Basic Income Versus Job Sharing

As is so often the case, one of my students has sent a very interesting link, that sparks a dialogue about economic choices our society faces. In this case, the link is to a video describing a (European) proposal for providing all (EU) citizens with a guaranteed basic income. You can see the video here.

The proposal is interesting. The first concern that arises is what will happen to productivity. Will people still want to work, when their work isn’t tied to their incomes? Will a country that adopts this approach become an impoverished (at least as far as income) land of poets? And will the highly productive people who want to work, to earn more income above the basic income, be willing to share those gains with those who aren’t working or are working in low productivity jobs? It does seem that we have a tremendous amount of wealth, our societies are rich enough to provide everyone a basic income…but we GOT that rich by having  lots of incentives to create wealth: those who created it got to keep it. (To varying degrees some did that on the backs of others… but a lot of it was legitimate wealth creation nonetheless).
   Another angle, consistent with a lot of the ideas of degrowth, is simply that we are working too many hours..The video makes the point that our productivity has gone so far up that people rightly fear losing their jobs…millions already have, over the years. But I’d say the solution to that is to work fewer hours…that might cut in to productivity a little bit, but it might not. If we had two COA economists, each of us working 30 hours a week (because I often work 60 hours a week), there would be some increased administrative overhead costs…but the two economists working for 30 hours each would be fresh all the time and collectively have much more expertise and ideas than I alone could possible have. So, instead of guaranteeing a basic income, you greatly increase the job availability (two economists get hired at COA instead of one; each economist gets paid less than the 60-hour-a-week single economist, but enough on which to live)…and people have enough time off to become poets, great parents, and/or contributing members of their communities, etc. The market still sends signals indicating which kinds of work are needed, and people can still get rich, tho it might be a bit harder. I think this would be a better solution than “pay me and I’ll go be a [bad] poet.”

You cannot separate either the basic income proposal or my job sharing proposal from norms (New Institutional Economics, of course)….our social norms would need to change considerably. I think the norms necessary for for a shorter work week would be easier to move toward (because we already have shortened the work week a tad…just not nearly enough, given productivity gains) relative to the norms necessary to make a basic income a human right (give me something for doing “nothing”…”nothing” in quotation marks because it’s really wrong to say that poetry and parenting is “nothing”…but those norms persist). For either proposal, however, we need to keep pushing the ideas, to have them “on the shelf,” becoming normalized and ready to go when we’re ready for some change.

Why cooperation?

I do a lot in the realm of cooperation and cooperatives…in my courses, in conversations with people, and in real life. I was recently asked by someone about how and why I got into cooperatives and cooperation…and this was via e-mail, so I had to write it down, succinctly. Here is what I said:

“I teach economics, as I mentioned. At COA, off course there are plenty of students interested in sustainability, and also quite a few who are suspicious of standard economics. Ecological economics answers both situations: it’s the economics of sustainability, and is in marked contrast to standard economics in lots of ways. Once I got into teaching ecological economics, I got into sustainable food systems, which led me to farming. It turns out, additionally however, that a lot of ecological economists see cooperatives and a cooperative economy as a necessary part of some kind of “sustainable” future. So much of sustainability is somewhat hopeless/depressing (once you start looking at it systematically and intensely as ecological economics does), but cooperatives are a major bright spot, one of the few places where change can be real, effective, and possible (possible, as opposed to, for example, us stopping using carbon-based fuels anytime soon; getting rid of carbon would be *highly desirable,* but I think it will be a cold day in hell before we actually restrain ourselves in this realm, and many other, realms). Plus, my students love the idea of a cooperative economy, it really gets them excited and inspired. So I work it into a lot of my classes, have a new dedicated class (The Economics of Cooperation, Networks, and Trust), and do cooperation in real life whenever I can. I’ve been involved in co-op startup efforts in Bar Harbor and Seal Harbor (both ultimately unsuccessful), co-managed a buying club for about 4 years, and am working with another farm toward some kind of producer co-op for local foods in Knox County. Throw in 1) the desperate state of the rural Maine economy and resulting out-migration of young people, and  2) the financial constraints to doing small scale sustainable agriculture as a sole proprietor, and all off a sudden co-ops and cooperation make for a pretty important topic.

