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A model for efficient regulations

[Edit:  I changed the title of this post since I never explained the old title–BSE]

[Edit II:  see also the excellent post by Noah Smith on this topic.]

There’s been a fascinating back-and-forth on the nature of public and private coercion and labor markets.

To start things off Chris Bertram, Corey Robin and Alex Gourevitch (BRG) argue that libertarians ought to care as much about private modes of coercion as they do about public modes.   Specifically, they should care about coercion in the workplace.   If you truly believe in a philosophy of maximizing freedom why would you accept a situation in which workers are forced to endure a thousand indignities  which they did not specifically contract for?

Critical to their point is that exit (i.e. quitting) from a bad job situation is not sufficient to ensure worker freedom–exit is expensive (lost wages), uncertain (the next job may be as bad, if it comes along at all) and bosses may use a “boiling frog” strategy in which individual humiliations are added one at a time and none of them are so horrendous to induce workers to up and quit.   I might add that homo economicus might leave in such a situation, homo sapien would not.

Tyler CowenAlex Tabarrok and Adam Ozimek (CTO) respond by asking (to paraphrase) what would workers be willing to sell their freedoms for?   A very strange opinion, in my view, for libertarian freedom lovers, but Adam adds the distinction between ‘static’ and ‘dynamic’ freedom.   I think his argument is entirely missing the point, but that’s me.

In defense of BRG, Miles Kimball makes a good argument that worker protections can certainly be justified, morally and economically (he uses the example of ‘worker’ protections in the military).    My favorite response, though, comes from John Holbo; which I’ll discuss in a moment.

Surprisingly, Matt Yglesias enters the fray (here and here)  on the side of the libertarians.   He argues that as long as there is full employment in the labor market, then exit is a credible threat and so having no labor market regulations will be efficient.   To quote Matt:

…But you have to make the argument that tighter regulation of permissable work rules will in fact benefit the intended beneficiaries in a world where labor market regulation isn’t going to suddenly increase employers’ benevolence…

Challenge accepted.   My response will mostly be geared toward Yglesias, and I will have a model!   I love ya Matt, but I gotta bring some economics beatdown…

That’s a lot of reading, but interesting.   Before I get to my model, let me first make a couple of points.

