Bryan Caplan  

Labor Econ Versus the World: Further Thoughts

My Comments on George Shultz's... Economics Strikes Again: Stere...
Further thoughts on Labor Econ versus the World:

1. In my youth, I saw Industrial Organization as the heart of our secular religion.  My history textbooks loudly and repeatedly decried "monopoly"; teachers, peers, and parents echoed their complaints.  Since the late-90s, however, such complaints have faded from public discourse.  The reason isn't that plausible examples of monopolies have vanished.  If anything, firms that look like monopolies - Amazon, CostCo, WalMart, Starbucks, Uber, Facebook, Twitter - are higher-profile than ever.  But the insight I preached in my youth - the main way firms obtain and hold monopoly on the free market is reliably giving consumers great deals - is almost conventional wisdom.  What modern consumer fears Amazon or Starbucks?

2. Another reason Industrial Organization has faded from our secular religion: Thanks to e-commerce and internet reviews, it's now indisputable that reputation impels firms to treat their customers well.  When people want to buy with confidence, almost no one asks, "Does the government regulate this?"  Instead, they scrutinize the seller's reputation.

3. Since moderns are satisfied with markets as consumers, it's only natural that our secular religion focuses on producers.  For the vast majority of us, "producer" means "employee." 

4. The main lesson of labor econ is that markets for labor closely resemble markets for other goods.  Why then are people so eager to believe that unregulated labor markets are terrible?  Part of the reason is that the little differences are occasionally traumatic.  Wages don't adjust like stock market prices, so involuntary unemployment is a real and frightening prospect.

5. Another important reason, though, is that markets where people trade vaguely-defined products for cash tend to be acrimonious.  When products are vague, the side paying cash often feels ripped off, and the side receiving cash often feels insulted.  In most markets, sellers strive to standardize products to preempt this acrimony.  In labor markets, however, this is inherently difficult because every human is unique.  As a result, employers often lash out at workers because they feel cheated, and employees often resent employers because they feel mistreated

6. These problems are amplified by the fact that our jobs are central to our identities.  So when we feel mistreated by a boss (or by co-workers the boss fails to control), we experience it as a serious affront.  This in turn leads people to demonize employers as a class.

7. Once you demonize employers, it's natural to (a) look to government for salvation from current ills, and (b) imagine that existing "pro-labor" laws explain why the demons in our lives don't already treat us far worse.  This isn't just the root of our secular religion.   If you take the demonization of employers and salvation by government literally, you end up with Marxism or something like it.

COMMENTS (19 to date)
Damian writes:

Point 5 is important and insightful, especially applied to unions. In my experience, it seems that the employees that resent their bosses the most are unionized ones (teachers often think the administration is out to get them). But in the unionized case, both sides try really hard to standardize the product (e.g. 5 firemen per truck). But I think your point still holds - the acrimony may be diminished over the actual product, but now employers now feel cheated because of arbitrary and stifling work rules which discourage innovation. And employees, perhaps without realizing it, dislike their bosses and work environment because of what it has become once the product is so standardized.

Kevin Erdmann writes:

I second Damian. I hadn't really thought about that before. The explicit motivation for unionization is usually income transfer or negotiating power, but the credentialism and categorization that is usually associated with unionization probably does create a sense of security or certainty for laborers, until the second order effects Damian point out begin to play out.

Jo VB writes:

Your view that monopoly has faded from the public's angst might be true in the US, but does not seem to be shared by my European countrymen. Shops cannot open after 6pm or on Sunday, explicitly aimed at diminishing the comparative advantage of chains. Amazon does not operate in many countries and only sends books or DVDs internationally. Energy and media markets are still extremely regulated. Uber is banned and AirBnb will be soon. Zoning restrictions make even the US look like the land of the free. I could go on for a while. I cannot think of any European CEO with a high profile (there are big firms here) and I don't think that is an accident. Big Business is not viewed kindly here.

Matt Moore writes:

The UK experience certainly reflects the American, and this can be seen in the policy priorities.

Anti-trust investigations are rare and not the stuff of headlines or of manifestos. Also, there isn't much left to privatise. Even the Royal Mail is private now. The EU, in one of the few good big things it did, bans state aid to industry in most cases. Many stupid tariffs still exist, but because these are executed at the EU level, they never hit the UK media cycle.

Conversely, issues around labour - minimum wages, living wages, tax on the low paid, benefit withdrawal rates, criteria for claiming disability - are all hot topics.

sourcreamus writes:

This is really insightful, is this a well known theory or did you just come up with this? It seems like something that is so obviously true that it must have been known but I have never encountered it before.

Ryan Murphy writes:

Regarding (1) and (2), what about Comcast?

Thomas Sewell writes:

Ryan, I don't think he's counting government created monopolies, which are the most common type out there. To be fair, they don't have much to do with markets.

Jesse C writes:

@Thomas Sewell: Could you point me to something that supports the notion that Comcast is a government-created monopoly? Not doubting you, but I don't know what keeps competition at bay.

More generally, the extent to which the telecom market is free seems nonobvious to me. I'd like to learn more.

ThaomasH writes:

By your theory, certain kinds of labor regulation might make jobs more "standardized" and so reduce resentment.

