Short Essay Regarding "Economic Coordination within a Mixed Ecology of Enterprises: Erasing a Theoretical Antinomy"

This article is another contribution, after the manner of <a href="http://www.afterecon.com/economics-and-finance/short-essay-regarding-use-knowledge-political-economy-paretian-insight-hayekian-challenge/">Vandivier (2016), toward the synthesis of Austrian economics and other modern schools of thought. The paper responded to asserts that a reasonable theory of fiscal catallactics must incorporate sociability and venality. This paper responds that venality can be modeled in a way similar to the modern concept of shirk. Sociability is captured in the model presented in this article.

Catallactics is the subfield of praxeology concerned with exchange and the emergence of prices on the market. Sociability is taken to mean societal coordination. A full-scope model of sociability would therefore supersede the scope of catallactics. Sociability as defined would include non-market and non-monetary transactions. Praxeology is an even more widely scoped science as it includes concerns both societal action and individual action. A useful approach to catallactics would be to consider it a special case under a generic model of praxeology (GMP). This paper presents a particular GMP.

GMP cannot begin with prices as an input to human action. Such a model must show prices to be an output of human action in the first stage. In later stages, after prices have emerged, the consideration of prices by actors is essential.

GMP is able to explain a first-stage Robinson Crusoe economy as well as a later-stage complex society with exchange and entangled institutions. The particular implementation of GMP in this articles leverages so-called market precursors and care is taken to ensure compatibility with other modern schools of thought by construction.

Any traditional economic problem requires three inputs to become coherent and solvable. The three inputs are prices, preferences, and endowment or income. In the Robinson Crusoe economy there are no monetary prices, and no monetary endowment or income. In lieu of these market factors we can use precursors.

The precursor for income or endowment is human capital. Human capital is discussed in a rich literature and the whole meaning of the term is applied in GMP. Notably, human capital is heterogeneous, multi-specific, and not fully transferable. It includes non-transferable qualities like tacit knowledge and genetic features as well as some transferable components such as transferable skill knowledge. In the context of this paper, Robinson Crusoe’s human capital profile leads him to be relatively more productive at certain activities. This influences his propensity to engage in comparative activities over a given period.

The precursor for price is level of effort (LOE) per unit. LOEs, measures in hours of labor, are standard measures used by modern firms during the construction of estimates of effort (EOEs), quotes, work contracts, and other plans. A well-constructed EOE is based on the average worker profile, not a particular worker. The joint product of an LOE and a specific individual’s human capital profile is the number of hours of labor from a specific individual required to produce a unit of a specific good.

Preferences fully exist in their final form even in the first-stage economy, so no precursor is needed. Given these first-stage factors, the Robinson Crusoe economy is as solvable as any typical undergraduate problem in microeconomics, including use of the typical undergraduate microeconomic graphs of a consumption choice between two goods. Crusoe selects between consumption and investment in such quantities as will optimize his utility subject to constraints. The introduction of additional individuals into this economy has the effect of presenting each individual with various costs and benefits, and social coordination is achieved with every individual acting in its own interest.

GMP can be extended to include the concept of venality. The paper explains venality by stating that “For example, the carrier could procure legal services from the spouse of the director of the public entity as an indirect way of paying for services.” In general, venality is the tendency of an individual to act in their own interest instead of the interest of the employer. This is perceived by the employer as a non-pecuniary cost and it may be perceived by the employee as non-pecuniary income.

The modern literature elaborates the notion of shirk to technical precision as a consequence of the concept of efficiency wages. Carl Shapiro and Joseph Stiglitz together produced the Shapiro-Stiglitz theory of efficiency wages. This theory states the prevailing wage in equilibrium may be above the market-clearing wage in order to induce workers to cease shirking by generating some unemployment which acts as a disciplinary device.

Becker (1957) creates an even broader framework which is applied to the case of racial discrimination. In principle, however, that approach is applicable toward all sorts of non-pecuniary costs, not just racial discrimination. While this article doesn’t conduct a full literature review, the inclusion of non-pecuniary prices are a well-studied modern topic.

Such non-pecuniary prices are a superset of the costs, benefits, and prices associated with venality. As a result, we can model venality along the lines of Becker, Stiglitz, and Shapiro. A thumbnail of how this can be done follows.

Suppose individuals gain utility from various kinds of venal activity. Such activities may including shirk, discrimination, and other activities. As long as monitoring is provided in a quantity of 0, shirk is a free gain in utilitarian terms and will therefore be consumed arbitrarily. Employers will demand monitoring as consumption of monitoring by the employer will be a direct gain to revenue or profit.

There is an axiom which Mises and Milton would agree: An individual will take an action when the expected economic benefit exceeds the expected economic cost, ceteris paribus. They would likely quibble over the meaning of an economic benefit, but that will not be taken up here. As previous discussion has indicated, the meaning of an economic benefit in the context of this model is defined in the utilitarian manner. What follows from this is that employers will consume monitoring until the expected marginal benefit equals the expected marginal cost.

The key takeaway is that such a level of monitoring as will result is not perfect or full monitoring. Perfect or full monitoring would coincide with a cost in excess of the perceived benefit. Because monitoring will be imperfect, we should consequently expect some degree of venality. An interesting feature of this approach is that it holds even on a free, unhampered, or efficient market.

As a short point in semantic clarity, the specific modern schools of thought discussed in the introduction include Neoclassical Economics and New Keynesian Economics. Gary Becker is a member of the Chicago School of Economics which is identified as a Neoclassical School of Economic Thought. Becker’s employment of the equilibrium modeling of rational actors possessing preference curves and rational actor assumptions is typical of the Neoclassical School. Those are the specific components of that broader tradition applied in this article.

Joseph Stiglitz is a key contributor to New Keynesian Economics. Specific contributions include the efficiency wage theory previously described, and contributions to the theory of asymmetric information. George Akerloff has also identified as a member of the New Keynesian School, and he has contributed similarly to efficiency wage theory and the theory of asymmetric information.  Akerloff (1995) is a landmark piece receiving more than 24,000 citations and establishing key ideas in the theory of asymmetric information. Yelen (1984) discusses efficiency wage theory and notes that Akerloff was involved in discussions establishing the content of that paper.

In conclusion we have established a basic model of economic analysis which incorporates non-pecuniary prices, venality, and sociability. The intent of this model serve as a microcosm of synthesis between a praxeological approach and a mainstream approach. This model leverages market priors to allow for explanation of both the Robinson Crusoe economy as well as the emergence of complex and entangled society. Notable, prices and property rights are emergent in the later stages of this model, rather than factors stipulated at the outset.

 

Citations:

Becker, G.S. 1957 The Economics of Discrimination. Chicago: University of Chicago Press.

Akerlof, George. The market for "lemons": Quality uncertainty and the market mechanism. Essential Readings in Economics. Macmillan Education UK, 1995. 175-188.

Yellen, Janet L. Efficiency Wage Models of Unemployment. The American Economic Review, vol. 74, no. 2, 1984, pp. 200–205. www.jstor.org/stable/1816355.

Vandivier, John. Short Essay Regarding: "The Use of Knowledge in Political Economy: Paretian Insight into a Hayekian Challenge." After Economics, http://www.afterecon.com/economics-and-finance/short-essay-regarding-use-knowledge-political-economy-paretian-insight-hayekian-challenge/