Other people's labour

6.3 of The Economy 1.0 & The Economy #4

Simply speaking, what does a firm’s profits depend on?

-Cost on getting the inputs needed for the production process

-How much is produced from said inputs

-Sales revenue selling said output

-Taxes/Subsidies

Why is it impossible to write an enforceable contract that says what tasks one must do in order to get paid?

-It can’t have an exact idea what the employee needs to do, because it may be determined by unforeseen future events

-Too impractical/costly to observe how much effort each employee makes in doing the job

-Even if the firm gets this information, good luck convincing the court. Hint: you’ll fail.

Because of such contractual incompleteness, what happens?

-The contract omits things both employees and owners care about. How hard and well the employee will work, and how long the worker will stay

-Thus, paying the lowest wage is usually never the firm’s strategy to minimise the cost of labour effort it needs.

Why is Karl Marx (1818-1883) seen as a great economist?

-Marx understood why capitalism was so dynamic. Capitalists could only survive by implementing new technologies, to lower costs of production, to continuously reinvest their profits, in order to keep on growing

-Marx said this leads to a conflict between employers and workers. In a market, buying and selling are done between equals. In the labour market, though, the appearance of freedom and equality was all illusion.

-Workers would be rented by employers and would usually obey continuously in order not to lose their jobs. Marx said this was significant power divergence, which was a core defect of capitalism

Why do firms not use a piece rate to pay their employees?

-In theory, a piece rate incentivises employees to work better, because the pay increases if they produce more

-And it was utilised, as it made sense, until it didn’t

-Today, it is fairly hard to measure the amount of output one makes in a modern knowledge and services-based economy. How could you compare the output of a fireman to a barrister accurately?

-Compound with how employees rarely work alone, good luck separating individual workers.