Freedom in Firms

As I have mentioned before, last week Pete and I went to a conference on the firm, which was organized by Atlas Senior Fellow William Dennis and sponsored by Dick Cornuelle. I must give a big thank you to both of them for making this event possible; we had a great time discussing the economics and sociology of the business organization.

One of the themes that came up again and again was freedom in firms. This was, for instance, central to David Ciepley’s Critical Review paper “Authority in the Firm”, which was discussed on the first day. Ciepley argues that economics in the 20th c. poorly addressed the issue of production in firms because it could not address well the issue of authority in a planned order. In other words, one of the big problems of contemporary economics is that firms restrain freedom and this issue has been theorized away.

As Pete mentioned, Ciepley’s paper tends to confuse authority and authoritarianism. While authoritarianism implies a reduction in freedom, authority doesn’t. Isaiah Berlin made the distinction between positive and negative liberty in his famous lecture delivered at Oxford University in 1958.

As Berlin defined it, negative liberty refers to freedom from coercion. In this sense, liberty is a political concept, which can only be understood with regard to the issue of the use of violence among men. In other words, an individual is free if he can do what he wants to do with what he owns without anyone stopping him from doing so (i.e. using violence or the threat of it against him). As Herbert Spencer explained, this means that everyone enjoying negative liberty also has a duty to respect others doing the same (the law of equal freedom). For those interested in a non-utilitarian version of it, see one of my favorite books by Murray Rothbard’s, The Ethics of Liberty.

Positive liberty, alternatively, is defined as the ability to act to fulfill one’s own potential. In this sense, any restriction on one’s capacity to achieve goals is a restriction on freedom. It defers from negative liberty in the sense that it does not refer to the issue of the use of violence among men. The fact that I can’t fly to Europe flapping my arms like a bird is a restriction of my liberty in the positive sense. If somehow men could be endowed with wings, our liberty would increase. It is easy to see why Berlin had strong reservations about this view of liberty, as it could be used to provide more power to the state in order to “increase” freedom for all. One major issue is that positive liberty is not compatible with the law of equal freedom: more positive liberty for some doesn’t mean more positive liberty for all.  This is why liberty as we know and use it can only be understood in the negative sense.

Liberty is a political concept referring to the use of coercion. This gets us back to the firm. Since economists understand firms as nexuses of contracts, employees contract with the management team, who represent the equity owners, over the use of their labor services. Labor contracts are voluntary transactions within specified (by contract and/or legislation) boundaries. Employees decide to participate in the managerial plan, which is to employ labor services in order to achieve certain production processes with the aim of selling the output. The key word here is “services”. Firms only employ the services of their labor force; they don’t own their employees.

Therefore one may believe that firms imply a reduction in liberty (if employees’ choice sets are reduced) if one understands liberty in the positive sense. However, in the true sense of the notion of liberty (the negative one), there is no change. In a free market, there is no problem with freedom in firms. Employees voluntarily submit to some authority within the limits of negative freedom (it is an exchange of money against labor services) and their (true) freedom is not affected. (Even using the false concept of positive liberty, it is difficult to say that an employee’s freedom has been reduced. Indeed, contract restrictions are compensated by the increase in purchasing power obtained from salaries and wages.)

While Pete, Ivan Pongracic, and I were surprised that this debate even took place, it didn’t seem to bother the rest of the crowd. This goes to show that the idea of labor relations as alienating employees is still alive and well – especially among US academics.

Comments

[Ott Lake Rambler]

I don't know if the positive and negative liberty distinctions really gets at the authority/authoritarianism issue. We can go back to Bakunin who made a fairly clear distinction. Authority is fully compatible with freedom (if you will). It is the voluntary recognition that another has superior knowledge compared to you. (I defer to the authority of the shoemaker for the production of my shoes, the authority of the professor for the insights on the economy, etc.) Authoritarianism, on the other hand, is an issue of force and coercion, perhaps even misplaced authority -- somebody claiming to have superior knowledge and ability, and pummelling everyone in his way. I would have hoped that the conference participants would have perhaps shown how the modern evolution of the hierarchical firm was founded in part on this "misplaced authority," i.e., the erroneous belief that the heirarchy actually *does* have superior knowledge . That is, I would have expected the discussion to be not so much a debate over liberty per se within the modern firm, but with the knowledge problem within the structure of the firm. Management theory seemed to merely assumed the hierarchy possessed the appropriate knowledge to back their authority. Austrian theory suggests, instead, that they hold no such authority, that the authority has been theoretically misplaced and misidentified. Wouldn't that lead to a more productive discussion than negative liberty and voluntary contracting?

[Rafe Champion]

The mythology of exploited workers is alive and well in Australia also. A hundred years ago a centralised industrial relations and minimum wage system was put in place and it has only recently come under sustained pressure for reform. This is going to be a very frustrating process for reformers! For background on our IR system
http://badanalysis.com/catallaxy/?p=1489
For a critique on some labor mythology
http://badanalysis.com/catallaxy/?p=1484

[James Fletcher Baxter]

Consider:
The missing element in every human 'solution' is
an accurate definition of the creature.

The way we define 'human' determines our view
of self, others, relationships, institutions, life, and
future. Important? Only the Creator who made us
in His own image is qualified to define us accurately.
Choose wisely...there are results.

Many problems in human experience are the result of
false and inaccurate definitions of humankind premised
in man-made religions and humanistic philosophies.

Human is earth's Choicemaker. Psalm 25:12 He is by
nature and nature's God a creature of Choice - and of
Criteria. Psalm 119:30,173 His unique and definitive
characteristic is, and of Right ought to be, the natural
foundation of his environments, institutions, and re-
spectful relations to his fellow-man. Thus, he is orien-
ted to a Freedom whose roots are in the Order of the
universe. Selah

- from The HUMAN PARADIGM