    Part of all this work is the result that I’m not starry-eyed about co-ops…they are amazing at providing lots of different things, but there is also cold hard economic logic that explains why they make up so little of our economy (but the variables behind that logic can change…people need to re-evaluate what’s important to them, or not be told by corporate American what is important to them). So I tend to spell things out, not ignore the tough economics of cooperatives and cooperation, but am constantly hopeful that we can do better. I do think the U.S. (and Maine in particular) could and should develop a cooperative economy.”
    That about explains it.


Contemporary lessons from an early economy

I’m reading The Merchant of Prato, by Iris Origo. Written in 1957, there are no doubt more up-to-date treatments of the the Medieval European economy. But as it was written by a non-economist, it portrays the every-day life of Francesco di Marco Datini, 1335 – 1410, as well as the economic scene of the time; its economics, politics, religion, and personal life all rolled into one. As such, it’s a much better read than most economic histories, but still has plenty to tell.

First, there was plenty of trade going on the 14th Century, all over Europe and the Mediterranean. All manner of inputs and finished goods are traded, from the the Baltic and Scotland to the Levant and Balkans, North Africa, the Black Sea, and of course spices and other such goods coming from farther afield. A vast network of trading houses and merchant companies, with firms having representation in many major cities, exists to support the acquisition of inputs and sale of finished products. (More money is made and trade conducted in luxury goods, but one does find commodities such as wheat moving around.)

Production is carried out by extreme specialization, requiring inputs and intermediate products to change hands many times. In the production of cloth, wool is carded, fulled, sheared and cut multiple times, spun, woven, measured, dyed, and many, many other steps, all by different people. Some production is shared out to peasant households, such as weaving.

Most of this production is organized by guilds…the guilds are the center of economic life. Merchants organize production as individual agents, but the steps they must take, the rules they must follow, the who-does-what, is all determined by guild rules. The guilds  provide two main functions: establish some monopoly power, by all their rules and requirements, and create trust and reciprocity (because any bad dealings mean getting kicked out of the guild, which means going out of business); like all institutions, they seek to reduce uncertainty in what, by many measures, is a very, very uncertain time.  The guilds establish voluminous sets of rules for how things are to be done, where and how things can be sold, limited points of entry and exit, and lots of penalties if the rules are broken.

The economic system can thus be characterized as some kind of market feudalism.  Markets are very present, but entry to them is highly restricted, and price is determined at least as much by custom (in the form of guild restrictions and numerous taxes levied by sovereigns or municipal or guild authorities) as by supply and demand.  Access to economic resources such as mills is highly restricted and taxed.The feudal state controls the ultimate means of production (land and labor combining in agriculture), but merchants are acquiring massive wealth without the control of these factors of production. The economic fate of people is tied not only to weather (the biggest variable in agricultural production), but the fortunes of war, piracy, and pestilence , all as a result of the increased opportunities and perils of trade.

Risk is everywhere: all travel has to happen with heavy arms and escorts (A surprising amount of transportation of goods happens overland, via mules.). Plagues can shut down a city and its trade, meaning orders for inputs do not get filled, and finished goods do not get sold, with disastrous results for merchants. Monarchs borrow money to fight wars, then default, leading to chains of bankruptcies. Wars between cities states, religious feuds, and travelling bands of mercenaries all can shut down trade. It can take upwards of 3 ½ years to go from ordering wool at the point of shearing to the sale of fine dyed cloth.

Most of the finished products are destined for the rich…who pay very dear prices to cloth themselves in the finest cloth, decorate their houses with drapery, art, carved and inlaid furniture, etc. They must pay for all of this, which means value is being appropriated  from somewhere: the peasants of course. Great wealth is still available from the usual feudal sources, but add to this the growing wealth of the merchant class, who also want fine clothes and goods.

Basically, the merchants provide a new means for the nobility to display wealth…prior to all this trade, being nobility meant having the best local stuff, but now it means having the best stuff from the far corners of the world…a process which enriches the merchants (though plenty of merchants lose their shirts, too). So we have two wealthy classes, with all this wealth ultimately being produced by the peasantry and an army of craftspeople in between. Some of this new wealth is due to subtle improvements in the technology in production, but a lot of it probably just comes from comparative advantage…furs that are a dime a dozen in the Baltic fetch high prices in Italy. The greatest technological development is probably in the mechanisms of commerce, e.g. letters of credit, double entry accounting, etc.

