Politics and Power in Ecnomic Organizations

Power in Competitive Exchanges

By a ‘competitive capitalist economy’ we mean one in which productive assets are privately owned, production is carried out by employees, and all markets are characterized by free entry and large numbers of buyers and sellers.

Agent A to have power over agent B it is sufficient that, by imposing or threatening to impose sanctions on B, A is capable of affecting B’s actions in ways which further A’s interests, while B lacks this capacity with respect to A.

Capitalist economy exhibits a system of power relations has typically been motivated by reference to such deviations from competitive conditions (pervasiveness of monopoly, the autonomy of management, corporate influence over government policy and consumer demand, and the ubiquity of disequilibrium.)

Capitalist economy exhibits a system of power relations has typically been motivated by reference to such deviations from competitive conditions (pervasiveness of monopoly, the autonomy of management, corporate influence over government policy and consumer demand, and the ubiquity of disequilibrium.)

Walrasian Model is a paradigm where market is purely competition and “exit” is non-sanction.

Walrasian model is in fact a limiting case based on an shorten arbitrary of the concept of rational action.

allows agents to optimize when they shop for groceries but not how they decide to work hard for their employer

Puzzle of Obedience

Employee – Employer relationship (employee is efficiently responsive to his employer due to the assets that he works with and the assets that can be taken away from the employee) asset meaning “job”

The exercise of power is thus not something taking place outside of markets, but rather is critically dependent on how competitive markets work when contracts are incomplete.

Contested Exchange

Consider agent A, who purchases a good or service from agent B. We call the exchange contested when B’s good or service possesses an attribute which is valuable to A, is costly for B to provide, yet is not fully specified in an enforceable contract.

Exogenous enforcement is absent when there is no relevant third-party enforcer.

When the contested attribute can be measured only imperfectly or at considerable cost (work effort, or the degree of risk assumed by a firm’s management)

when the relevant evidence is not admissible in a court of law (agent’s eyewitness but unsubstantiated experience)

when there is no possible means of redress (when the liable party is bankrupt)

when the number of contingencies concerning future states of the world relevant to the exchange preclude writing a fully specified contract.

An employment relationship is established when, in return for a wage.

The employer’s promise to pay the wage is legally enforceable.

The worker’s promise to bestow an adequate level of effort and care upon the tasks assigned, even if offered, is not legally enforceable.

We considered the worker’s job as an asset, the value of which depends in part on the worker’s effort level.

Short Side Power and Political Theory

There exist a unemployed worker to would prefer to be employed despite lower salary that he can offer rather than an employed worker in the current job which it is costly to the present employed.

Worker can impose sanctions by: social unrest, burning down of factories, destroying it’s investments etc.

Employer can dismiss the current employee thus, employer has greater power.

However, the cost for replacement would add more value since, training, effort etc are considered in hiring for a replacement.

Adaptation and opportunism in political and economic
markets

Therefore it seems that in competitive markets it is possible to exit from economic relations without suffering relevant costs. The absence of these penalties demonstrates that rents—or, to state it more precisely, quasirents—do not exist.

if the continuance of a relation allows the benefit of rents, at least from one side, it is evident that its interruption must generate losses or costs.

Opportunistic view can impose sanctions by the losses it incurs. By means of a judicial system more explicitly, if the seller violates a contract, the buyer can turn to another supplier, therefore choosing exit and inflicting on the former a sanction that consists of less revenues

If many buyers act in this manner the sanction can mean the expulsion of the seller from the market due to his or her business failing.

In order for this mechanism of sanctioning to function, the non-opportunistic agent must be able to turn to other suppliers without excessive costs, and the opportunist, because of the absence of asymmetric information, must be unable to find new buyers for his or her products or services.

Opportunism is not the sole reason for worsening performances, then exit can have undesirable consequences.

Organisations also face problems of adaptation to environmental changes, exit can prevent efficient organisations from successfully adjusting to the new conditions.

Voice is defined as follows: ‘any attempt to change, rather than escape from, an objectionable state of affairs’.

Not opportunism but problem in adapting of changes to the environmental conditions.

Since the cause of the problem is the difficulty in adapting, sanctions even in the form of exit can be not only inefficient but even damaging. if clients were to leave the firm quickly, the latter would not have the time to remedy its mistakes.

Can easily condemn to expulsion organisations that are vital and that can promise their clients or members a high level of well-being given a reasonable remit of time.

the best answer on the part of the clients is more co operative behaviour. 

Voice, it not only allows management to acquire vital information but also gives it enough time to make necessary adjustments.

We can state that sanction is the correct reaction in the case of opportunism.

Adaptation problems arise, best response is to be more co-operative attitude. “Readiness to recontract”

Voice, on its part, does not necessarily involve a co-operative attitude.

It can also be employed to inflict damage.

In this case it is more appropriate to view voice as a kind of sanction or at least a threat of sanction.

Suing in court and harassment as manifestations of voice (assuming voice can perform a useful function) therefore we are referring to problem of opportunism.

