Today, a modern
market economy with its ever-finer division of labor depends on a constantly
expanding network of trade. It requires an intricate web of social institutions
to coordinate the working of markets and firms across various boundaries. At a
time when the modern economy is becoming increasingly institutions-intensive,
the reduction of economics to price theory is troubling enough. It is suicidal
for the field to slide into a hard science of choice, ignoring the influences
of society, history, culture, and politics on the working of the economy.1
Ronald Coase, the
world's oldest active economist, here aptly describes the economy in the age of
the Internet, giving us the expression "institutions-intensive." His
famous contributions to the theory of how bargaining might address externalities
and how the boundaries of the firm depend on relative institutional
effectiveness turn out to be preludes to the sort of economic analysis that is
needed today.
Over the course
of Coase's lifetime, the locus of economic activity has been shifting, from the
farm to the factory floor to the office and even to "the cloud." With
each step, the concept of property has become more difficult to define, the economic
entities have become more difficult to locate in time and place, the proportion
of wealth that is intangible has risen, and earnings have become increasingly
contingent on social constructs rather than on individual attributes.
According to
Bureau of Labor Statistics data, in every year between 1939 and 1956, the
proportion of total employees in the nonfarm sector classified as
"manufacturing production and nonsupervisory workers" was over
twenty-five percent. This figure has been falling steadily, until in the last
four years it has averaged just six percent.
The plunge in
manufacturing production work is indicative of the declining share of economic
activity that is measurable. One hundred years ago, the output of an individual
farm worker was quantifiable. In principle, farm workers could be paid on the
basis of specific, tangible accomplishments—pounds of apples picked, bushels of
wheat harvested, etc. The same holds for pre-industrial manufacturing, where it
was possible to pay for piece work.
Inside a large
20th century factory, the output of the individual worker was
not as readily measured. Total output was still quantifiable, but one could not
attribute a ton of steel or a shipment of refrigerators to an individual
worker. Factory workers are paid to be in a particular place at a particular
time. They clock in, clock out, and get paid by the hour.
In the decades
following World War II, as the share of employment on the factory floor
declined, what increased was clerical work. Secretaries, sales clerks, and
telephone operators, like factory workers, are paid to be in a particular place
at a particular time. They might receive a biweekly salary, but they are
expected to work set hours.
With the advent
of the Internet, work is no longer necessarily fixed in time and space. Someone
can answer email on a smart phone at any time, in any location. A friend of
mine in sales and support for an educational software company is typical.
Because his clients span the globe, he can be called at any time of day or
night. Neither they nor his boss know where he is when he picks up the phone.
Usually, he is in his basement office, but sometimes he is out of town at a
conference or on a family vacation. As more workers hold jobs whose contours
are shaped by the Internet, the once well-defined concept of "hours
worked" becomes much less precise.
It is not just
the individual worker for whom output and hours worked have become harder to
pin down. Entire industries, such as education, health care, finance, and
government are now increasingly prominent. In each of these sectors, the very
definition of "output" is not clear.
Moreover, it is
often the case that the value of these services is contingent on institutional
arrangements. For example, the value to an individual of a particular
educational credential will depend on the licensing requirements within the
field in which the person is pursuing employment. The value of pooling
mortgages into securities depends on the institutional role of rating agencies,
government policies, and other highly contingent social arrangements.
Garett Jones has
suggested (via Twitter) that "Workers mostly build organizational capital,
not final output."2 Building organizational
capital means developing processes and capabilities within a firm. That is, in
an institutions-intensive economy, many jobs consist of attempting to improve
institutions. Business process improvement, standards-setting, and negotiating
arrangements with other firms all fit within this framework.
Although we
think of companies like Amazon, Apple, and Google as technology companies,
these firms are institutions-intensive. Google's mechanism for auctioning ads
has been the key to its profitability. Similarly, Apple's success depends in
large part on institutional arrangements, such as its iTunes service and its
App store. Amazon's encouragement and use of customer reviews has played an
important role in the success of its online sales efforts.
In neoclassical
economics, the earnings of individuals are thought to be determined by
individual characteristics and decisions. Economists write down models in which
earnings accrue in a deterministic fashion to human capital and physical
capital. However, these models are not realistic in an institutions-intensive
economy.
One example of
the complexity of today's economy can be found in a recent best-selling book, The
Immortal Life of Henrietta Lacks, by Rebecca Skloot.3 Cells taken from a tumor
of Henrietta Lacks have been a tremendous boon to medical research, including
help with the cure for polio. Skloot's book raises the issue of whether Lacks
and her family were adequately compensated for this.
On the one hand,
one could argue that the cells of a person's body are certainly the property of
that individual, so that Lacks and her descendants are entitled to great
wealth. After all, is not "self-ownership" a core foundation for the
definition of property? On the other hand, one can argue that the value was
created not by Lacks herself, but by the researchers.
Similar issues
arise with regard to data on the Internet. Should Amazon be compensating the
people who write helpful reviews? Should Facebook and Google be compensating
people for providing information and services that those companies use to earn
advertising revenue?
The
technologically-determined income shares of neoclassical economic models do not
describe our contemporary world. In an institutions-intensive economy, the
pristine modeling of non-institutional factors misses out on the institutional
contingencies that actually drive economic outcomes.
Footnotes
1. Ronald Coase, "Saving Economics from the Economists."Harvard
Business Review, December 2012. (Available online at http://hbr.org/2012/12/saving-economics-from-the-economists.)
2. Tyler Cowen, "The Wisdom of Garett
Jones." Marginal Revolution. Originally published on
November 5, 2009.
3. Rebecca Skloot, The Immortal Life of Henrietta Lacks. New
York (Random House, Inc.), 2011.
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