Already the merchant class takes no interest in the affairs of state other than as they relate to trade….everything is about trade, with religious salvation (and hence, good works, charity, etc) taking a back seat, with civic duty and virtue a very, very distant last place.

Already the fate of the peasantry is tied to this global economy. Riots and insurrections occur when business conditions are poor, for example when merchants aren’t ordering enough wool to be shorn, processed, and woven. (e.g. a peasant revolt in Florence with demands that a minimum amount of cloth be ordered, to keep the peasants employed in cloth production and not starving). When Richard of England defaults on his loans, huge merchant/banking houses go bankrupt, leading to cascading chains of defaults of smaller houses, leading to starvation in the countryside.

In the end, everyone gains, to some degree or another, by this trade system; those who stand to gain the most also stand to lose the most, at least in raw financial terms. Even the peasant gains, as s/he realizes that a paltry, mean existence of scratching out existance by agriculture under the thumb of the ruling feudal system can be improved upon by taking in a little wool for weaving. This can stay at a small scale and provide a small amount of additional income, but it could also perhaps eventually lead for this peasant to the formation of a new guild, and thus moving from peasant farmer to craftsperson, with a bit more comfort in life. (It’s not clear what percentage of peasants are engaged in non-agricultural side activities.) But the specialization that is involved means those involved become more dependent on others, and on events in distant lands. To gain, we must become slaves.


The economics of worker-owned businesses

I just finished two books that run through, in gory detail, the economics of cooperatives. My purpose here is to review their key findings, especially in regard to worker ownership of businesses, and offer some thoughts of my own.

The first book, Henry Hansmann’s The Ownership of Enterprise, examines the costs and benefits of being an owner of a business (whether a standard investor-owned corporation, which is basically still a cooperative of capital providers, or a worker-, producer-, or consumer-owned cooperative), as opposed to having a contractual relationship (as a worker or consumer or provider of capital) with the same firm. The second book, Gregory K. Dow’s Workers’ Control in Theory and Practice, uses a similar logic, but seeks to answer the more focused question of why there are so few worker-owned businesses in the United States. (The number I hear most often is that there are around 300 worker-owned businesses in the United States.)

Both authors acknowledge that there are economic explanations for why worker-owned businesses are not common in the United States (and, relatively speaking, in other parts of the world). Hansmann lays the most significant blame squarely on the costs that workers face when trying to organize and run a business (“governance of the firm”). In particular, if the workers have widely divergent preferences for what the firm should be doing, what it should be paying for labor, etc., and no governance structures for essentially muting that heterogeneity, governance becomes extremely-time consuming and hence costly. Having spent considerable time trying to organize a consumer cooperative, I can attest to the deadly costs of highly divergent preferences in that realm, so I find Hansmann’s rationale compelling. Investors (providers of capital) who seek to organize and run a firm (through the usual channels of a board of directors and management) are likely to have much narrower interests (earning a profit) and hence face lower costs (“transaction costs”) of running the firm.

Both authors run through a long list of potential lowered costs that worker ownership can provide. For example, having workers be owners can lower the costs of monitoring management and determining worker remuneration preferences. However, Hansmann in particular concludes that these foregone costs are insufficient to outweigh the costs of governance that worker ownership entails. While Hansmann goes to the well of purely economic logic a bit too often (“we don’t see a lot of these firms, so the costs must outweigh the benefits”), the evidence is nevertheless compelling.

Dow attributes the dearth of worker ownership to a wider range of forces. He and Hansmann both consider the possibility that workers will have a more difficult time obtaining capital for business operations or expansion, but while Hansmann largely discounts this as a negative force due to highly functional capital markets in the United States, Dow does consider it to be a significant factor working against worker ownership. Investor-owned firms come with their own capital, so obtaining it is not nearly as much of a challenge for them, while obtaining workers on the market via contract is relatively easy. In particular, if the assets being purchased by borrowed capital are less fungible, lenders will be less willing to provide capital on a contractual basis, thus disadvantaging worker-owned firms.

