Saturday, September 07, 2019

Martin Weitzman's The Share Economy

I happen to have one book by Marty Weitzman (1942 - 2019) on my bookshelf. So I thought I would write a bit about The Share Economy: Conquering Stagflation.

This is an ill-timed book. It proposes that firms negotiate with workers to pay them a percentage of revenues, instead of, say, an hourly money wage. It argues that such a change will address the widespread macroeconomic problem, throughout the 1970s, of simultaneously high unemployment and high inflation. But, by the time the book came out, stagflation had been "solved", in an extremely reactionary way. The countervailing power of organized labor was being abolished. Labor unions were being crushed, and workers would, by and large, no longer see their wages increase with productivity. Instead of unemployment being addressed, workers would just have to get used to long-lasting higher unemployment.

Maybe some day, we will get back to a setting where Weitzman's book is socially relevant. Even so, it is worth exploring how macroeconomic performance is affected by microeconomic structures.

Although I think of Weitzman as a mainstream economist, his view of the microeconomic setting at the time of his writing was not that far away from Post Keynesianism. He thinks of the "tone" of "modern industrial capitalism" as set by "a relatively small number of large-scale firms", such as those in the Fortune 500. These firms are described by the theory of monopolistic competition. (quotes on p. 11). These firms are characterized by constant costs over a wide range of levels of production below limits set by capacity. They set their prices at a markup over cost. The theory of profit maximization, under these assumptions, yields a markup based on elasticity of consumer demand.

Weitzman explicitly rejects a theory of monopsony for labor markets:

"...If your aim is to focus in on fine close-up details and you wish to do justice to the facts, you must rely on a heavily institutional approach. But I think the unique long-run substitutability of labor among different uses actually makes the competitive theory a rather good description of long-run tendencies in the labor market...

In this book I am primarily interested in the general theory of wage determination... least the labor market behaves 'as if' it is competitive, in the sense that countervailing power between buyers and sellers of labor is sufficiently balanced that neither party has a clear upper hand and both possess approximately equal bargaining strength. The economy-wide real wage is not very different from what would be determined by competitive forces in the labor market." (pp. 29-30.)

I am not sure that Weitzman's account of firms is consistent with firms operating multiple plants and producing multiple products. I think of Alfred Eichner's theory of the megacorp here. I also doubt that theories of full cost, markup, or administered prices should be developed based on markups determined by elasticities. Rather, the markup might be theorized as based on firm's plans for growth.

Weitzman sees that firms will respond to fluctuations of demand by adjusting quantities, not prices. He cites Janos Kornai's contrast of planned, socialist economies with capitalist economies. In the United States, firms must attend to making the consumer's shopping experience as pleasant as possible, while in the Soviet Union, establishments do not care and consumers wait in queue. On the other hand, establishments in the Soviet Union cater to the worker. Weitzman argues his share economy would change the dynamics of the labor market such that firms in the United States would also worry more about the worker's experience.

Wietzman sees the contemporary practice of firms awarding year-end bonuses as a start towards his share economy. He includes Eastman Kodak as an example. Kodak is now bankrupt, and Kodak Park in Rochester, NY, is mostly empty and decaying. In my anecdotal experience, bonuses are often experienced as a present that cannot be planned or depended on. Maybe it would be different with more transparency from your employer, as resulting from a union contract, representatives from the union sitting on the board of directors, an Employee Stock Ownership Plan (ESOP), or some such.

Overall, I find The Share Economy intriguing. It illustrates how good economists will not develop an universal theory, but will address problems of the economist's own time and place.

(A propos of nothing in particular, Branko Milanovic has a post coming close to an endorsement of Neo-Ricardianism.)

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