Barry R Weingast Barry R. Weingast Stanford University (with Margaret - - PowerPoint PPT Presentation

Barry R Weingast Barry R. Weingast Stanford University

(with Margaret Levi Tania Melo Frances Zlotnick )

Treasury Seminar 21 April, 2015

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p , 0 5

 Open access to organizations.

Necessary condition for both economic and political

• Necessary condition for both economic and political

competition.

▪ Market economy Market economy ▪ Democracy

 Developing countries



Limited access

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 NWW.09 date open access to business

corporations:

• In the 1840s & 50s.
• General incorporation laws..

 Yet open access to labor organization much

later:

• Why did open access to labor organizations take so

long?

• Why so much violence associated with labor

▪ Especially state suppression of labor organization?

St t t k bli d t i l i t l b b fi ▪ State took a blind eye to violence against labor by firms ▪ Government often collaborating with firms.

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 The traditional wisdom:

• Labor-business conflict as a zero- or negative-sum
• Labor-business conflict as a zero- or negative-sum

struggle over rents.

• The traditional approach assumes (usually implicitly)

The traditional approach assumes (usually implicitly) that violence stopped because:

▪ Law recognized labor organization ▪ Governmental behavior changed:

▪ Stopped collaborating with firms to suppress unions; ▪ Punished either side for violating the rules Punished either side for violating the rules.

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 The problem is far deeper.  The traditional view is partially correct  The traditional view is partially correct.

• It fails to understand the problem of violence:

▪ The causes of violence prior to the 1930s regulatory changes; The causes of violence prior to the 1930s regulatory changes; ▪ Why regulatory changes stopped the violence.

• It fails to understand the potential for mutual gain

p g (e.g., Freeman and Medoff 1984 and Mares 2005).

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• We claim that violence resulted from an inability to solve

commitment problems.

• Traditional view misses the existential threat to business
• Traditional view misses the existential threat to business

▪ We are so used to the peaceful equilibrium that most scholars implicitly assume that it was the natural solution once the new laws t k ff t took effect. ▪ This assumption ignores the problem of how unions and labor

• rganization threatened business and society.

▪ Would labor advocate socialism and demand major changes in the economic system? ▪ Would labor demand a share of managerial power, as some unions advocated (e g IWW)? (e.g., IWW)?

▪ Similarly:

▪ Business could not commit to eschew violence ▪ Government could not commit to being a neutral arbiter (instead

• f siding with firms).

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▪ Mares hypothesis:

▪ Workers invest in skills in exchange for worker protection during down turns down turns.

▪ All are forms of commitment problems. ▪ Once labor organization became legal: ▪ Once labor organization became legal:

▪ Membership would swell, ▪ Labor would become powerful. p ▪ Once labor’s numbers and power grew, it could not be undone.

▪ Implications: Prior to the New Deal:

▪ Stakes were very high ▪ Hence violence: Both sides fought because high stakes.

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 Our thesis:

• Part of the success of the 1935 NRLA

It solved the commitment problems ▪ It solved the commitment problems.

• Yes, per traditional wisdom,

▪ Legislation solved the existential problems for unions ▪ Hence lowered stakes for Unions ▪ Hence lowered stakes for Unions.

• But also greatly lowered the stakes for firms.

▪ Largely unrecognized.

• Transformed government into a more neutral arbiter
• Transformed government into a more neutral arbiter.
• We argue that the political stalemate prior to 1930 hindered

labor-firm cooperation.

 Proceed as follows:

• Prior to 1930, the law favored business over labor
• Labors tactics
• Implications and conclusions.

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Q Wh did th l id ith fi i t l b ?

 Q: Why did the law side with firms against labor?  Absence of labor legislation implied:

• Law on the side of employers
• Strikes and walkouts

▪ Labor: temporary absences. ▪ Firms: permanent disruption of employment,

▪ hence legal to hire new employees hence legal to hire new employees ▪ (seen by unions as strikebreakers).

