illustrious blogleader Stephen Gordon that is also exemplified by the "bygones will be bygones" thinking. Technological change may displace workers in this generation, but in itself it offers opportunities for the next. In the aggregate, a population may be willing to accept this tradeoff because they still expect that the next generation will be doing the productive labour that will support them in their old age and support their grandchildren. They are not necessarily looking at decline.

Unrestricted trade, it turns out, can push even new forms of labour to the bottomless well of cheap workers outside the developed world. In exchange, we see that in the US in particular the new middle-class supporting jobs were created in FIRE and other service industries that do not produce new things in themselves. Guess what: it turns out that there's only so much room for bank managers, and they'll eventually be unable to buy the goods that foreigners make. As we see.

Declining labour power is a symptom in the sense that free trade was ultimately engineered to break the power of labour to extract a larger share of wealth than "equilibrium" would permit without free trade. Unionization played a crucial historical role in expanding labour's share of the pie; so in that sense the decline in its power is a "symptom."

The end result is a population, particularly in the USA where the working class has been at the losing end of this for decades, that is looking for revenge. Bygones are not bygones, and this was not a sound footing on which to put a good chunk of the developed world, if not most of it.

Sina: "It is, however, fair to the labour market which is selling its labour to a single producer."

There is no "labour market".  There are employees of monopolistic employers, and then there's the rest who get equilibrium wages.  You are advocating handouts to random labour market participants as a remedy for monopoly power.  

"where is your outrage for the monopolistic power Canada Post has?"

The beneficiaries of that monopoly are the employees and the government of Canada, in contrast to a private monopoly whose beneficiaries are its employees and the shareholders.  As far as the employee beneficiaries, I am no more outraged by one monopoly than the other.  But I way prefer monopoly rents to accrue to government than to private interests.  In fact, that (or directly to citizens) is basically where I think they should be going.

That said (and this is also for Frances and Mandos), I don't think that collective bargaining against private monopolies does much economic harm.  For the most part, as Frances points out, it probably just extracts monopoly rents.  It's just that it only does so for the benefit of one group of employees.  The benefit of unions is that (unlike minimum wages), they can target their efforts where the rents actually exist.  More than anything, the existence of successful collective bargaining (and I don't consider the NA auto industry experience a success, RSJ) ought to be viewed as an opportunity to either remove artificial barriers to entry in that industry or find another way to extract those rents for the benefit of all citizens.  There are however cases where trade union power has become so great that the union acts as a monopoly supplier of services.  The Quebec construction industry which has managed to establish an effective legal minimum wage (of the order of $50/hour) for each trade in all new construction is a case in point.  These instances cause real harm and ought to be targeted as monopolies in their own right.

I haven't been replying to the comments because the economic questions that the commentators are struggling with are so hard. I have no answers.

Mandos, you sound Marxist when you write about the working class looking for revenge - but if working class revenge is manifested in the tea party movement with its support for Republican pro-rich tax cuts...?

RSJ, it all sounds so 19th/early 20th century - powerful industrialists, powerless workers, etc. Will history look at the mid/late-20th century as some strange historical anomaly where workers briefly a decent standard of living?

RSJ:

"Suppose an industry has increasing returns to scale. Then any non-zero price is too high."

price=profit?  If the industry has similar size competitors it won't be excessively profitable, unless it also happens to be excessively superior at what it does.  

"Are you going to penalize those firms with high taxes in order to subsidize firms with decreasing returns to scale?"

There's a better solution for the latter:  break yourself up, stay small.

On IP:

Microsoft discovered a natural monopoly on operating systems/document file formats.  The impact of their (now ebbing) reign on technological progress over the past 25 years was arguably stifling.  I think they should have got the Standard Oil treatment back in 1998.  

IP protection as it exists today is the result of years of advancement of established industry interests at the expense of small innovators and consumers.  Witness ever extending pharmaceutical patents, software patent protection, and our ever expanding WIPO "obligations" (C-32: Canadian DMCA minus fair use).  In the US today, you can basically patent anything. The fact is, if an established player doesn't like what a small potential competitor is doing, they can kill them by inflicting millions of dollars of legal fees on IP suits, no matter how spurious.  

