Lecture 13: The Capitalist Firm

Lecture 13: The Capitalist Firm

Overview of Social Dilemma Essay

  • Due Date: Monday

  • Prompt Overview:

    • The essay must analyze an original social dilemma as a 2x2 game.

    • Requirements:

    • Describe a specific social dilemma observed in the real world, which should:

      • Not use examples from class or the textbook.

      • Include a definition satisfying the text's criteria.

    • Present two tables:

      • First Table: Descriptive representation akin to Figure 4.1 in the text.

      • Second Table: A payoff matrix displaying four hypothetical situations, similar to Figure 4.2a.

    • Explain the assigned payoffs for each situation succinctly.

    • Describe the Nash equilibrium and mutually preferred outcome based on the payoff matrix.

    • Explain the categorization of the game as either a Prisoners' Dilemma or Assurance Game (without conflict).

    • Consider real-world resolutions to this social dilemma and their effectiveness in achieving a Pareto improvement.

  • Structural Guidelines:

    • Double-spaced.

    • One-inch margins.

    • 12 point Times New Roman font.

    • Length between 500 - 750 words (excluding tables and references).

    • Use paragraph form; no bullet points or numbering.

    • Outside sources are optional and must be cited in MLA or APA format.

    • Grading based on spelling, grammar, and organization.

    • Encouraged to seek help at the CSU Writing Center.

Examples of Social Dilemmas

  • Prisoners’ Dilemma Example:

    • Everyone's dominant strategy is to stand up.

    • Result: When everyone stands, visibility does not improve significantly compared to when everyone sits.

    • Standing is identified as unpleasant.

    • Task: Model this interaction as a 2x2 game and find:

    • The Nash equilibrium.

    • The mutually-preferred outcome.

  • Assurance Game Example:

    • Everyone's best response is to conform to the system used by others.

    • While the Dvorak keyboard is better than QWERTY, path dependence keeps society using QWERTY.

    • Task: Model this interaction as a 2x2 game and find:

    • The Nash equilibria.

    • The mutually preferred outcome.

Economics Course and Major Information

  • Economics Major Requirements:

    • Core Courses:

    • ECON 202 Principles of Microeconomics

    • ECON 204 Principles of Macroeconomics

    • ECON 306 Intermediate Microeconomics

    • ECON 304 Intermediate Macroeconomics

    • ECON 335 Introduction to Metrics

    • MATH 141 Calculus for Business

    • STAT 201 General Statistics

    • ECON 211 Gender in Economics

    • ECON 240 Economics of Sustainability

    • ECON 376 Political Economy of Capitalism

    • ECON 325 Health Economics

    • ECON 460 Economic Development

    • Elective Courses: Examples include:

    • ECON 492 Capstone Seminar.

  • Career Paths for Graduates:

    • Positions include Asset Management Analyst, Natural Resource Analyst, Business Development Manager, Financial Analyst, and other analyst roles in various firms like Fidelity Investments, Goldman Sachs, etc.

    • Top Employers of Graduates:

    • Charles Schwab & Company, KPMG LLP, Starbucks, etc.

  • Average Starting Salaries of Graduates (Comparative):

    • Economics: Average pay around $60k+

    • Other majors range from $46.2k (Political Science) to $62k (Finance).

The Capitalist Firm

  • Fundamental Assumptions of the Model:

    • Gains from trade exist (Unit 1).

    • Adoption of cost-effective technologies is common (Unit 2).

    • Collective projects can lead to social dilemmas (Unit 4).

    • Voluntary contracts determine surplus and its distribution (Unit 5).

    • The labor discipline model (Unit 6) explains:

    • Determinants of wages and profits.

    • Split of surplus between owners and workers.

  • Role of Firms in Capitalist Economy:

    • Coordination Mechanisms:

    • By Firms: Companies like Apple hire specialized workers.

    • By Markets: Apple acquires supplies (e.g., LCD screens) from other firms.

    • Concentration of Economic Power:

    • Firms are characterized by a hierarchy where:

      • Owners and managers direct the labor force.

      • Orders are typically hierarchical commands.

    • Markets enable decentralized economic power through voluntary transactions.

Theoretical Insights by Herbert Simon

  • Background:

    • Simon was initially trained in political science; recognized as an economist.

  • Core Contributions:

    • Investigated why firms employ workers.

    • When tasks can be clearly specified, firms contract work to individuals or other companies.

    • For uncertain tasks that are hard to contract, firms employ workers to follow directives.

    • Winner of the Nobel Prize in Economic Sciences in 1978 for contributions regarding decision-making processes in economic organizations.

Characteristics of the Capitalist Firm

  • Planned Economies vs. Market Economies:

    • Market Response: Individuals respond to price signals.

    • Firm Response: Workers follow managerial orders.

    • The firm operates as a mini centrally planned economy, suppressing price mechanisms (Ronald H. Coase, 1937).

  • Ownership and Control Dynamics:

    • Corporations often separate ownership from control, minimizing diligence of managers in comparison to owners directly involved.

    • Owners are often referred to as residual claimants of the firm's profits.

    • Managerial compensation may include bonuses or promotions but also creates principal-agent problems.

    • Example of moral hazard illustrated by Wells Fargo's CEO actions.

Labor Relations and Contracts

  • Distinct Features of Contracts:

    • Product Contracts:

    • Transfer ownership permanently.

    • Typically short-lived.

    • Labor Contracts:

    • Temporarily transfer control over a worker’s tasks to management.

    • Often extend for many years, fostering development of worker-specific skills.

  • Challenges of Labor Contracts:

    • Typically incomplete due to:

    • Uncertainties about future tasks and firm needs.

    • Costs involved in supervising worker performance.

    • Difficulty in basing enforceable contracts on observable efforts.

    • Incomplete contracts make strictly minimizing wages ineffective in managing labor costs.

    • Examples of Piecemeal Payment: Common in agriculture due to measurement difficulties in output.

Reasons for Incomplete Labor Contracts

  • Case Study Discussion:

    • Identify familiar jobs (teacher, retail worker, etc.) and discuss elements of incomplete contracts; focusing on essential responsibilities that cannot be fully stipulated or enforced.

Philosophical Observations from Karl Marx

  • Background of Marx:

    • Observed the rise of capitalism and critiqued its implications.

  • Historical Materialism Theory:

    • Details the societal progression from slavery, to feudalism, to capitalism.

  • Key Works:

    • The 1848 “Communist Manifesto” acknowledges the benefits of capitalist expansion while condemning resultant inequalities.

  • Core Arguments:

    • Capitalists utilize wages to command the workforce within the firm.

    • The