Your daily Coase

ON SATURDAY, my esteemed colleague took a look at recent research which revealed that American households are willing to give up some proportion of their income to pay for distributive justice, though this willingness varies with demography. This finding dovetails nicely with other research on the monetary value of justice, some of which found its way into the latest offering from New Yorker columnist James Surowiecki. This week, the invaluable business writer examined the economics behind sustained labour strikes. A (rather lengthy) sample:

[J]ustice matters quite a bit in strikes, which often turn more on questions of fairness than on strict economics. Fairness doesn’t matter much in conventional economics, which assumes that, if you and I can make a deal leaving us both better off, we’ll make it. But, in the real world, if the deal seems unfair to me I may very well reject it, even if doing so leaves me worse off. The quintessential example of this is the so-called ultimatum game, where participants offered a share of a ten-dollar bill by a fellow-participant will actually turn down the free money if they think their share isn’t big enough...Readiness to pay a price in order to enforce an idea of what is right is part of what keeps sides from settling: writers accept the loss of paychecks because they believe they deserve a cut of the revenue from their work, and producers accept the loss of business because they believe that TV shows and movies are their property. The paychecks and the profit-and-loss statements may indicate that the writers and the producers should be able to resolve their dispute quickly. But in labor relations the bottom line isn’t always the bottom line.

Interestingly, Ezra Klein seized on this dynamic as a point of support for those currently manning the picket lines. Writing today, in a response to a post from Megan McArdle, he says:

Forgetting whether the economic analysis is correct (I don't think it is, and, in any case, don't imagine it relevant to the writer's demands, which are for a percentage of a new revenue stream), she's treating individuals too much like rational economic actors, and not enough like human beings. People care about fairness, too. About being paid appropriately for their work and being treated with respect and dignity.

This, I think, gets to the heart of the matter. What is appropriate payment for the work in question? We can safely assume that the market is setting a reasonable wage, around which there is, in all likelihood, a band of surplus subject to negotiation. We cannot assume, however, that available surplus is always there or particularly large. To the contrary, as Mr Surowiecki notes, strikes are more likely to take place when management doesn't have much room to negotiate, and the less room they have, the longer a strike is likely to persist.

If the goal is to win a battle, however small, against management and in the name of dignity, then I suppose it's fine to support unions and striking workers. If the goal, however, is to materially improve the lives of the workers in question, this strikes me as the wrong way to go about it.

Returning again to the research cited by my colleague, it's clear that there are households out there willing to part with some income to improve the justice, as they see it, of an income distribution. From an efficiency standpoint, then, we ought to be able to arrive at a bargain in which surplus is extracted from households which are willing and able to give (or be taxed), rather than from individual businesses or industries, which may not be.

The trick, of course, is in generating political leverage for labour at a level sufficient to generate that outcome. This is not a new idea in economics. By organising at a broad level--a national level, perhaps--labour should be able to obtain a larger share of national income with fewer distortionary costs to the economy as a whole. If instead unionisation continues to emphasise firm or industry organisation, then they'll find themselves fighting harder, at greater cost to the economy, for paltry returns. Mr Klein might want to forget the justice, if only for a moment, and consider the economic analysis.