All entries for March 2008

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.


March 22, 2008

Cameron breaks law while riding bike.

From the BBC website:

Conservative leader David Cameron has apologised after being photographed ignoring red lights and cycling the wrong way up a one-way street. Pictures in the Daily Mirror newspaper showed the politician breaching traffic rules as he cycled to work.

“I know it is important to obey traffic laws – but I have obviously made mistakes on this occasion and I am sorry,” Mr Cameron said in a statement.


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