The clients choose their reaction on the basis of a calculation of convenience which takes into account both the costs and results of alternative strategies

The Client

There is no asymmetric information.

The clients are not in conflict among themselves; rather they share the same preferences and do not free ride. Therefore it is possible to treat the entire set of clients as if they were in fact simply one client.

Both sanctioning and recontracting give rise to costs the lowest costs one has to bear to have either an effective sanction or a timely adaptation.

The clients expect to use the organisation’s service for time periods. Periods are measured in such a way that adaptation to the unfavourable exogenous event will take place in precisely one period. (n+1)

The clients have no intertemporal preferences, so their rate of discount is equal to zero.

In this more complex framework, efficiency will be achieved if opportunistic actions are sanctioned and if adaptations are eased by means of recontracting.

If sanctioning is not chosen as the reaction in the case of opportunism and/or recontracting is not applied in the case of adaptation, inefficiency is generated.

Is Power an Economic Good?

Two-Person Economy

Private Good – Individual (i) consumes a quantity (xi) of x, the second agent consumes no units of  xi.

Individual (i) consumes a quantity (xi) of x, the second agent also consumes the same amount – public good.

Third good – which is ignored by most economies  - positional goods – the individual (i) consumes (xi), the second individual must consume and equal but negative quantity –xi.  – zero sum goods

Positional goods have characteristics polar to those of public goods.

In the case of public goods, other individuals cannot be excluded from consuming a positive amount of the goods equal to that consumed by the individual supplying the good.

it will be impossible for individual i to exert or consume a positive amount of power if individual j does not consume negative amounts of it.

A person who consumes power is able to command more activity than they can execute.

In our two-person economy this is possible for one individual only if the other individual consumes negative power; that is, he or she executes more actions than he or she commands.

Individual (i) consumes social status when he or she is superior to individual (j) according to a system of evaluation shared by both individuals.

Consuming status is consuming a shared feeling of superiority.

The consumption of which is only possible if the other individual consumes negative status or a shared feeling of inferiority.

-xi                0              +xi

The extreme points of this line define x as a positional good (−xi) and a public good (+xi), whereas 0 units of xi will define x as a private good. Moreover, the segments −xi,0 and 0,xi will respectively define semi positional and semi-public goods.

The first concerns is inequality. It is possible to consume a positional good only if it is unequally consumed: for, its consumption implies the joint consumption of positive and negative quantities.

The second concerns growth. It is impossible to have a growth of total consumption of positional goods. A growth in positive consumption will be matched by a growth in negative consumption.

Types of Positional Goods

Bi-positional good = one (only one) consumes a negative equal amount.

Multi-positional good = more than on (not all) consumes a negative equal amount

Pan-positional good = all other consumes a negative equal amount (n-1)

Applications of Positional Goods

National Security: investing at your national security, compared to other countries: therefore you are more dominant in national security than the other country

How Politics Limits Market

Political Economy is an extremely important pre-occupation that it only requires people that can understand.

Political Economy bears practically upon the individuals of modern populations that are:

Rulers or would be rulers.

Citizens or aspirants for citizenship.

Direct subjects of government authority.

Advisers to the government.

Disagreements, confusion and unstableness comes from the people interacting with different level of proficiency and understanding.

Not only in deals and contracts, but also in economic activities such as local and international trade, “trade offs”, employment, etc.

Political economy demands rigorous study.

It is important to substantiate however, it does not mean that it will create accurate economic model for both fields of politics and economics.

Government Policies must also overcome economic constraints to gain economic and political possibilities.

Socialist Project, it contains no practicality, no reform efforts, no representation, and no planning methods.

Non-Cooperation could limit the consolidation of a state-centred economy.

It could challenge the forms of life, in the sense of value and it’s subsistence needs.

It is a major issue on which how politics limits the market or constraints the operations of markets.

There are no analytical techniques that far invented to ensure an accurate comprehension of either economic or political causality .

Sellers have the same structure to follow for them to supply the market.

Buying and selling to choice and taste.

Buyers’ choice is between taste and needs within their resources.

Theory markets imperfections are under political suspicion and criticism since medieval Europe (from mercantilism to physiocrats).

World Market / International Trade has lacked “Legitimacy” due to power in sheer casual force.

Social scientists have questioned the side variety of intellectual and practical setting: from peasantry to socialism to which it concur the dispute on scope and limitation of structure and agencies of social revolutions.

Governmental actions and political power affects local market.

Fair trade that to include the perception of justice and injustice in causal analysis in  the division of domestic labour.

The Author identifies how politics limits markets by: Power, Choice, and Legitimacy.

It is also important to analyze the impact of the behaviour and culture if the people to conceptualize economic models.

All market processes depend upon the initial holdings of those who participates.

Time is a neutral element but it is not a framework to determine whether the past is to be taken as a normative baseline.

Political Power also depends on the economic opportunity of the market.

Political choice or preference does set limits for market operation, however the process is, it is plain enough that there have already been and will continue to be the most massive economic consequences of its impact.

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