Besides governance of the firm and obtaining capital, Dow assigns blame for the relative lack of worker ownership to a third set of factors, which he calls “commodification asymmetries.”  The idea is that labor and capital are fundamentally different; in particular, it’s easy to sell shares of investor-owned (publicly traded) firm, but a worker-owner must often quit his or her job in order to appropriate the value s/he has accumulated in the role of owner. In a similar vein, an investor who contributes 90% of the capital to start and run a firm can easily lay claim to 90% of the profits or residual value of an investor-owned firm, while a worker who contributes such disproportionate effort (or has invented something extremely valuable to the firm, or done any other number of good things for the firm) is unlikely to be able to appropriate that value; he or she must essentially be willing to share all that with fellow worker-owners. Here too, I see echoes of this phenomena in consumer co-op formation, where it is said that for a food  co-op to get off the ground, there must be one or two or three “heroes,” people willing to work extraordinarily long and hard to get the co-op going.

So, to summarize, according to these researchers (both of whom are accomplished economists who presented a very impressive array of research and knowledge to support their claims), the lack of worker ownership is attributable to:

  • difficulties in workers governing a firm (Hansmann, Dow)
  • difficulties in workers obtaining capital (Dow)
  • difficulties in workers appropriating the full value of their efforts (Dow)

If this were all there were to the issue, then the prospects of expanding worker ownership in the United States would seem dim. While obtaining capital can be creatively approached (see Michael Shuman’s latest, Local Dollars, Local Sense), depending on “heroes” essentially to be good souls and donate a huge amount of effort to starting and running a worker-owned business is not sustainable, and overcoming governance issues might be even more problematic. But perhaps there’s a role for brainstorming here, in the context of organizational design and/or policy.

However, both authors leave some stones unturned. (Charitably, we could say that at the time that Hansmann and Dow were writing, these stones hadn’t achieved their current prominence in economic research.) What comes to my mind are two important potential benefits of worker ownership: signalling, and networks.

Signalling refers to communicating information to other parties in economic exchanges. The need to communicate information in economic exchanges is pervasive: “this is a good product,” “we will be good partners in a joint venture,” and “we can pay the money back” are messages that businesses want to communicate at various times…but the businesses also have an incentive to misrepresent, and the intended target has to decide if the firm sending the message is to be trusted; this situation is known as “asymmetric information.” There are various ways to overcome asymmetric information; firms can offer a money-back guarantee to consumers, or offer up collateral for a loan. These indirect ways of communicating are known as “signalling.” Economic actors have developed numerous ways of signalling, but these steps are usually costly, and often there is no really efficient way to communicate trust effectively. I would suggest, however, that being a worker-owned business signals a certain amount of trustworthiness, which is an economic benefit right up there with obtaining capital and effective firm governance. Worker-owned businesses need not be saintly, but merely by having undergone the relatively arduous task of organizing as worker-owned, a business is saying that it has values and priorities other than only making financial profits; this in turn can make it easier for the firm to overcome informational asymmetries and thus conduct business in a less costly way.

The other stone left unturned is that of networks. Worker-owned businesses are cooperatives (in the sense that distinguishes them from investor-owned firms), which connects them in a very strong way to all other cooperatives. Almost all cooperatives ascribe to what are usually referred to as the Rochdale Principles, and one of those principles is that cooperatives help and support other cooperatives.(Check out the Principles here.) In my experience, this principle is not hollow rhetoric; I’ve never come across a consumer co-op or worker-owned business that didn’t take the principle seriously. Being a fellow cooperative meant automatic preference and assistance for a firm. Thus, worker-owned businesses are automatically immersed in an extremely useful, economic network. These days, it is cliche to say that economic networks are extremely valuable, a great source of economic benefit, and worker-owned businesses have a tremendous advantage over investor-owned business in this regard. And it’s easy to see how networks and signalling complement each other: the label “worker-owned business” carries the informational signal that immediately fosters networking; the two build in each other recursively.

