Sunday, January 18, 2015

The Hours of Labour and the Problem of Social Cost

From The Hours of Labour and the Problem of Social Cost

In "The Problem of Social Cost," Ronald Coase (1960) examined one variety of presumed market failures – outcomes that Cecil Pigou (1952) had described as “incidental uncharged disservices” (or uncompensated services) but are now commonly referred to as "externalities." The incidental quality of these effects makes them a social cost. The economic analysis Coase challenged and the standard examples he re-examined were taken from Pigou's discussion in part II of The Economics of Welfare. Coase argued that the suggested courses of action in the Pigovian tradition – liability, taxation or regulation – were inappropriate and often undesirable.

Coase claimed that the traditional approach to the problem of social cost "tended to obscure the nature of the choice that has to be made" (1960, 2). He characterized the question posed by the approach as "one in which A inflicts harm on B and what has to be decided is: how should we restrain A?" He objected that the problem was really a reciprocal one and the real question should be "should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm."

However, Coase didn't consider the full range of Pigou's examples and analysis. While Coase’s restatement of the problem may have been appropriate to the specific externality problems discussed by Pigou in part II, it entirely overlooked the radically different labour market problem encountered in part III, in which competitive pressure compels an employing firm to inflict harm on both itself and its employees and thus regulatory restraint of the firm (and competing employers) may benefit both.

Along with the majority of the preceding Pigovian tradition, Coase evaded the thorny questions of working conditions and unemployment. Whatever gains in tractability may be accomplished by such a maneuver are more than offset by a forfeit of realism and of insight into the complex interdependency of economic factors in the long period. The determination of the hours of work provides a particularly compelling example of a circumstance in which mutual benefit could result from an imposed non-market restraint.

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