But traditional copyright isn't even required to spur technological innovation.  I am typing this comment on a computer that contains not an ounce of proprietary software.  I choose it, because it is the most high performance, flexible architecture I can get; not because I care about paying $50 to Microsoft. But I pay a cost by not being perfectly
compatible with protected proprietary standards (which have zero intrinsic content value). I am not saying that copyright protection should be revoked.  But maybe we need to be a little more skeptical about industry demands.

And lets not exaggerate the investments of the pharmaceutical industry in R&D.  The public investment in R&D is far greater and vastly more
innovative (it's essentially the entirety of science).  The industry spends more than twice as much on marketing as they do on R&D.  And much of the R&D that they do isn't very sophisticated: doing clinical trials is not rocket science.  And more than half of the marketing budget is on "educating" doctors.  So what gives value to their patents?  Is it the R&D, or is it "correctly" informing doctors and patients about value of their medicine?  The public is damn good at doing science.  I would happily revoke or drastically reduce patent protection for medicine and hand over development of new treatments to public institutions.

Mandos:

I don't celebrate when an Canadian garment worker becomes unemployed.  But the "bottomless well of cheap workers" (gasp!) in foreign countries, are actual human beings too.  I think it's great if a Chinese peasant is lifted out of destitute poverty.  And, on the balance, I think it is a morally justified trade off.  And if and when the Renminbi is allowed to rise to equilibrium, the Chinese peasants will be even wealthier and unemployed Canadians will have more opportunities to compete.  

Mandos, you sound Marxist when you write about the working class looking for revenge - but if working class revenge is manifested in the tea party movement with its support for Republican pro-rich tax cuts...?

That was my point. Essentially, the kinds of left-wing populist tradeoffs that could be made to give the population a (relatively true) sense that they don't have a high risk of a destitute future have been soundly rejected by the consensus in favour of unrestricted international capital, without no power for labour to bargain up wages.

The only remaining outlet is (ineffective and dangerous) right-wing populism, which usually involves taking revenge on weaker groups rather than stronger ones. This is effectively what has happened in the USA. Class structure matters and the gap created by the erosion of the bargaining power of labour through whatever instrument (relatively liberal trade with China, etc, etc) has created an increasingly socially incoherent and volatile society. I live in it, I see it.

I don't celebrate when an Canadian garment worker becomes unemployed. But the "bottomless well of cheap workers" (gasp!) in foreign countries, are actual human beings too. I think it's great if a Chinese peasant is lifted out of destitute poverty. And, on the balance, I think it is a morally justified trade off. And if and when the Renminbi is allowed to rise to equilibrium, the Chinese peasants will be even wealthier and unemployed Canadians will have more opportunities to compete.

Let's leave aside the neoliberal ponies-and-unicorns scenario of how this is actually going to end (ie, it's likely to end in not nearly as pleasant a place)---and instead look at the moral-political axis of this scenario.

We live in a geopolitical world that is predicated on national borders, with policy makers who are expected, or so we're told, to be responsive to the varied interests of people who exist within those borders. From a global perspective, sure, there's no moral difference between the Chinese peasant and the Canadian garment worker. But from the perspective of the very contract between the people and government to make policy, there's a very sharp moral difference between the Chinese peasant and the Canadian garment worker.

Once the political class decides that it no longer needs to make policy that primarily favours the Canadian garment worker over the foreign one, the social/political contract is broken. Mainstream economics as a whole appears to have provided the alibi for the political class in much of the developed world to do so. After all, the Canadian garment worker wasn't consulted on whether s/he wanted to give her job as an act of charity to the Chinese peasant; s/he was put into competition with the peasant against his/her will, across political and democratic borders. (And hence, so many in the USA, especially among the working class, do not believe that elections will ever ameliorate their downward trajectory.)

Now, if this meant that the Canadian political class was responsive to the Chinese peasant, it still would be one thing: they would be responsive to someone whose needs are not being met, and who has some justification to have them met. It would retain some kind of a nimbus of responsibility. It would also be the effective conquest of Canada by the Chinese peasant. Fine. But the political/economic class in Canada and the USA is clearly not responsive to the Chinese peasant. In fact, if it were at all feasible to move multinational operations to Sierra Leone, they'd do so, and perhaps eventually will, especially if the RMB rises enough to price out skilled Chinese labour. In which case, what we'd really end up---and indeed, what we are seeing the world over, China included---is a narrow class of transnational economic elites, and a dystopian class of disposable workers who are, on average, narrowly better off than the were before.

