This year's so-called Nobel Prize in Economics went to Oliver Hart (UK) and Bengt Holmström (Finland), from Harvard University and the Massachusetts Institute of Technology, respectively, for their contributions to Contract Theory.
As a subfield of microeconomics, Contract Theory probably is of little interest to macroeconomists. Similarly, econo-aficionados -- normally obsessed with macroeconomic policy -- might be indifferent to that announcement.
I think that would be unfortunate: Marxists and leftists, in general, should be interested.
From the "Popular Science Background" to the Prize in Economic Sciences 2016, housed by the Nobel Prize website (PDF):
"Contracts are essential to the functioning of modern societies. Oliver Hart's and Bengt Holmström's research sheds light on how contracts help us deal with conflicting interests."I am not qualified to evaluate the merits of professors Hart's and Holmström's work. I can, however, highlight that a basic premise of Contract Theory seems to be that in a capitalist society there are conflicting interests between principals and their agents. As a field of study, it does not limit itself to the particular case of firms, but it recognises that, in their case, owners (principals) and workers (agents) have conflicting interests: the terms "shirk", "slack off", "free-riding", present in the text, suggest labour as a cause. This shouldn't surprise Marxists or workers and I doubt it would surprise managers and business owners, although some so-called leftists might be shocked, shocked to hear that.
What may surprise Marxists is that Contract Theory, as a normative (i.e. interested in what "ought to be", not just what "is") branch of economics aims to offer ways to better align the conflicting interests of managers (a category of worker) and business owners, through the selection of better measures of managerial performance, and more flexible performance-pay schemes:
"[S]uppose the agent is a manager whose actions influence her own firm's share price, but not share prices of other firms. Does that mean that the manager's pay should depend only on her firm's share price? The answer is no. Since share prices reflect other factors in the economy – outside the manager's control – simply linking compensation to the firm's share price will reward the manager for good luck and punish her for bad luck. It is better to link the manager's pay to her firm's share price relative to those of other, similar firms (such as those in the same industry)."In this it follows and develops Milton Friedman's dictum: "[T]he manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them."
It also appears to have implications for marginal productivity theory.
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This latest Nobel announcement is quite opportune, as it addresses recurrent concerns about who, in modern 21st century capitalism, is a capitalist.
And one doesn't need to be a laureate to understand some of their insights:
"One important application of incomplete-contract theory has been in financial contracts. Suppose, in the example of the manager, that true performance is difficult to use in a contract because the manager is able to divert the firm's profits. The best solution may be for the manager to become an entrepreneur and own the firm herself – an entrepreneur can freely decide how to run the firm, and make the appropriate trade-off between actions that raise profits and actions that increase her private benefits … This feature [borrower cum manager cum entrepreneur] is typical of real-world financial contracts, such as the sophisticated contracts signed by entrepreneurs and venture capitalists."
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Incidentally, this research also has implications for "worker-owned firms" operating in a capitalist environment, and it may also point, for good or ill, to State Capitalism (but you'll have to read the whole thing).
Is there any charge emptier than economic determinism?
UPDATE:
12/10/2016. David Ruccio gives an overview of Contract Theory, with links to papers. It's a good read:
"In other words, the Nobel Prize-winning approach to contract theory is used to demonstrate what neoclassical economists had long presumed: that capitalist firms represent the most efficient way to organize production.
"That’s why, from a neoclassical perspective, capital hires labor."I can't say whether capitalist firms are indeed the most efficient way to organize production or not: it would depend, I suppose, on how one defines efficiency and whose point of view one assumes. But I can say that, from a Marxist perspective, to extract the maximum of labour power from the workers is the reason why capital hires labour.
"Economic Principals" offers a historical background to Contract Theory. Those interested in HET, like yours truly, should find it very interesting.
The good folks of "Marginal Revolution", not generally known as Marxists, are ecstatic with the latest so-called Nobel Prize and offer extensive coverage: Tyler Cowen and Alex Tabarrok.
“But I can say that, from a Marxist perspective, to extract the maximum of labour power from the workers is the reason why capital hires labour.”
ReplyDeleteI believe the Marxist perspective on this has led to a great deal of confusion. What it lacks is a clear sense of the concrete motives driving their desire to “extract labour power”. I think it’s more understandable to say: through its ownership of the means of production, the propertied minority is able to systemically force the propertyless majority to produce the goods and services needed to retain power and live luxuriously.
As for contract theory, I’d add my 2 cents and say that the conflict of interest between managers and owners is insignificant when compared to the oligarchy’s existential need to consolidate into large firms to control pricing and avoid the price wars of the 19th century.
Jim
Hi Jim
ReplyDeleteThanks for the comment.
I believe the Marxist perspective on this has led to a great deal of confusion. What it lacks is a clear sense of the concrete motives driving their desire to “extract labour power”. I think it’s more understandable to say: through its ownership of the means of production, the propertied minority is able to systemically force the propertyless majority to produce the goods and services needed to retain power and live luxuriously.
Although I did not put it explicitly anywhere (given your comment, I suppose perhaps I should have) we are in complete agreement on this: through its ownership of the means of production, the propertied minority is able to systemically force the propertyless majority to produce the goods and services needed to retain power and live luxuriously
That bit, at least in my understanding, is the crucial insight of Marxism: workers under capitalism (as serfs under feudalism or slaves under slavery and so on, down to the beginning of written history) work in excess of their needs; they are compelled to do so because the surplus they produce is expropriated by capitalists.
Surprising as it may sound coming from me, a Marxist and a worker, Marx's fundamental contribution on this was to highlight what was obvious and evident for anyone with eyes to see and a brain to think, and yet -- like all best secrets -- was hidden in plain sight.
Capitalists (as feudal lords and slave holders before them) freed themselves from the need to contribute to output. They are parasites under a system where their parasitism is legal and enforced by the state.
That's why in the next post I mention that to get a cut in a firm's profits, shareholders don't need to have a beating heart, they only need to own a share of the firm. Joint-stock companies have freed capitalists even from the need to have a human body: now even firms (artificial persons) can own firms.