So, signalling and networks are two economic benefits of worker-ownership that have largely been under-appreciated in the economic literature. Of course, we are still left with the result that there aren’t that many worker-owned businesses, so one might ask what is the point of identifying additional benefits? Well, the key bit about these two benefits, signalling and networks, is that by being under-appreciated by (the all-powerful) economists, they have probably been under-explored as means of fostering worker-owned businesses. There’s a funny thing about economic policy: things that have not been explored theoretically rarely find their way into policy or “how to” literature. The knowledge is out there, but it’s tacit, meaning known but not written down or otherwise easily communicable, and hence hard to share with others. Because of this, while we might, if we rack our brains and get really imaginative, be able to find some undiscovered opportunities to counter or obviate the three major explicit obstacles of worker ownership (obtaining capital, firm governance, and appropriation of value), it’s fairly likely that there are ways we can harness in new ways the signalling and network advantages that worker-owned businesses have.

To borrow from Monty Python, I’m not dead yet. Worker ownership may make up a very small sliver of the economic activity in the United States, and there may be significant economic disadvantages to them. But our contemporary economy is never static; new forces emerge that constantly create new opportunities. Signalling and networks aren’t just recently emergent ideas in economic theory, they’re also growing exponentially in importance in the real economy.  I’ll report back when I’ve collected (no doubt in concert with some of the very cool people and organizations working on this issue) good ideas about harnessing signalling and networks (and other unturned stones) for fostering worker-owned businesses.

The ambiguity of sustainability

Here is an interesting article about the term “sustainability,” thoughtfully forwarded by a colleague at College of the Atlantic.

I feel pretty ambivalent about the article. On the one hand, it frames fairly well, and has some great data presentation in it. And it can get one thinking. On the other hand, it kind of creates an intellectual tempest in a teapot. In a lot of ways, the situation surrounding “sustainability” is not that complicated:

  • We used to only think about getting more stuff, but now some of us worry that we’ll run out of stuff, and seriously alter the planet in the process.
  • Others don’t agree. They think we can keep inventing our way out of scarcity, and/or that a messed up planet isn’t so bad, as long as there’s lots of shopping malls. (Those without access to shopping malls will find other ways to adjust.)
  • Words get co-opted. All the disagreement about what we need or don’t need to do contributes to a lot uncertainly about words like “sustainability.”
  • If we are going to do some serious changing regarding our use of the planet’s resources, we’ll probably have to question some cherished “rights,” e.g. to have as many children as we wish, to accumulate as much stuff as we want, etc. (This is probably the best contribution of the article.)

Of course there’s lots of details, and books are written about them, and we won’t be able to cover it all in a one term course in Ecological Economics.

At times I appreciate expressions like “destabilizing ambivalence” and ” the cultural moment to which sustainability gives expression,” but I don’t see them as necessary here (Does “cultural moment” have any meaning?). Students need to be thoughtful about what sustainability means, that it has multiple meanings and is contested.

But think about “the role of government in the economy.” The phrase captures questions and issues that didn’t exist prior to the 1930s. And it remains contested, too; there’s lots of disagreement about it, both normatively (what we “ought to do”) and positively (what actually happens in the economy). Huge books have been written about the issue, and there’s still no agreement. So, informed people ought to know about the debate, and will probably take a position on it. End of story, no big deal. I think “sustainability” is similar. It’s more about being informed about the issues and debates, rather than approaching it as a fundamental problematique. There’s lots of ambiguity and ambivalence about sustainability, but do we need to create ambiguity *about* the ambiguity and ambivalence? I don’t think that’s out there: it’s *clear* that sustainability represents a contested cultural shift, much as did the idea of government intervention in the economy in the 1930s.

Maybe I’ve been studying this stuff too long. I think a lot of the “confusion” about sustainability arises simply from not digging into the topic enough.

Idiotic economists for Romney

Here is the text of an e-mail I got today (actually, the second time I received it):

Dear Fellow Economist,

We are asking you to join us and other economists by signing on to the “Statement by Economists in Support of Governor Mitt Romney.”

More than 500 economists have already signed the statement, including:
Gary Becker
Robert Lucas
Robert Mundell
Edward Prescott
Myron Scholes
Michael Boskin
John Cochrane
John Cogan
Kathleen Cooper
Steven Davis
Martin Eichenbaum
Martin Feldstein
Bob Grady
Phil Gramm
Kevin Hassett
Douglas Holtz-Eakin
Marie-Josée Kravis
Anne Krueger
Arthur Laffer
Edward Lazear
Allan Meltzer
Greg Mankiw
Tim Muris
June O’Neill
Harvey Rosen
Paul Rubin
George Shultz
John Taylor
Robert Zoellick

If you would like to join us by also signing on to this statement, please reply to this e-mail…[...]

