Sunday, March 06, 2011

Monopolies for Everyone

Monopolies enjoy above average profits because barriers to entry prevent competition from lower prices down to their marginal cost. This reduces output, and raises prices for consumers, a suboptimal outcome. We all know that business monopolies are bad for the economy, even if they would help individual companies.

Yet, many still think that if only everyone can be in a union, all would be well. Political scientists Jacob S. Hacker and Paul Pierson argue in the Washington Post that not only are unions good for their members but also that unions promote a strong middle class. Krugman and other liberal economists see attacks on unions as harmful to our nation, especially through its affect on inequality. Unions have monopoly power because the federal government gives them the power, not the right, to be the sole bargaining agent for workers in a plant or company, even if many of the workers don't want to be represented. That an economist like Krugman would see such monopolies as a good thing highlights the fact that economics does not constrain or guide one's thinking, merely provides another way to frame arguments.

That the inefficiency of union monopolies is still disputed is one reason I don't take economics so seriously anymore. You can always find some convoluted reason why some partial equilibrium result generalizes, and so basic economic insights like the inefficiency of monopolies, trade restrictions, or taxes that favor debt over equity. It makes me think, what's the point of economics if these easy issues are still debatable?

8 comments:

Taylor Conant said...

Eric,

Sheesh, way to throw the baby out with the bath water.

Krugman employs "logic" and argumentative rhetoric in his anti-philosophical tirades, maybe we should get rid of those, too.

Or maybe, we should point out his errors, economic, logical, rhetorical, etc., and preserve these tools of thought for their usefulness to people who aren't stupid a-holes like Paul Krugman.

Just a thought.

Anonymous said...

Eric,

Paul Krugman does not write in his capacity as an economist, but in his capacity as a political hack. Once you understand that, everything becomes crystal clear.

Also, I think it's funny that they consider "promoting middle class" a good thing when it's at the expense of the working class. Or that they even consider union members middle class.

Brad F. said...

E,

I think unions are trickier than you present here. Yes they are monopolies and yes in a world without labor market frictions they would most definitely suck.

I think the union issue is as tricky as why people don't just contract themselves out for every job they do rather than organize in a firm. There are informational issues and benefits to long term contracts etc... all seem somewhat relevant to unions.

Trade restrictions are also generally silly, but you've got to step into the realm of political economy in order to fully appreciate that debate, although I think thats a lot more clear cut than union issues.

I've got nothing on taxing debt versus equity but I do know where you're coming from, you're the expert.

I also think you're too harsh on economics if you expect it to solve all of the worlds problems by itself.

Anonymous said...

Perhaps the existence of a union with a strong bargaining power for a given industry may make me more likely to make a personal investment in learning the skills of the members the union represents.

Its odd how theory predicts that free market, low taxes, and low unionisation would be the best for generating industry, but the leading industrial countries have interventionist governments and high unionisation.

Taylor Conant said...

Anon,

You're putting the cart before the horse. Can you form an industry in a union before the industry itself exists? No.

The industry develops. Then it becomes unionized. Correlation does not equal causation.

Or is there some Silicon Valley United Tech Workers Union that formed before Silicon Valley did, for example, that I missed?

Taylor Conant said...

Correction:

"Can you form a union in an industry before the industry itself exists?"

Anonymous said...

"Can you form a union in an industry before the industry itself exists?

That's a fair question. But not everyone is a born risk-taker, and at some point a growing industry will need to attract people who make conservative choices. The existence of unions may lead individuals to choose to invest their time in that industry as they can have more faith in a reward for their efforts.

Taylor Conant said...

Anon,

Two points:

1.) The union has no magical powers. It can't get any more value out of the work-for-labor equation than naturally exists. For an employer to want to hire a unionized laborer, which would necessarily cost more (otherwise, why is the laborer organizing with a union which will take part of his pay in dues?), the laborer has to be that much more productive. And if he's that much more productive, it's questionable why he'd want to give up his pay to a union instead of using his stronger productivity as a bargaining tool himself.
2.) If the union-laborer-employer relationship is a FULLY VOLUNTARY one (that is, there is no coercion involved by any 1st or 3rd party, aka the government), I have no problem with it. But then we come back to square one where we have to be a little bit curious what special power a union would have if it can't coerce employers and laborers alike to go along with its decisions and decrees?