It's a good thing (for China, and maybe for the world) that the undemocratic Chinese elite still see their duty---and their lives, given that China has revolutionary habits---in terms of serving the economic interests of at least some of their working population.

But that is ultimately why trade, immigration, and technological improvement are none of them substitutable for one another. The political class that is ultimately responsible for passing economic policy must remain responsive to the needs of the people who elected them first and foremost, and free trade has essentially broken that contract in a way that immigration and technology do not, with the unfolding negative consequences.

RSJ, it all sounds so 19th/early 20th century - powerful industrialists, powerless workers, etc. Will history look at the mid/late-20th century as some strange historical anomaly where workers briefly a decent standard of living?

Unless something is done, probably yes. Except now you have a class of people who have tasted prosperity and will remember it for generations, and whose resentment at losing it may boil over in ways more destructive then their ancestors could have imagined, even after WWII.

Mandos:

And so we return to Postman Paul.  Can I Translate what you say above to their situation: "But from the perspective of the very contract between Paul and Canada Post, there's a very sharp moral difference between Al and Paul"?

So from your perspective it's about contract obligations.  Paul deserves the job in perpetuity, for no other reason than because he has it. Al is somebody else's problem. From my perspective, poverty stumps your
"contract".

The greatest political failure is the failure of the left to move beyond an irrelevant 19th century framing of capitalism.  People are listening to Glenn Beck because the incoherence of the ideas of the left has left them with the impression that there is no need to be coherent.

"if it were at all feasible to move multinational operations to Sierra Leone, they'd do so"

Absolutely.  But it isn't.  The current disequilibrium will end over the next few decades.  The supply of cheap workers is only seemingly
bottomless.  And billions of people will by then be far less poor than they otherwise would have been.

And yes we need to find ways of preventing the future from becoming dystopic.  But price/wage solutions and other barriers and distinctions between labour and the unemployed poor is not the solution.

The decline of the American empire.

Like the decline of the Austro-Hungarian empire, which started with the assassination of Archduke Franz Ferdinand, the seemingly insignificant subcontracting of work by Postman Paul, historians will note, was the tipping point.

JVFM: Best laugh in a long time! Thank you.


" ... if working class revenge is manifested in the tea party movement with its support for Republican pro-rich tax cuts"

"People are listening to Glenn Beck because the incoherence of the ideas of the left has left them with the impression that there is no need to be coherent"

Most people don't know or would refuse to believe that Beck and friends are incoherent. Americans are looking to be rescued. Beck and his ilk are perceived as beckoning the way to the life raft for no other reason than they look and sound like the guy who just might know the way to safety. Obama et al could play this game too, but they choose not to, and have paid a heavy price. Of course, the best option would be to stop the idiotic theatrics and just produce the life raft before the ship sinks.

K,

Ok, I may be late 19th Century, but I'm older (younger?) than your Ricardian Utopia :) I think I have enough experience in the business world to know that there is almost no objective relationship between pay and performance. It's all relative, and relative to somewhat arbitrary conventions. Suppose you have 5 people working together, producing $10 in total output. It could well be the case that if any of them leave, total output declines by $10, or maybe only 10 cents. But if the second person leaves, total output may decline by $8. And if the third person leaves, total output may increase to $5. Or maybe $1.

And the order in which they leave makes a difference, too.

It's a non-commutative group.

A might be key to having B and C perform well, but A working only with B may not make much of a contribution at all. So how much do you pay them?

And if you think I am cooking up some strange example, then think back over your life to any misfits that you may have known, that suddenly found their place and became very productive when working with the right group of people, in the right environment. It happens all the time.

Once you move beyond the *18*th century corn model, you can't say anything about marginal product of either labor or capital without feeling a bit embarrassed.

It's an infantile view of production, and not something that you want to hang your hat on when trying to explain wages.

Regarding our poor chinese worker, who is reliant on selling shirts to canadians, the last I checked we were not on a gold standard with specie flows.

Why would this poor worker need to make a shirt and then ship it overseas, and how would this net export of real resources benefit him?

