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Author: Shubha Ghosh

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Free Labor, Free Organizations,Competition and a Sports Analogy

I have enjoyed the discussion on Orly’s book and thought of an interesting analogy to sports that is worth sharing. The inspiration was  Haddock, Jacobi, & Sag, “League Structure & Stadium Rent Seeking–The Role of Antitrust Revisited,” 65 Florida Law Review 1 (2013), an offprint of which appeared in my box the other day.  I recommend the article for those interested in regional economic development, sports franchising, antitrust and composing a title for an academic article without using a colon.  The ideas below are inspired by the article but represent my own views, not those of the authors.

Free agency in sports is desirable along the lines of Orly’s argument. Talented players are not locked into a particular team and can auction their skills off to the highest bidder.  I think the case is strong for free agency as benefitting individuals and society. One can complain about rent seeking and about the dynamics that lead to improper behavior like doping. As far as rent seeking, it is a loaded term like piracy or pornography, acting more as a conclusive label rather than an analytical concept. Orly’s argument supports rent seeking when it benefits talent and helps to unlock it.  As far as the dark side of competition (doping or cheating), those can be handled through other means than limiting free agency.

Does the free agency argument translate over into the firm or organizational level?  As Haddock, Jacobi, & Sag point out, there is lots of wasteful behavior as sports teams threaten to move in order to get better franchise deals from cities.  I understand their argument to be that the industrial structure of sports franchises in the United States leads to such opportunistic behavior as strapped and often desperate cities cannot effectively respond to the threat of exit by a team. They contrast the US sports team structure with that in the UK, where teams rely more on fan support rather than public subsidies.  Consequently, municipalities often have several sports teams that compete among themselves.

I found this example fascinating for the purposes of this symposium.  First of all, the free agency point maps readily onto Orly’s point. Competition among players is perhaps more effective and arguably more fair than competition among teams where players are locked into the firm and its mechanisms (if any) for internal competition.  At the same time, arguments for free competition do not readily transfer over to the franchising level given the industrial organization of teams and their relationship with cities. The answer to the problems Haddock et al. identify for sports franchising in the US lies in altering the political and market structure within which bargaining and competition for franchises occur. The example illustrates the relationship between individual mobility, competition internal to an organization, and the background structure of competition that defines how interactions among and within organizations play out.

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Fight the Power?

Orly’s book is terrific. Let’s just get that straight. The book is filled with the kind of creative energy that Orly’s reform proposals seek to release. But the emerging (or worse, entrenched) fud in me had to react to the celebration of freedom that the book exhorts. Throughout the past several centuries of human history, perhaps through all of human history, appeals to freedom have interrupted periods of dominance, control, and centralization.  “Talent Wants to be Free” is another example of the pendulum swinging away from centralized control. Whether that is a rightward or leftward swing, I will leave for others to sort out.  While Orly does not extol “stealing this book,” the arguments against over regulation by government (in the form of strong intellectual property laws) and against overly bureaucraticized mega-corporations have a Hoffmanesque quality. Of course, nothing wrong with that, but the skeptic in me wonders if unalloyed freedom is unquestionably a good thing.

Orly appeals to competition as an engine of innovation, and she points to many examples that limit the liberating force of competition. The proposition that competition fuels innovation is hard for anyone, in my mind, to contest.  Harder still is understanding what competition is.  Spencerian  renditions of Darwin as applied to social dynamics has been a recipe for disaster and elitism, leading to the very concentration that Orly decries. If competition is meant to guide innovation, it cannot be hard core laissez-faire. Is competition then the nicely diagrammed exposition of Econ 101, channeling Alfred Marshall into prices being driven to MC and minimum AC, profits dissipated, surpluses maximized, or perhaps the more elaborate auctioneering process Pareto optimally? Although an elegant formulation, the technical rendition of the dirty world of markets ignores the details of transactions and transacting, the role of legal rules and of technicians like corporate attorneys, accountants, and bankers. Perhaps  Coase has the right take on competition as a form of endless bargaining and negotiation as social costs and benefits are readily transformed, transaction costs willing, into private ones. I have no doubt that competition drives innovation, but the hard question is what kind of competition.  It is easy, however, to translate competition into unfettered freedom. That translation in my mind does not wholly work.

What is lost in translation by rendering competition as “freedom” is recognizing the need for organization to help free individuals reach their potential. Organization writ large here includes the family, the school, the business entity, and, yes, the state. Freedom without organization is anarchy and anarchy leads to either dissipation of energy into entropy (and yes that is a nod to the ideas of Thomas Pynchon, especially Gravity’s Rainbow in which flights of freedom give way Icarus-like to crashing and destruction) or to dominance and concentration by the powerful (another nod).  Neither is conducive to innovation.

Although Orly makes somes reference to Coase, I felt that there was not appreciation of his “A Theory of the Firm,” which  demonstrated that organization within an entity might be preferable to the freedom of exchange that is a hallmark of competition.  But Coase’s notion of the firm was not supplanting competition, Instead, by internalizing exchange, competition of sorts is brought into the organization as individuals vie for position within the hierarchy.  In this way, Coase is not justifying the Soviet state or centralized planning, both of which are ineffective and in opposition to innovation. Instead, consistent with Orly’s vision of freedom, the Coasean firm internalizes competition but also must confront competition that occurs through exit or dissent in order to avoid the exact forms of concentration that Orly correctly finds as antithetical to innovation.

My point here is that freedom is worthless without some form of organization that provides soil for freedom’s fruit. One example of this is the concern over D2P, a new acronym  a colleague recently assaulted on my overly taxed brain.  It stands for “Distribution to Product” and refers to the difficulty of going from labs to markets. Freedom within the university certainly leads to the creation of all sorts of inventions and new works.  The problem is the lack of institutions for facilitating the movement from the creative stage to the commercialization stage.  That movement is not dependent solely on the freedom of inventor, financier, marketer, and corporate attorney.  Instead such movement is impeded by too much freedom and not enough organization. Perhaps I am just raising dull questions about practical details.  But my point is that extolling freedom without organization may be as big a problem as extolling centralized control over freedom,

I will end with an advertisement for myself.  I have been working on a piece on nonprice competition and intellectual property, and I plan to write it after I finish my articles on the Federal Circuit’s contract law jurisprudence and Holmes’ intellectual property jurisprudence at the Mass and US Supreme Courts. The nonprice competition piece draws on Hirshcman’s theory of nonprice competition from his “Exit, Voice, and Loyalty.” Before I expand that piece into 50+ pages, let me try to distill that article-to-be into a few sentences.

Exit and voice serve as ways to promote competition through signals other than price.  Orly’s book provides a vivid and forceful exposition of exit and voice as examples of freedom.  But loyalty is necessary since organizations often act as the incubator for freedom. The problem is that loyalty can quash freedom through acts of provincialism, xenophobia, and blind faith. The difficult balance requires structuring loyalty so as not to supplant exit and voice but to channel those two freedoms into creating dynamic, evolving organizations that promote innovation.  In short, organization without freedom is tyranny, but freedom, without organization, is anarchy, with all its attendant costs.