Statement by Economists in Support of Governor Mitt Romney

We enthusiastically endorse Governor Mitt Romney’s economic plan to create jobs and restore economic growth while returning America to its tradition of economic freedom. The plan is based on proven principles: a more contained and less intrusive federal government, a greater reliance on the private sector, a broad expansion of opportunity without government favors for special interests, and respect for the rule of law including the decision-making authority of states and localities. Applying these principles, Governor Romney would:

  • Reduce marginal tax rates on business and wage incomes and broaden the tax base to increase investment, jobs, and living standards.
  • End the exploding federal debt by controlling the growth of spending so federal spending does not exceed 20 percent of the economy.
  • Restructure regulation to end “too big to fail,” improve credit availability to entrepreneurs and small businesses, and increase regulatory accountability, and ensure that all regulations pass rigorous benefit-cost tests.
  • Improve our Social Security and Medicare programs by reducing their growth to sustainable levels, ensuring their viability over the long term, and protecting those in or near retirement.
  • Reform our healthcare system to harness market forces and thereby reduce costs and increase quality, empowering patients and doctors, rather than the federal bureaucracy.
  • Promote energy policies that increase domestic production, enlarge the use of all western hemisphere resources, encourage the use of new technologies, end wasteful subsidies, and rely more on market forces and less on government planners.

In stark contrast, President Obama has failed to advance policies that promote economic and job growth, focusing instead on increasing the size and scope of the federal government, which increases the debt, requires large tax increases, and burdens business with many new financial and health care regulations. The result is an anemic economic recovery and high unemployment. His future plans are to double down on the failed policies, which will only prolong slow growth and high unemployment.  President Obama has:

  • Relied on short-term “stimulus” programs, which provided little sustainable lift to the economy, and enacted and proposed significant tax increases for all Americans.
  • Offered no plan to reduce federal spending and stop the growth of the debt-to-GDP ratio.
  • Failed to propose Social Security reform and offered a Medicare proposal that relies on a panel of bureaucrats to set prices, quantities, and qualities of healthcare services.
  • Favored a large expansion of economic regulation across many sectors, with little regard for proper cost-benefit analysis and with a disturbing degree of favoritism toward special interests.
  • Enacted health care legislation that centralizes health care decisions and increases the power of the federal bureaucracy to impose one-size-fits-all solutions on patients and doctors, and creates greater incentives for waste.
  • Favored expansion of one-size-fits-all federal rulemaking, with an erosion of the ability of state and local governments to make decisions appropriate for their particular circumstances.

In sum, Governor Romney’s economic plan is far superior for creating economic growth and jobs than the actions and interventions President Obama has taken or plans to take in the future. This November, voters will make a fundamental choice between differing visions of America’s economic future.

[end of e-mail]

Here is my response:

You all sent me one e-mail, and I treated is as spam; for this second one, I’m going to tell you what I think. You people are high as kites. The propagators of this e-mail don’t know much about economics, and the signatories come across as hapless academic rubes who must not have read what they signed. A successful capitalist economy takes government oversight…do you forget 2007 and 2008? IDIOTIC! I’m not saying Obama has done a perfect job…but he (and Bernanke) are trying to strike a good balance. The stimulus was needed…and may not have been enough.

And here’s some basic micro for you: increased productivity comes about from (among other things, but largely) increased specialization (facilitated by ever more complex technology)…that requires increased coordination; as a result transactions (rather than transformation, aka production) become relatively more important in an advanced economy…yes, a lot of those lawyers are actually doing something useful. And transactions require government to provide the right institutional framework…so government gets bigger! I’m not a big fan of it, I don’t like big government…but there is quite a bit of logic to it. I voted for Reagan, twice…but this is not Reagan’s economy!

The attacks you make are simplistic; good economists understand complexity and don’t go out on a limb with simple claims; the economists who signed this statement are the type who are too in love with their precious (Chicago) models, and are an embarrassment to the profession (assuming they really did sign…perhaps this is just some scam).

Davis Taylor, PhD
Professor of Economics
College of the Atlantic