Nathan W writes:

Once upon a time I was working on a farm and asked the employer for a proper mask to protect me from the pesticides. I also pointed out that the fungicides were being applied at about 100 times the maximum recommended amount.

I got fired the next day for no reason at all. He handed me a cheque and told me not to come back. The labour authorities couldn`t do anything because I hadn`t been working there long. (It is legal in most of Canada to fire people for no reason if you've been working there under 3 months.)

Labour standards matter, and usually the only way to get them is through collective action, usually political parties supported by unions.

A usual suspect writes:

"The main lesson of labor econ is that markets for labor closely resemble markets for other goods." has to be the worst summary of the literature possible. The literature on search alone falsifies that statement. (Since search frictions generate price dispersion even for homogenous products, e.g. Hortacsu and Syverson 2004)

And people don't care about regulation now that they have reputation mechanisms? How bizarre. What about, say, the issues with lead paint in Chinear-exported goods? People weren't clamoring for tighter regulation?

Conscience of a Citizen writes:

Ryan Murphy above sort of beat me to it, but really, your points (1) and (2) are not supported by the examples you chose, and are mostly falsified if you look at proper examples.

If anything, firms that look like monopolies - Amazon, CostCo, WalMart, Starbucks, Uber, Facebook, Twitter...

Of those only Twitter appears to be a monopoly, and then only if you define the market very narrowly. Facebook desperately wants to be a monopoly but sure isn't one now. All of the other firms you listed are highly competitive. Costco (please note that the second 'c' in Costco is not capitalized) for example, competes with Wal-Mart and vice-versa, both compete with Amazon, and all of them compete with many other retailers (Target, anyone?). Uber? What about Lyft?

There many actual monopolies (and oligopolies) out there, like Comcast, which behave as textbook monopolists: they reduce output and raise prices to maximize their profits!

Thanks to e-commerce and internet reviews, it's now indisputable that reputation impels firms to treat their customers well.

Really? Like Comcast (worst customer service in America) again? Or Time-Warner?

[T]he main way firms obtain and hold monopoly on the free market is reliably giving consumers great deals...

Patently false. The main way firms obtain and hold monopoly/oligopoly is by capturing lawmakers and regulators (other examples are legion, see another and another).

Stephen Karlson writes:

Perhaps it's that I did my graduate work at Wisconsin, but the heart of the secular religion that I understand as the Welfare Economics Paradigm is the Diamond - Mirrlees - Stiglitz general equilibrium approach to taxation. Monopolies and oligopolies are incidental.

verplanck.colvin writes:


Perhaps Thomas is referring to the state laws that ban municipalities from creating their own telecom entities to maintain current monopoly status.

Downpuppy writes:

What on earth does "Look like monopolies" mean?
Starbucks? There's thousands of competing coffee shops.
Amazon, WalMart, Costco? They're competitors! Like Facebook, Twitter, Tumblr, MySoace, Yuku, etc.
Uber? Lyft, Zipcar, taxis, public transit, friend with a car

Where a company does get a monopoly- like Microsoft had with Office, cable companies that are the only one in town, drug companies hanging on to patents and killing off generics - the abuse is as bad as ever.

@Nathan W

Leaving aside truth, justice, and the Canadian Way, donĀ“t you think that the guy did you a favor by firing you the next day?

I mean. Who wants to work for a guy that doesn't provide proper masks and doesn't follow directions on application of fungicide? What other stupid and harmful things is he doing that might hurt you?

Thomas Sewell writes:

@Jesse C
In the Cable Communications Act of 1984, Congress turned local cable into something controlled by municipalities. So if local politicians want to rig things so that only the single favored company they prefer is able to serve as a cable provider in a geographic area, they can. Many of them did. Cable service turned into who can work with the politicians the best, not who can please customers the best. The city, not the end user, became the "customer".

You don't think just anyone could decide to offer cable TV service to you, did you? No, they can't and the reason is that it's illegal without political influence paving the way.

@verplanck.colvin That is a little part of the puzzle as well, as other politicians made sure they game was still being played the same way as before.

Note the lack of market forces in all the above, as compared to political decision making.

Jesse C writes:

@Thomas Sewell and @verplanck.colvin: Thanks for the answers. So I see that cable may be a monopoly on a per-case basis, and only in the context of a local market and as a result of local government. But even if there were 100,000 cable companies, if I only get to choose the one in my city, it's a monopoly.

The extent to which cable is a monopoly should serve as a direct measure of how amenable governments are to monopolies. On that note, I'd love to know a graph of % of US homes broken down by number of cable/broadband providers available.

Also, there ought to be some at least some markets that have a simple tax on cable runs, don't care who lays cable beyond building permits, etc, right? If not, that's just sad.

Aaron McNay writes:

@Jesse C: Local governments and public utilities also limit ISP competition through pre-deployment barriers. To start an ISP and lay cable, a new business needs to get permission from local governments to use publicly owned right of ways to place their cable. However, there have been numerous complaints of local governments and public utilities charging very high prices for the access, as well as slowing the review process down. Other kickbacks are also usually required, such as free access for schools and government offices. Overall, these issues make it harder for new service providers to enter an area, which limits competition.
Here is some additional information on these issues:

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