▪ “The expectation of returning to work at the conclusion of a strike was j di d b th l l d l l ti d i ht f l jeopardized by the legal and popularly sanctioned right of employers to hire and fire at will.” (Gitelman 1973:9)

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Ab f l b l i l ti i li d

 Absence of labor legislation implied:

• Few restrictions on business’s employment practices:

Fi Firms

▪ Used armed men against strikers; ▪ Hired replacements for strikers; ▪ Hired replacements for strikers; ▪ Fired labor organizers; ▪ Fired workers for joining unions; j g ; ▪ Refused to listen to workers’ complaints or grievances’ ▪ Suppressed worker free speech ▪ Widely used spies and agent provacateurs.

• All limited labor-firm cooperation in situations with

mutual gain mutual gain.

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 Law sided with firms:

• Police powers in United States designed to protect life
• Police powers in United States designed to protect life

and property.

• Antitrust laws used against Unions

Antitrust laws used against Unions

• Injunctions against strikes very common.

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 We now think of organized labor as focused on

wages conditions hours fringes health issues wages, conditions, hours, fringes, health issues.

• Unions generally eschew:

▪ Attempts to extract firm capital Attempts to extract firm capital. ▪ Demand participation in firm management. ▪ Attempts to use their political power to create socialism.

• These limits are part of the post-NLRA equilibrium

▪ Cannot be taken as given. ▪ Did not hold in the pre-New Deal environment.

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 Pre-NLRA labor environment very different from

post-NLRA.

• Nothing limited demands of labor
• Nothing limited demands of labor.

▪ IWW advocated worker control over firm management.

▪ Many other unions sought various degrees of direct input to firm management.

▪ Although much violence by firms some by labor (often fringe ▪ Although much violence by firms, some by labor (often fringe groups).

• Implies high risk for firms.

N dibl it t b l b if i d t t ▪ No credible commitments by labor, if organized, not to use its power or to support political officials to pass anti- business legislation. Fi it l d h th k t t t ti ll t ▪ Firm capital and hence the market system potentially at risk. ▪ Unionized workforce could lead to major national strikes.

▪ Threaten political order if combined with union advocacy of socialism.

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• Business had a united interest in suppressing labor
• rganization.

▪ Limit labor’s economic power ▪ Limit labor s economic power ▪ Limit labor’s political power.

• Goldfield (1989) argues:

( ) g

▪ Growing radicalization and the potential for growing militancy and disorder was a major reason for the passage of the NLRA.

▪ “To many in 1935, it did indeed seem that a specter was haunting the To many in 1935, it did indeed seem that a specter was haunting the United States” [1276] ▪ “New Deal labor legislation was a result of interaction between labor movement growth and activity, the increasing strength and influence of di l i ti ti l l th C i t t lib l radical organizations, particularly the Communist party, liberal reformers with both immediate and historical corporate ties, and government officials (or state managers) with primary concern for preserving social stability and assuring the continued electoral success p g y g

• f the Roosevelt‐led Democratic party.” [1268‐69ea]

▪ Katznelson (2013) agrees.

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 Three commitment problems plagued solving

labor violence labor violence.

• Labor could not commit to moderation

▪ Violence Violence ▪ Radical demands from politics.

• Firms could not commit not to use violence against

g labor

• Government could not commit to be a neutral arbiter.

 We take for granted that all three commitment

problems have been solved.

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 Changes in the 1930s:

• Great Depression;
• Great Depression;

▪ Threat of radical labor

▪ Including labor violence

▪ Labor Demands for Socialism

• Democrats take power

▪ Pro-labor ▪ Yet could not ignore business.

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 Three-way political exchange

• Labor gains:

▪ Right to exist, ▪ To collective bargaining. ▪ Some monopoly power. S p y p

• Business gains:

▪ Protection of their assets; ▪ Moderate political demands by labor

▪ No socialism.

• Government becomes a neutral arbiter of the rules

Government becomes a neutral arbiter of the rules

▪ Punish both labor or firms for using violence. ▪ Democratic Party gains politically:

N L b C tit ▪ New Labor Constituency ▪ Many businesses support legislation because it prevents much worse.

