Abstract
Theory and policy relating to labor markets is dominated by the mainstream labor market model, although a less well-known, socioeconomic version can also be identified. The mainstream model is methodologically flawed and forced, thereby, to relegate any (serious) investigation of labor market institutions and/or social structures to the margins of its analysis. The socioeconomic account is not so much methodologically flawed, as methodologically ambivalent. While this ambivalence does not actually prevent the investigation of institutions and/or social structures, it does promote ambiguity whenever we inquire into the precise nature of the interaction between them and labor markets. Insights from Austrian economics, when used in collaboration with critical realist methodology, can play a part in augmenting the socioeconomic account, generating a totally new approach to the analysis of labor markets.
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Notes
I prefer the term “account” to “model” or “theory” because the latter come with so much unwanted baggage. On my understanding, an “account” is a coherent and consistent set of statements designed to systematically explain some aspect of the phenomenon under investigation.
This paper draws upon, while also extending and deepening, ideas first presented in Fleetwood (2006b). The latter paper makes no mention of Austrian economics, although it does elaborate a little more upon the socioeconomic account, and a lot more on the critical realist critique of the deductivist method, and closure conditions, that underpin the mainstream model. Readers wishing to know more about this form of critical realist critique should consult Fleetwood (2006b).
Gerhart and Rynes (2003, 15) clearly have something like this “systematicity” in mind when referring to the “highly interconnected logic of the neoclassical model”.
Saint-Paul (2000) is a good example of this. Misleadingly entitled The Political Economy of Labor Market Institutions, it contains virtually no insights into the nature of institutions (or social structures): in fact, they are not even defined.
While Gerhart and Rynes (2003, 40–44) recognize there is a gap between mainstream theory and reality, in the final analysis they cite both Samualson and Coase to make the point that mainstream theory may not be perfect, but it is probably the best available. It is time we stopped accepting this old chestnut.
The fact that this model can be made more sophisticated does not actually mean the basic principle is, or can be, abandoned. I have never come across a mainstream economist (even one ready to concede that a socioeconomic approach has some validity) who is ready to abandon the idea that wages, supply, and demand for labor are functionally related.
Note well that (Old) Institutionalists have little or nothing in common with New Institutionalists or Neo-Institutionalists who, essentially, attempt to “modify or broaden the mainstream toolkit” (Rogers, 1994, 6).
For discussion of institutions and/or social structures, see Auer (2001), Hodgson (1988, 1999, 2001), Rogers Hollingsworth (2005), Lawson (2005), Rogers (1994), Rutherford (1999), and Searle. I have attempted to clarify the relationship between institutions and social structures in Fleetwood (2006a).
Rules are informal, implicit, and often tacit, whereas regulations are formal, explicit, and never tacit.
Another socioeconomists writes: “Whereas in standard theory, it is assumed that in markets the exchange between supply and demand occurs in abstraction of any power relation or regulation, the term ‘institutions’ implies a socioeconomic regulation of the unbridled working of the markets” Auer (2001, 3).
In a review of economic sociology, Ingham (1996) comes very close in a couple of places to actually stating this sentiment.
A deterministically closed system can be expressed probabilistically and can, thereby, be transposed to a stochastically closed system. Here y and x 1, x 2, … x n are regularly conjoined under some well behaved probabilistic function. In effect, the claim “whenever event x then event y” is transposed into the claim “whenever events x 1, x 2, … x n on average, then event y on average”, or “whenever the average value of events measured by variables x 1, x 2, … x n are what they are, then the average value of event y measured by variable y is what it is”. Stochastically, closed systems, are still closed systems.
Mainstream theorists do, of course, recognize that substitution between labor and capital is not ubiquitous and attempt to deal with it through nonconvex isoquants. “L” shaped isoquants associate one production technique with one capital-labor combination and allow no substitution. Isoquants with n “flat” sections imply n−1 production techniques and allow limited substitution. But, where tangency between the isocost curve and the isoquants is at a corner, factor prices could change without “causing” substitution. Where tangency occurs along the face of one of the “flat” sections of the isoquant, then the choice of technique becomes indeterminate.
Incidentally, this argument works despite the fact that in many cases workers can be substituted for machinery because the mainstream model assumes that this substitution is always possible. It is forced to treat nonsubstitutability as a special case.
Social theorists discussing the so called agency-structure debate tend not to use the term “institution,” and while it seems strange referring to the agency-institution debate, this may be little more than linguistic preference. If institutions are systems of rules, and if rules are distinct from the agents that draw upon, and reproduce them, then most critical realists would be quite happy to consider institutions alongside social structures, as nonagential social phenomena. There should, then, be no problem extending the scope of the agency-structure concept to include agency-institution/structure.
See Fleetwood (1996), footnote of first page, for a comment on the way mainstream economists try to deal with processes.
In any case, a causal-explanation of the agents, structures, and processes involved in making labor markets work, should involve much more than deducing/predicting wage rates and quantities of labor, perhaps in the presence of “imperfections” like institutions or social structures. This preoccupation is, arguably, a hangover from mainstream labor economics.
I wish to thank Nick Wilson, for constantly reminding me not to lose sight of the role of agent when attempting to emphasize the role of social structures. He also expresses a similar antidualist position in Wilson (2004).
Note that Vaughn (quoted earlier) seems to imply that there are two phenomena, markets and institutions (or social structures), but she is not entirely clear.
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I wish to thank Paul Lewis and Gregor Zwirn for their insightful comments on earlier drafts of this paper.
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Fleetwood, S. Austrian economics and the analysis of labor markets. Rev Austrian Econ 20, 247–267 (2007). https://doi.org/10.1007/s11138-006-0009-6
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DOI: https://doi.org/10.1007/s11138-006-0009-6