Once a nation is able to produce, the distribution of output is a political problem, and is not helped by canadians at all, or reliant on canadians to solve. There are people who want shirts in china, too, and would buy them if they could afford to do so.

That chinese firms can sell to canadians allows them to price out domestic consumption; it's dynamic inefficiency due to artificially low interest rates.

FYI, consumption shares in China have now been driven down to 35% of GDP. 40% of GDI consists of retained earnings in the government sector as well as state owned enterprises. If they were really interested in increasing the incomes of their population, they would not drive the household disposable income down to 60%, or allow 1% of the population to earn 40% of GDI. And there is evidence that these numbers significantly understate the level of inequality.

This is all about being able to charge more for products than your own nationals can afford to pay, making up the difference by importing demand. This savings glut phenomena is very real, IMO, and I think it is no accident that these periods occur during times of trade liberalization, and are followed by depression. I don't think its a forced law of nature, but we had similar levels of inequality just prior to the great depression as well as prior to the long depression. I'm not saying I have all the answers, but I can certainly see that wages are out of synch with value-add, and that prices of goods are too high. Don't you see it?

The above should read 1% earns 40% of household disposable income, not total income. That is for China, not the U.S., obviously.

There are lots of statistics about median wage shares in the developed world as well. That median wages have not kept in line with prices or national output is beyond dispute. Why bringing it up is taboo is beyond me. It's an important macro driver, we have data on it, and it's plausible that this is related to our current demand constrained situation.


I once was more interested in this topic and collected some data from OECD.stat, which you may enjoy as chart porn:

http://1.bp.blogspot.com/_fevQMK7kLEI/SwKQna4z9cI/AAAAAAAAAHI/p2Y35enKAC0/s1600/recession_and_wage_per_output.png
http://2.bp.blogspot.com/_fevQMK7kLEI/S6V8x6a38MI/AAAAAAAAAK0/QJAcMjeCFO8/s1600-h/earnings_evolution.png
http://2.bp.blogspot.com/_fevQMK7kLEI/TBAVwjYBf1I/AAAAAAAAAMc/NIIGXmM8f0E/s1600/OECD_income_inequality_perceptions.png
http://3.bp.blogspot.com/_fevQMK7kLEI/S6V8xX4iDQI/AAAAAAAAAKs/iGcsOAtgSo8/s1600-h/recapture_rate.png
http://2.bp.blogspot.com/_fevQMK7kLEI/SyseB7LhGUI/AAAAAAAAAIw/BJN1325jDFQ/s1600-h/funding_costs_house_prices.png

RSJ: I didn't call you 19th century.  Frances said that.  I called Mandos 19th century.  You need to keep your ad hominem attacks straight.  And though rents may be Ricardian, I credit the Utopia to Henry George in 1887, which is, basically, almost 20th century.  So there!

"It's an infantile view of production, and not something that you want to hang your hat on when trying to explain wages."

For the most part, I have no need to explain wages.  If there are monopoly profits, they will likely be shared between shareholders and organized labour.  Successful collective bargaining is just an indication of the existence of monopoly rents, but the root cause is the monopoly. So my point is to eliminate the monopolies, or at least tax the rents for the benefits of *all* citizens.  When the monopoly power disappears, the non-equilibrium wages will too (see General Motors), but these are not the target.  The monopoly is the target.

"Why would this poor worker need to make a shirt and then ship it overseas, and how would this net export of real resources benefit him?"

You're kidding, right?  He wants an IPhone, if he has to make a thousand shirts to get it.  

"This is all about being able to charge more for products than your own nationals can afford to pay, making up the difference by importing demand."

It's partly about that, but mostly it's about China being poor. Rigged exchange rates play a role, but on a PPP basis Canadians are about 5.7 times as rich as Chinese.  Even if the Renminbi doubled (and everything else stayed the same!), the Chinese would still be three times less rich than us.  Why?  Because they don't have the skills to be as productive as the average Canadian.  Since they were recently subsistence farmers, most Chinese don't have the skills to be productive even to the level of our minimum wage.  They have the skills to make shirts at $1/hour.  If their government permitted their economy to move to a natural equilibrium that figure might be $2/hour.  But that doesn't change the fact of their comparative advantage in making shirts (speaking of Ricardo).  

