Saturday, January 17, 2015

Kapp-and-Trade Unions

In her essay, "On Working Class Environmentalism," Stefania Barca highlighted the formative contribution of K. William Kapp to a conceptual framework of social costs that integrates occupational, environmental and public health research. In his The Social Costs of Private Enterprise  (1950), Kapp advanced the thesis later summarized by Joan Martinez-Alier that, from a business perspective, "externalities are not so much market failures as cost-shifting successes." As Barca explained:
The core idea of the book was that social costs are produced by the internal logic of private business, that is the principle of investment for profit at the individual unit level. In order to maximize profit on a given investment, entrepreneurs need to minimize relative costs: in the existing legal and political structure of the US economy, Kapp observed, entrepreneurs found it possible and profitable to shift the real cost of human and environmental health and safety on third parties, namely the workers and society as a whole.
Barca described Kapp as a "non-orthodox economist." It is useful to pay close attention to precisely which orthodox premises Kapp was deviating from. In  Environmental Disruption and Social Costs: A Challenge to Economics," objected to the treatment by economic theory of "allocation, production, exchange and distribution as if they occurred in an essentially closed and autonomous 'economic' sphere with only minor effects on man’s natural and social environment." Introducing the the concept of "externalities" as an after-thought to this fundamentally flawed analytical framework only serves to create a "false impression that the theory has adequately incorporated the interdependencies at work.":
In short, simplifying assumptions and empty terms create the impression of adequacy but do not solve the problem. They will give us empty conclusions such as that rational allocation and optimal efficiency will be the outcome provided that important external diseconomies (and economies) are absent. Neither the assumptions nor the concepts nor the conclusions can lay claim to any of the virtues of which neo-classical and 'positive' economics have traditionally boasted. They are neither neutral nor objective; they are misleading and apologetic if not consciously so at any rate in effect. Such assumptions and concepts do not reveal but conceal what is actually happening. Moreover, they distract our attention from what is really important and what needs to be investigated. Thus they are preventing us from formulating the problem in an adequate fashion and hence from developing adequate criteria of action and appropriate methods of control.
This ad hoc treatment of social costs as incidental to the feature attractions of economic production, exchange and distribution is only aggravated by the Coasean abstractions of zero transaction costs and comprehensive assignment of property rights. Social costs appear "external" to market exchange precisely because they involve intractable transaction costs and assets for which it difficult or impossible to assign property rights. Wishes are not horses and prisoners do not have angels' wings. Calling a tail a leg doesn't make it one.

It would be easy, though, to overstate Kapp's deviation from orthodoxy and arguable that he does so in the above excerpt. Alfred Marshall was himself critical of the over-reliance on and misuse of static analysis. At the time Kapp's Social Costs of Private Enterprise was published in 1950, Institutionalist and Keynesian economists where influential both academically and in policy. Kapp's notion of cost-shifting was adopted from John Maurice Clark, who considered himself "enough of an 'institutionalist' (whatever that may mean) to have more than a lurking distrust of formulas and equations. But not enough of an institutionalist to ignore their importance..." Clark was the son of John Bates Clark, one of the pioneers of the "orthodox" marginal productivity theory.

In the years since Clark and Kapp were writing the lurking distrust has dissipated and the orthodoxy has become more rigid (in the name of "rigor"). Formerly, Robert Prasch has pointed out, the "divergence between the firm's and society's perspectives on the cost of labor was once widely understood and discussed in the economics literature." Today, however, "economists have simply dropped the concept of labor's social cost." Under idealized assumptions of perfect information, completely defined property rights and costless transactions "cost-shifting without compensation can not readily occur." In short, Kapp's caricature of the orthodoxy has become a reality.

The collective-bargaining implications of the social cost of labor are profound and far reaching. If only the wages, benefits and working conditions of currently-employed workers are on the bargaining table, then social costs and cost-shifting are expressly excluded. On the other hand, bargaining with a single employer over social cost shifting threatens to undermine that employer's competitiveness. This would appear to raise the necessity for some form of sectoral bargaining that addresses environmental and social justice issues.

2 comments: said...

The neoclassical economist who played the most important role in formalizing the concept of externalities was Marshall's follower, A.C. Pigou, in his 1922 (or 192?) The Economics of Welfare.

Curiously, Coase can be seen as agreeing to some extent with Kapp. He himself was frustrated with those like Stigler who went around declaring the applicability of his "theorem" in all kinds of places it did not apply because Coase himself was fully aware that in most situations transactions costs are very important, and he saw his analysis as leading to an emphasis on those and why they are and what to do about them. Once one abstracted from them, then the matter of property rights and negotiations (the latter involving transactions costs) amounted to a matter of simply determining who would pay for the costs in the end.

Sandwichman said...

Yes. Thanks, Barkley. Pigou definitely put the "externalities" concept on the map, although he didn't use the term externality. Pigou's terms were incidental uncompensated services and uncharged disservices. Marshall used the term "external economies."

Much of Pigou's analysis that relates to labor came from Chapman's "Hours of Labour," which in turn took its cue from Brassey's Work and Wages from the 1870s that Marshall was very taken by.

Direct lines of influence (and correspondence acknowledging the influence) can be traced from Brassey to Marshall to Chapman to Pigou to J.M. Clark to Kapp. In terms of "legitimacy" then, Kapp might be considered more orthodox than the received textbook version of externalities and market failure.

I agree that the so-called Coase theorem is not Coase. Where Coase slipped up, though, is that he didn't examine the issue of the social cost of labour, which both Pigou and Clark did. See my essay on "The Hours of Labour and the Problem of Social Cost."