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 NLRB: Power to define the scope of the

bargaining unit. g g

• This authority meaningfully limited union activity.
• It put the NLRB in the center of the quickly growing intra‐
• It put the NLRB in the center of the quickly growing intra‐

labor fight between craft and industrial organizing.  Gave the Board:  Gave the Board:

• The right to oversee and certify the election of

t ti representatives.

• The right to prevent unfair labor practices.

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 The right to prevent unfair labor practices.

• NLRB empowered

p

▪ To issue legally enforceable orders for employers to bargain with unions.

• To withhold certification and bargaining orders when

union behavior unacceptable.

▪ NLRB withheld bargaining orders from otherwise entitled unions when they have been found to have engaged in severe violence (Gitto 1982). severe violence (Gitto 1982).

 The NLRA created a regulatory process that the

Supreme Court held constitutional and hence legally p g y binding on employers.

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 Three Players, U, B, G.  Two periods

p

• 1880-1930;
• 1937-1950

 Begin with 1880-1930:

• Violence trap
• Violence trap.
• None of the players had the ability to commit not to use violence.

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Outcomes

Figure 1:

1880‐1930.

G Fight q1 Side w B N

Outcomes

D E Strike within limits B Do nothing Negotiate E I J B G Fight q2 Side w B N D E U B Strike without limits Do nothing Negotiate F H N Revolt g Large benefits to U H A

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N p1 Disorder C

U’s Preferences (based on history above)

 First, U prefers D (concessions) to E (destruction of the

, p union).

 Second, it prefers L2 to L1.

• To see this, notice that if U chooses to strike within limits, the lottery

L2 ensues; if strike without limits, the lottery L1 ensues.

• The difference between the two lotteries is q2 vs q1

The difference between the two lotteries is q2 vs q1

• Because q1 < q2, U prefers L2 over L1;
• Technically, we have L2 =q2D + (1 – q2)E > q1D + (1 – q1)E =L1.

 Third, p1 < p*:

• Low likelihood (p1) of a successful revolt during this period, U prefers

L to L L2 to L31.

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B’s preferences.

 If U strikes (with or without limits), B is best off fighting.

, g g

• B prefers L1 to I and L2 to F.
• Because U cannot commit to refrain from violence, negotiation means

th t B i i that B gives concessions,

• U and B cannot commit to honoring any concessions it makes.

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G’s preferences.

 1880‐1930: Largely a Republican era.

93 g y p

• Republicans favored business generally and, particularly, the

protection of property rights and freedom of contract. U i i ti d l b i l th t d b i th h

• Union organization and labor violence threatened business through

restrictions on:

▪ Property rights ▪ Freedom of contract.

 Hence, during this era, G prefered to support business and

use violence to suppress labor use violence to suppress labor.

• Specifically, G prefers L1 to outcome I;
• and L2 to outcome F.

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W b k d i d i l f h ilib i f h

 We use backward induction to solve for the equilibrium of the

game.

 Consider the first terminal node:

U h h ik i hi li i d B h h fi h

• U has chosen to strike within limits and B has chosen to fight.

▪ Because G prefers L1 to I, G will choose to side with B.

• If U chooses to strike without limits and B chooses to fight,

▪ G will also choose to side with B (G prefers L to F) ▪ G will also choose to side with B (G prefers L2 to F).

• Working backwards one node to B’s decisions.
• If U has chosen to strike (with or without limits), B will choose fight since it

prefers L1 to J and L2 to H. p e e s

1 to J a d 2 to

• Finally, consider U’s choice at the initial node of the game.

▪ We established that U prefers L2 to L1; and because p1 is low, it prefers L2 to L31.

• Hence U will choose to strike without limits.

 Along the equilibrium path:

• U chooses to strike without limits; B chooses to fight; and G sides with B

against U.

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 Circumstances changed.

• 1935‐36: the threat of disorder. M

935 3

• Many businesses came to favor compromise, as represented in the

NLRA, which gained supramajority support in Congress. E l S C t ld th NLRA/NLRB tit ti l

• Early 1937, Supreme Court rulds the NLRA/NLRB constitutional.