But I certainly do see manipulations of wages and prices (and property rights) by governments and powerful interests both here and in China.  And always to the detriment of the poorest members of society.

K,

"You're kidding, right? He wants an IPhone, if he has to make a thousand shirts to get it. "

Net exports means that nothing comes back. No iPhone.

This recalls the debates over the WTO during the Clinton administration, which simultaneously marked the explosion of our household debt orgy. The anti-trade crowd was upset that China was running a deficit, and the "reasonable" people kept responding with talk of comparative advantage, a model that is based on barter and precludes the existence of a trade deficit in the first place. It was a complete analytical failure to even conceive of the things that people were complaining about. It's the deficit that causes problems, not trade. When someone complains about a trade deficit, you cannot respond with pablum about comparative advantage.

The real comparative advantage that China has is cheap cost of capital, because the interest rates are so low. The growth there is not in low productive shirt making, but in very capital intensive industries. It has nothing to do with some productivity differential between Canadian and Chinese workers. The potential productivity of those workers is very high, but the economy is so dynamically inefficient that actual productivity, given the excess capital stock, is lower. But you would still be surprised at high the productivity actually is. It is so high, that no one can afford to purchase nearly enough consumption output.

A local official expropriates land on which a 1000 farmers earned a subsistence life, and builds a factory instead, hiring 500 workers. Productivity goes way up. There are now 500 unemployed people that must migrate somewhere else, and work in some other factory. But that means that factories need to produce and sell enormous amount of goods in order to employ those 500 people. That's why the economy needs to grow at 8% per year in order to keep unemployment constant, even though it is an aging population and the labor force is growing slowly. That means that the economy is constantly expanding capacity. It is expanding capacity in order to build more capacity. Simultaneous to that, the consumption share of GDP keeps falling, and household disposable income shares keep falling, both trending to some "Hell Point".

You can't apply the standard tools of analysis to try to describe this problem. Otherwise, prices would clear, right? The people would be able to buy their own output and there would be no need to keep exporting in order to maintain employment. The only reason why you need to net export in order to employ someone is because of high productivity and prices that do not clear.

In the standard analysis, you would expect a developing country that needs more capital goods to import them. If it must, it will buy the capital goods by exporting consumption goods, but it would be better to just import the capital goods on credit. So a developing nation "should" be running current account deficits or at a minimum have balanced trade. Disposable Incomes should be rising at the same rate as output.

But that's not how it works. The developed nations are net importers and the developing nations are net exporters. The developing nations are doing everything they can to chase away foreign capital, and be net lenders to the developed nations. Why?

Generally, a country can produce its own capital goods, and it can produce its own money. But if wages are out line with prices, then it cannot produce its own demand. Demand is really taking the place here of capital -- it is the one thing that the country cannot supply for itself, so it must import it. Which is curious because demand is completely under the control of the nation, and there is no "real" reason why there should be a demand deficiency, other than a political class earning massive rents, and not willing to share those rents with labor. So the developing nations are not poor farmers who are unproductive, but they are stuck with a dysfunctional political system that only allows an increase in productivity if it is paid for with net exports.

This has nothing at all to do with "lifting someone out of poverty", but keeping them trending towards the Hell Point, by allowing prices to clear at levels that are beyond the reach of the domestic population.

Yep, dystopia on both sides, two rival groups of global rich whose rivally mutually enriches them at the price of creating a global underclass. But this argument has, as RSJ says, being going on since the 90s and before, with the other side essentially taking it on faith that in sixty years we'll all be better off than we were before, and that the increase in inequality has no costs of its own.

But wealth is relative. The real question is, without unions and labour wage protection (ie, defence against falling to "equilibrium"), would we ever have had the period where the industrialized world emerged, for a time, from the Dickensian dystopia from which it started? That we'd have had worker's compensation, worker protection, some form of public health insurance/regulated health provision in most of the developed world? That we'd have had all these things by letting everything sink to the "equilibrium" wage? If you believe in the ponies-and-unicorns story of neoliberal globalization, you also have to believe *that*.

RSJ - on the 19th century thing - my point was that sometimes I see parallels between the 19th century (relatively liberal trade regime, extreme inequality, etc) and now. That's all.

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