March 25, 2008

Nature of the firm: A historical example.

Listening to this Podcast today I heard of a fascinating historical fact, cited from the paper by Chenung (1983): ‘The Contractual Nature of the Firm’, Journal of Law and Economics.

In old China (few hundred years ago) people use to transport things via the Yangtze River, using labourers (coolies) to pull the barge up the river. These barges were large, and so needed 10-15 people. These group of men acted like independent firms.

However there was a moral hazard problem. When pulling a barge with 14 other men it’s in your best interest to shirk, and only pretend that you are pulling the barge. The other men wouldn’t notice that you are shirking, the barged is still being pulled.

To counter this problem these ‘firms’ would hire a 16th man, who would typically be paid more then the others. His job was to monitor everyone else’s work and whip them if he saw anyone shirking. Just the presence of having him there got rid of the moral hazard problem, thus he didn’t even need to whip people normally.

What we saw hence, merely as a result of free market competition, was a situation where the typically transportation firm consisted of a hierarchical structure. One where at the bottom was 15 low-paid labourers who did all the work, and at the top was a well-paid manager who didn’t actually do anything, except perhaps once in a while use his whip to discipline his subordinates.


- 2 comments by 1 or more people Not publicly viewable

  1. these ‘firms’ would hire a 16th man, who would typically be paid more then the others

    It would interesting to see if these men were initially paid more, or it simply evolved to the situation that they were paid more because of there position of power.

    How is it rational for these ‘firms’ to have paid significantly more to these new men? Surely someone would have volunteered to do this job requiring very little mental or physical effort for the same pay as somebody breaking their back pushing the boat!

    I looked up the article, and there is no mention of the workers agreeing to pay the whipper more money… only that the workers “agreed to the hiring of a monitor to whip them”.

    Only after the positions of economic power have been allocated will the inequitable wages surface. I would suggest to these fishermen that a better solution was to share the position of monitor between them. Hence getting balanced work patterns, increasing the economic welfare for all….

    If this was the birth of the firm it seems it could have all been so much different… If only they knew about Parecon!

    26 Mar 2008, 10:55

  2. Perhaps the monitors were paid more because they would need to be relatively strong and smart. If you whip someone, they’re going to be pissed off. So you need to be smart enough to make sure that you punish the right men, and strong enough to credibly enforce the punishment (i.e. not be scared about being beaten up later because of it). So the scarcity of men who fulfilled both criteria would have pushed up his market wage and meant that a work sharing scheme was impossible.

    I haven’t actually read the article, but if you listen 56 minutes into the podcast you will hear the two academic economists talking on it mention that the monitor was paid more.

    26 Mar 2008, 12:58


Add a comment

You are not allowed to comment on this entry as it has restricted commenting permissions.

Our Society

This is the blog of the International Current Affairs Society at Warwick. Any member can contribute, and anybody at all can comment on the entries.

Please see the ‘About Us’ link to find out more information about what we do.

March 2008

Mo Tu We Th Fr Sa Su
Feb |  Today  | Apr
               1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30
31                  

Search this blog

Blog archive

Loading…

Most recent comments

  • Perhaps the monitors were paid more because they would need to be relatively strong and smart. If yo… by on this entry
  • these 'firms' would hire a 16th man, who would typically be paid more then the others It would inte… by on this entry
  • Many one–way systems in this country have been designed with only motorists in mind. In countries su… by on this entry
  • I think the funniest thing about this was boris johson's responce. When asked what he thought he sai… by Scott on this entry
  • all part of getting rid of the small farmers independence. example, USA 1930's. on my travels, i not… by cal on this entry

Tags

Tracker

Not signed in
Sign in

Powered by BlogBuilder
© MMXVIII