American Economy

Theories

Explanation of a relationship, ideally a causal explanation

Normative/Positive

Normative - statements that affirm how things should be, how they aught to be

Positive - statements that attempt to describe reality as it is

Criteria of good theories

Falsifiability, high explanatory power, high explanatory range, high predictive power, parsimony

Empirical regularity

A correlation or pattern between two or more variables

Centralized vs decentralized decision making

Centralized: bound by choice of group (such as median voter theorem)

Decentralized: members an opt in/out of a choice (such as our game theory concepts)

Prisoner’s dilemma

Two rational individuals acting in their own self-interest fail to cooperate, even when it's the best outcome for both.

One example is with right-to-work laws. Each state, in their own self-interest, will implement right-to-work laws to attract nearby firms, causing a race to the bottom between states

Battle of Sexes (BOS) game

No unique equilibrium with conflicting goals, An example of this is the NFL, where each team wants only home games. Coordination is required.

Simple coordination game

No unique equilibrium with multiple goals, An example of this is worker labor negotiations, where coordination is required

Equilibrium

Each player has a “best” response.

Three characteristics we care about: Existence, uniqueness, optimality

Solutions to multiple equilibrium: communication, third party enforcement

Collective Action

When a group of people work together to achieve a certain action, think about unions, etc

Problems with collective action

Free rider problem - logic of prisoner’s dilemma. Free riding typically doesn’t happen if n=k (everyone is needed) OR k is very small (only a few people are needed)

Multiple goals - coordination game, must coordinate on a single goal

Conflicting goals - BoS game, coordination still better but goals conflict

Key is third party enforcement or communication!

Costs of collective action

Communication, monitoring, enforcement

Privileged groups

Small n groups, where communication/monitoring/enforcement are easier/cheaper

By-product theory/Olson

Olson argues that groups have a hard time with free rider problem. Introduces idea of by-product theory: Many groups succeed not because members truly care about the collective good, but because the collective good is a by-product of pursuing private benefits (selective incentives).

Challenges to by-product theory

Ideology, political entrepeneur

Business - size of sector

Measured as % of GDP and then also employment

3 main sectors

Service (still increasing), Industry (still makes a lot of stuff but need less people to do it), Agriculture (very concentrated industry)

Business associations/interest groups

Associations representing businesses or corporations. There are three types:

Economy wide - chamber of commerce

Industry-wide - AMA

Business-specific lobby - IBM Pac, etc

Labor - features

unemployment (likelihood + duration), labor force participation rate, productivity, wages

Social cleavages

Division within society, including race, gender, urban-rural, ethnicity, nationality, age, etc

How is labor different from other inputs of production (reasons for government intervention)

Labor determines a large portion of someone’s life

Bargaining power of workers is less than bargaining power of buyers (firms)

Voluntary effort is required for maximum output

Workers enter an authoritarian relationship with employers

Large scale unemployment can lead to social upheaval

Corporations

legal person → longevity, limited liability. Key operational features → seperation of ownership and control, diffused ownership. US high ease of business gets you high access to capital

UNIONS - collective bargaining

monopoly on labor contract negotiations

Unions in US vs more generous welfare capital states

govt determines more things in more generous welfare states → costs of unionization for employers is much smaller in these welfare states

Wagner Act (1935)

Establishes NLRB (currently in the air because of Trump), Agency shops (informally known as closed shops), streamlined unionization process, curtailed management’s response to unionization efforts

Closed shops

Two types -

agency shops (paycheck auto deducted for union dues)

union shops (automatically a voting member as well)

Helps solve free rider problem

Taft Hartley (1947)

Right to work laws - states were given power to ban agency /union shops. Otherwise was anti-union and lowered penalties for interfering with unionization.

As a result, right to work laws caused a prisoner’s dilemma for states, where a state that implemented the right to work law would gain favorability for local companies, causing a race to the bottom

private vs public sector unions

Difference in incentives of management

Private: worried about profit (less favorable for unions)

Public: political support maximizing (more favorable for unions)

Associations for Labor

Economy wide - AFL-CIO (does not help negotiate labor contracts, but help labor organize, lobby, and financially support action)

Industry-wide - autoworkers

Local chapters (negotiate contracts, etc)

Pluralist vs neo-corporatist interest group systems

Pluralism: diverse range of groups, organization entirely voluntary

Neo-corporatist: government helps groups organize, with a limited number of groups supported as a result (tripartite labor negotiations between government, labor association, private sector set contracts for whole country)