▪ Allowed the NLRB to enforce its rules.

 Implications:

• Government gained the ability to sanction both labor and business if

they fail to play by the (NLRA/NLRB) rules. The abilit of G to sanction both b siness and labor allo ed the three

• The ability of G to sanction both business and labor allowed the three

players to implement cooperation

▪ Mutual respect for the rules ▪ An absence on violence.

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Fi 2

Outcomes

Figure 2:

1937 forward.

Fight

Outcomes

K L M enforce rules Do nothing G Play by the rules B Play by the rules M N O enforce rules Do nothing G contest B Play by the rules R S T Fight enforce rules Do nothing G enforce rules G U B Strike without limits U V enforce rules Do nothing G contest Play by the rules N Revolt Large benefits to U W

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N p2 Disorder X

 U prefers the outcome when it plays by the rules

and B chooses to also play by the rules (outcome O) and B chooses to also play by the rules (outcome O) to two other outcomes:

• (i) The outcome of revolting (L

= p W + (1 – p )X); and

• (i) The outcome of revolting (L33 = p2W + (1 – p2)X); and
• (ii) The outcome when it chooses continuation of the

status quo (striking without limits, B contests U’s actions, status quo (striking without limits, B contests U s actions, and then suffer punishment by G).

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 For B:

• If U chooses to play by the rules, B prefers to play by the rules.

If U h t ti t iki ith t li it it f t t t

• If U chooses to continue striking without limits, it prefers to contest

U’s actions.

 For G:

f f h l d h l l

• G prefers enforcing the rules over doing nothing (electoral

gains).

• This means that G will punish either party if they break the

This means that G will punish either party if they break the rules.

• As with the failed NIRA, if G fails to implement the rules:

It ill t i l t l t th i l b t l b d ▪ It will not gain electoral support as the violence between labor and business continues, ▪ p2 may rise above p*, U t h lt i t d f ti ▪ U may to choose revolt instead of cooperation.

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A b f l th i b k d i d ti

 As before, we solve the game using backward induction.  At each decision node involving G,

• G will choose to enforce the rules. Doing so gains it electoral support

g g pp and forestalls potential revolution.

 Working back a node, B has three choices:

• if U has chosen to play by the rules fighting risks punitive actions by G
• if U has chosen to play by the rules, fighting risks punitive actions by G

so B is best off choosing to play by the rules.

• If, instead, U chooses to continue striking without limits, then B is best
• ff contesting U’s actions and G will impose sanctions on U
• ff contesting U s actions and G will impose sanctions on U.
• At U’s first choice of the game,

▪ If U chooses to play by the rules, outcome O occurs in which both U and B play by the rules and hence negotiate in good faith rules and hence negotiate in good faith. ▪ In contrast, if U chooses to continue to strike without limits, then B will contest U’s strikes and G will then rules against U. ▪ Whereas if U chooses to revolt, the outcome is the lottery L33 = p2W + (1 – p2)X. y

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p2 p2 ▪ Among these three options, U prefers to play by the rules. Hence the equilibrium path

• f this game is for U to choose to play by the rules and B to choose to play by the rules.

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 Labor Laws of the 1930s:

• not simply about rent-transfers from Business to

not simply about rent transfers from Business to Labor.

 They solved the three commitment problems

i t d ith l b t i associated with labor opportunism.

▪ U could not commit to striking with limits; B ld t it t h i l ▪ B could not commit to eschew violence. ▪ Even though both preferred the outcome where both negotiate in both periods to fighting negotiate in both periods to fighting.

• Encourage greater cooperation between labor and

management. g

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 Commitment problems plagued labor relations

for 100 years for 100 years.

• Not obvious how to solve them.
• Firms maintained armies
• Firms maintained armies
• Government collaborated with firms in protection of

property property

 Three commitment problems prevented an

earlier solution. earlier solution.

 Limited access to labor unions.

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 New party, new circumstances allows the

Democrats to solve the three simultaneous Democrats to solve the three simultaneous commitment problems, including creating a neutral arbiter of the NLRB neutral arbiter of the NLRB.

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