Saturday, 27 November 2010

I'll see your utopia and raise you a dystopia

Imperator Fish bashes on the Objectivists. A post at NotPC argued that the Pike River disaster would have been avoided had the mine been open cast rather than shaft; DoC regulations may have prevented the company from using open cast mining.

For folks abroad - New Zealand's South Island continues to be disaster central. Twenty-nine miners died this week in a coal mine explosion on the West Coast. For context, the sinking of the Edmund Fitzgerald killed 29 men thirty-five years ago, in a country ten times the size of New Zealand, and Canadians still sing about it.

I have no clue whether DoC regulations were the binding constraint here - the mine was under some reasonably large mountains. I'd be pretty reluctant to blame the regs absent pretty strong evidence that the mining company had been pushing for open cast. And even then, I'd still be a more than a bit reluctant to pin it on DoC. Suppose it had been a private land owner who only allowed mine access under similar restrictive conditions, and the mine owner agreed. Would we blame the land owner for putting restrictions on use of his land? I'd hope not.

But the bit that bugs me in Imperator's post is here:
Let's also think for a minute abut the logic of the Objectivist arguments. They regard government regulation as evil. So in the Objectivist utopia we would have little or no health and safety legislation. Mines (closed or open) would be deathtraps, because mine companies would have no incentive to run safe operations.
If you want to mock Objectivist utopias for being unrealistic, you oughta do better than posit dystopias as counterargument. In the absence of health and safety legislation, the profit-maximizing firm will provide safety and other amenities up to the point where workers would sooner have more salary than more amenities. - that's rather likely more than zero provision. This is kinda Econ 101.

Suppose you, the rapacious Dickensian employer, could put in a safety improvement that will cost $50. You pay each of your 100 workers $10 per year. The workers value the improvement at $1 (per worker). The workers tell you that they'd really like the safety improvement. You tell them that it's expensive and they'd have to take a pay cut: you'll pay them each $9.25 per year if you put in the safety improvement. They say fine. You save $75 in salaries, pay $50 for the improvement. Your profits go up by $25. The workers are happier too - they would have been willing to pay up to $1 each to have the improvement and they've only had to pay $0.75.

Just look around wherever you work and count all the things you're provided as part of your standard employment bundle that aren't mandated by law. Is there artwork anywhere in the building? Is the paint on the walls a pleasing colour? Are the chairs more comfortable than they could be? Is the coffee or tea better than the minimum required? Is the climate control better than the minimum permitted? Is the landscaping pleasant? Employers provide a whole pile of amenities - not because they're required to, but because it's cheaper to provide those amenities than to provide the salary compensation that would be needed in the absence of those amenities.

What's required for this not to hold? It'll break if:
  • Firms aren't profit-maximizing, either because owners like injuring employees or because they're too dumb to recognize a profit opportunity;
  • Firms are bound by other legal constraints. Suppose a worker at the minimum wage would be willing to trade salary for workplace amenities (safety or otherwise). He's barred from making that trade, so the compensation bundle has a suboptimal mix of salary versus amenities.
You could make other arguments about workers being too risk preferring, or having too high a discount rate, or having some other preference that you don't like that leads them to prefer cash relative to safety. In that case, the regs have paternalistic benefits. I'm not much in favour of those arguments, but folks can make them. I have a really really hard time believing that we'd get to zero provision of safety.

Even if you want to posit the worst possible conditions for workers - say a local monopsonistic employer, no union, no exit from the town so you either work in the mine or starve - the employer will still have incentive to provide the most efficient (small) compensation bundle to workers. And if workers put value on safety such that it's cheaper for the employer to provide a bit more safety than to provide a bit of pay, he'll provide safety. Even if workers put zero value on safety, simple concern about mine shut-downs would motivate provision of some safety measures.

Yes, there would probably be less provision of health and safety in the absence of regulations mandating a minimum amount of health and safety. But there wouldn't be zero. I don't know why we need posit dystopias against utopias. Can't we all just have reality-based arguments?


  1. Hey Eric,

    Just thinking casually about this, but I was wondering why, as you've described it, the cost of paying for work safety was borne by labour factors of production. Wouldn't the allocation of safety costs by borne by capital and labour factors proportional to their elasticity of subsitution?

    If its very difficult to substitute labour in production, then costs like safety would be bourne by capital. Likewise, if labour is easily subsituted in production then it would bear the costs of safety.

    Thinking of a specific example of a low substituable labour force, like medical doctors, hospitals (capital) bears the cost of making the workplace safe: its not compensated by labour foregoing remuneration as you suggest.

  2. Overall elasticities will determine the overall compensation bundle. The components of that bundle will depend on what's most efficient to provide. No?

  3. Humm... I don't know what you mean by "most efficient to provide" in this context? Do you mean the components of that bundle will depend on who can provide them the cheapest?

    ps(Like your "rules" post by Penelope Truck :) )

  4. Suppose there's zero safety provided. Salaries are $60K per year. The firm discovers that workers value safety by more than it costs the firm to provide it. The worker's total compensation has to still be worth at least $60K to the worker, but now can cost the employer less than $60K to provide. So it's more efficient to provide the bundle that includes safety; the most efficient bundle will add safety until the worker values the marginal dollar spent on safety as much as the marginal dollar spent on cash salary.