November 30, 2013

Production as Privilege: Markets and Non-Markets

I realized when starting a sort-of summary piece on all the Production as Privilege series of posts that I had skipped straight from conceptual tool 7 to conceptual tool 9. That was enough of an excuse to go back and finish up with one more idea I had been wanting to write about. Here it is.

Conceptual Tool #8: Market and Non-Market Domains

The market is not everywhere. It may affect in some way nearly every domain of our lives, but there are social domains where other forces exert far more influence, and there are also social domains where we have set up deliberate barriers to keep the market out. Some of these places are surprising; one of the most surprising to me, when I first encountered it conceived in such a fashion, was the firm.

It may seem odd to think of firms (corporations in any form) as anti-market structures, but in fact that is exactly what they are. Firms are set up to keep market forces at bay, as decades of "theory of the firm" literature started by the late Ronald Coase has shown us. The "interior" of a firm is not a market but typically some type of hierarchical bureaucracy.

For example, the first person on the assembly line does not sell their product to the second person. They simply pass it along; the product is owned by the firm and the workers have agreed in advance to sell their labor. Similarly, most office workers do not have to buy own their computers--they are simply assigned them. These non-market workplace setups happen for a number of reasons: it would be very inefficient if each worker had to agree on a price before they passed along the product; or businesses may be able to get a better deal on a bulk computer purchase.

Likewise the allocation of work within a firm is very different from external labor markets. Workers may compete with each other for promotions but not to get paid for the work they are assigned. Workers perform various tasks for the firm without negotiating each price.

This all serves to remind us that capitalism has always had a more complex relationship to markets than we often think. The economics discipline tends to idealize markets and assume they are ideal in any situation, but this view ignores the myriad of daily interactions and relationships that have nothing to do with markets, and are governed instead by hierarchy or other social arrangements.

Gradually, thanks to a large extent to capitalistic profit incentives, the market has come to intermediate a good deal more than the basic exchange of commodities--not just our daily labor but our nearly everything we do, from cleaning our house to keeping us in shape. It is not a one-way process, however. Markets often recede naturally when they are inconvenient: for example, my house is currently managed by a rental company, so I do not have to contact the repairman or pay for repairs when my sink stops working.

Curiously, pre-capitalist relationships of production may have been more directly tied to the market than current ones are. Braverman argues that before capitalism, the division of labor was entirely confined to divisions between products, meaning that one person was responsible for the entirety of a product that was sold on the market. Their labor was therefore expressed in the market through the market value of the commodity they produced, instead of through contractual agreement with owners of commodity-producing processes. Over time, however, economies of scale and other forces pushed workers into salaried positions in hierarchical organizations.

What does this mean for our system of production and the way it distributes wealth? By highlighting the non-market nature of the firm, it allows us to question the assumption that workers in a company earn their marginal value. When economists model labor markets, they tend to assume workers are paid the same amount of money that they help a company earn. But outside of a simple econ101 manufacturing scenario, it is much harder than you might think to figure out what the value of a worker is for a firm, because the firm is not a market--the firm exists between the labor markets and the product markets. While the cost and benefit analysis firms employ to decide whether to hire or fire workers is certainly complex, it is mediated by hierarchy that may have little to do with any "value" in an economic sense.

For example, imagine two low-level employees join an organization with the same qualifications. One of the employees is related to the boss, so he is asked to help out with some administrative duties after hours and is eventually promoted to manager and makes significantly more money than the other employee. Now, a manager may indeed provide more value to the organization than a low-level employee, because the manager is more important for the overall running of the company. From this angle it makes sense that the employee with the connections is now making more money than the other employee. However, it is difficult to argue that this outcome is in fact due to market forces. Instead, it has been shaped by personal relationships, hierarchy, and bureaucratic organization.

Ultimately what is important is that we understand ways that markets work and fail to work. Too often they are assumed to be an ideal form of relationship when in fact they are ill-suited for a particular situation. By starting to note all of the places where markets have and have not taken hold, we can get a better idea of how to design policies that use--or do not use--markets appropriately.

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