Beyond the Market, Part 3: A Paradox Discussed

I wrote two posts on the topic of markets last week. The posts were parts 1 and 2 of a longer post titled “Beyond the Market,” in which I highlighted some interesting facts and paradoxes about markets.

In response to those one of those paradoxes, Saleem writes:

I liked that bit:

‘It is always good, however, to keep in mind that those of us who live in industrialized countries — those of us who live in North America and in Western Europe, especially — are much less in contact with markets than some of us would like to believe.’

Would be cool to see that developed a bit more…”

So what did I mean when I said that we come in contact with the market much less than some people would have you believe?

For starters, most of us have stable occupations. We sign contracts with our employers in which each party is protected in case of wrongful termination. That contract also specifies what each party can reasonably expect from the other. That is, your employer knows what to expect in terms of your work effort — the number of hours you spend at work, the quality of your work, etc. — and you know what to expect in terms of pay — e.g., how much you get paid per hour, when you get paid, etc.

In other words, most of us allocate our labor through employment contracts. Unlike the protagonists of Steinbeck’s The Grapes of Wrath, we don’t have to go from farm to farm looking for work. Nor do we have to hang out at the lumber yard day after day and hope to get hired as a day laborer.

Firms as Hierarchies

But it goes beyond that. The larger firms get, the more decisions are taken within their own hierarchies. This is especially true as firms integrate vertically and thus increase the number of things they does in-house rather than outsourcing them to other firms.

For those transactions taken within firms, there is no such thing as a price signal, and firm managers can sometimes expend a considerable amount of resources to accurately pricing those transactions.

Of course, the greater the number of large firms there are in an economy, the smaller the number of transactions that actually occur on the market.

In an economy like that of the United States, many people work for large firms. Not only do these people sign employment contracts that largely shield them from the market, but many of the decisions they take within the context of their jobs are taken purely within the context of a firm.

For instance, when I joined Duke faculty in 2006, I signed a three-year contract that was subject to renewal in 2009. My contract was then renewed, and I will be reviewed again next year. When I want to hire a researh assistant (RA), I don’t go on the open market — I know where to look within the university to identify a list of candidates to interview. I also don’t need to think very hard about what I am going to pay my RA — the university has a specific set of guidelines about how much to pay students at various levels.

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