 This is a problem for Libertarians, not Liberals
Via Holbo, Hayek argues that someone who contracts out their freedom is not more free, but less so;
The danger of confusion here is that this use tends to obscure the fact that a person may vote or contract himself into slavery and thus consent to give up freedom in the original sense. It would be difficult to maintain that a man who voluntarily but irrevocably had sold his services for a long period of years to a military organization such as the Foreign Legion remained free thereafter in our sense; or that a Jesuit who lives up to the ideals of the founder of his order and regards himself “as a corpse which has neither intelligence nor will” could be so described. Perhaps the fact that we have seen millions voting themselves into complete dependence on a tyrant has made our generation understand that to choose one’s government is not necessarily to secure freedom. Moreover, it would seem that discussing the value of freedom would be pointless if any regime of which people approved was, by definition, a regime of freedom.
Think about the context that Hayek has in mind:  he’s arguing against the social democrats who define permissible government behavior as anything supported by the majority of the people.   Hayek is saying that if the people elect a tyrant, they are still slaves whether or not there was an election.
Holbo (as well as BRG) are simply pointing out that this same principle applies as well to private as to social contracts.   Liberals, who do not view contracting as a sacred right but a practical and useful tool, are quite comfortable with the idea that contracting may reduce freedom.   For liberals like me, the Bill of Rights exists precisely because we recognize the possibility that the social contract may be a source of un-freedom.    It is a set of principles that can never be renegotiated.
Libertarianism and un-freedom
The point is that libertarianism is a philosophy of un-freedom one way or another.   To quote Holbo
…libertarians are unconcerned with maximizing freedom…Different ways of regulating the workplace will plausibly increase freedom-as-non-coercion relative to the levels that a libertarian regime will produce, and libertarians are not willing to go for it. They are unwilling in principle. From which it follows that libertarians are not concerned to maximize freedom.   They are maximizing contract rights and property rights. They don’t see they are not, hereby, maximizing freedom because they make the mistake Hayek diagnoses…: contracting away your freedom is not tantamount to keeping it.
 …Libertarianism does not take freedom as an end but as a means. Hayek is a utilitarian…
To quote Hayek,
If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.
So why all the liberty talk from libertarians?   Hayek points directly to the informational issue (which will play a role in my model), Holbo adds some thoughts:
…because the thing that actually belongs on the pedestal can’t be directly aimed at… In part we don’t even know what it is: the true standard of overall welfare for humanity…Maximizing freedom is the best proxy for maximizing welfare for humanity…So how do you maximize freedom? Here rubber meets road. You don’t maximize it by ensuring property and contract rights the way Hayek and other libertarians want. As BRG say, this will sometimes result in less freedom
Now as Yglesias says, this could all be a red herring.   True, he says, but so what?    Show that labor market regulations increase freedom (at full employment).   As Matt says
…in almost all political contexts, including this one, both the concept of freedom and the concept of property rights are red herrings. A political movement genuinely focused on freeing people from the coercive authority of the state would spend a ton of time tackling the everyday tyranny of traffic signals, lane striping, jaywalking laws, and the dozens of other similar regulations that impinge upon the day-to-day lives of hundreds of millions of law-abiding American citizens. By the same token, a movement obsessively focused on property rights would be outraged by the fact that every automobile driver and factory owner in America is causing fine particulate emissions to traspass on people’s backyards all across this fine land.
Fair enough, so let’s deal with the practical issue.   After all, both Holbo (speaking for the libertarians) and Yglesias have reduced the problem to a practical one.   Libertarians have this theoretical problem that contracts and property rights won’t maximize what they say they want, but what about the alternatives?   Could labor regulations make sense?
Libertarianism is the philosophy of the powerful
Before I get to that, one more Holbo quote–because he already deals with this objection–and then I’ll discuss my model:
Libertarianism isn’t a philosophy that blows different directions in the shifting winds of the labor market – coming out against unions when they get bloated and corrupt and exclusive but turning against management and capital when they are, as they certainly may be, objectively greater threats to freedom than any actually existing labor union. Actually existing libertarianism is the philosophy of treating as axiomatic that maximizing contract/property rights is tantamount to maximizing freedom…
…Hayek fails to see that he is not actually interested in maximizing freedom because, actually, he thinks that some people’s freedom is a lot more valuable than other people’s freedom. Liberals always want to ensure the maximum freedom consistent with enjoyment of that freedom by all. Hayek is definitely not on board…:“To grant no more freedom than all can exercise would be to misconceive its function completely. The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.”  Ideally, we would find that one man and even make all others his slaves, if that is what it took to let him exercise his freedom to the fullest… But obviously the point would not be that the man might have some preposterously bottomless capacity to be free. Rather, Hayek is saying that a world with much less freedom – a world in which this one-man-in-a-million is even a tyrant, perhaps – is better than a world full of freedom.
 In my own words, Hayek (and all libertarians) believe in the right of the powerful–presumably Galt-like supermen–to take away yours [rights].   As Holbo says of Hayek’s philosophy, “We can pick out a class of people who are likely to be better users of freedom. This is no part of Hayek’s official philosophy, but the reason he sees coercion on one side (workers) not the other (employers)”
An example of labor market regulations increasing freedom and welfare
 I’m going to use the example of workplace safety.   Workers value “safety” in their workplace, but of course they differ on exactly how much wages they would trade to be certain they will not be injured on the job.   Working in “un-safe” conditions does not guarantee injury any more than “safe” workplaces guarantee non-injury.   This means that safety is valued to the extent that it has an insurance value.
Workplaces chose their level of safety which all workers will share.   Presumably, this safety is expensive to supply but there is an opportunity for smart entrepreneurs to offer optimal trade-offs to potential employees on the “safety” vs. “wages” choice.   In particular, the “true” wage is the sum of worker’s willingness to pay for their safety (i.e. the insurance value of that safety which I’ll refer to as the “safety wage”) and the actual (i.e. money) wage.   In a full information equilibrium, workers will self-select into jobs whose safety matches their own preferences and the system is efficient.
So what’s the problem?   How exactly do workers know before they accept their jobs and start working what the insurance value of the job will be?   For example, they don’t see missing fingers until they start working the assembly line.   Signals require realizations.   The safety wage is unobservable at the time of contracting.
What all this means is that there is an informational asymmetry at the heart of the labor market–potential workers don’t know if their potential workplace is the sort of place where fingers are lost until they see it for themselves, but bosses certainly know what they’ve spent on safety.   Thus, firms cannot attract workers by offering higher safety wages and so the industry wide money wages must equalize.   Given this, bosses offering higher safety wages (which are costly for firms) will either lose employees or be forced to raise prices–which would drive away customers from their product.   So bosses offering higher safety wages will either drop out of the market, or they will cut back on safety.
In equilibrium all workplaces are unsafe–workers don’t have the option of finding better working conditions since the market has driven a race to the bottom in terms of safety.
The same model, of course, applies to boss ‘jerkiness’.   Boss’s jerkness is not observed by workers until they are on the job and ‘non-jerkness’ is clearly costly.   Bosses are not just being capricious when they are jerks, as Cowen himself points out
I had a job in the produce department of a grocery store.  They made me wear a tie.  They did not let me curse.  Even if there was no work at the moment, I could not appear to be obviously slacking for fear of setting a bad example.  They had the right to search me, including for illegal drugs
 Failing to search would be costly–presumably–in terms of more stoned cashiers.    Presumably there are some, unlike Cowen, who do not like being felt-up for drugs.
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  1. July 5, 2012 at 5:08 pm
  2. July 15, 2012 at 12:15 pm

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