by Tom Standage
Why do companies exist?
The idea of the price mechanism is central to the study of economics. Market prices convey information about what people want to buy and what others want to sell. Adam Smith used the metaphor of the “invisible hand” to describe how the economy is governed by price signals. In 1937 a paper published by Ronald Coase, a British economist, pointed out a flaw in this view: it did not explain what goes on within firms. When employees switch from one division to another, for instance, they do not do so in response to higher wages, but because they are ordered to. The question posed by Coase was a profound, if awkward, one for economics. Why do firms exist?
His answer was that firms are a response to the high cost of using markets. It is often cheaper to direct tasks by fiat than to negotiate and enforce separate contracts for every transaction. Such “exchange costs” are low in markets for uniform goods, wrote Coase, but are high in other instances. But his answer only raised further tricky questions. For instance, if the reason firms exist is to reduce transaction costs, why have market transactions at all?
To address such questions, economists have developed a theory of contracts, which makes a distinction between spot transactions and business dealings that require longer-term co-operation. Most transactions take place in spot markets. They are well suited to simple, low-value transactions, such as buying a newspaper or taking a taxi. And they are governed by market forces, as lots of buyers bargain over the price of similar goods. Things become trickier for goods or services that are not standardised. Parties to a transaction are then required to make commitments to each other that are costly to reverse. Take a property lease. A business that is evicted from its premises could not quickly find something similar. Equally, if a tenant suddenly quit, the landlord would be stuck. Each could threaten the other in a bid for a better rent. A long-term contract that specifies the rent, tenure and so on protects both parties from the opportunism of the other. For many business arrangements, it is difficult to set down all that is required of each party in all circumstances. This is where an “incomplete” contract has advantages. A marriage contract is of this kind. So is an employment contract. It has a few formal terms: job title, working hours, initial pay, and so on, but many of the most important duties are not written down. It cannot be enforced by the courts because its obligations are implicit. It stays in force mostly because its breakdown would hurt both parties. Because market forces are softened in such a contract, an alternative form of governance is required, which is the firm.
Coase argued that the degree to which the firm stands in for the market will vary with changing circumstances. Eighty years on, the boundary between the two might appear to be dissolving altogether. The share of self-employed contractors in the labour force has risen. The “gig economy”, exemplified by Uber drivers, is mushrooming. Yet firms are not withering away, nor are they likely to. Prior to Uber, taxi-drivers in most cities were already self-employed. Spot-like job contracts are becoming more common, but their flexibility comes at a cost. Workers have little incentive to invest in firm-specific skills, so productivity suffers. The supply chains for complex goods, such as an iPhone or an Airbus A380 superjumbo, rely on long-term contracts between firms that are “incomplete”. Coase was the first to spot an enduring truth: economies need both the benign dictatorship of the firm and the invisible hand of the market.
Millennial Americans are just as loyal to their employers as previous generations
It is often claimed that millennials (people born between 1982 and 1999) are fickle employees, changing jobs frequently and reluctant to commit themselves to a single employer for the long term.
Millennials are indeed more likely to switch jobs than their older colleagues. But that is more a result of how old they are than of the era they were born in: young people at the start of their working lives have always job-hopped more than older people who are more established in their careers. In America at least, average job tenures have barely changed in recent decades.
Data from America’s Bureau of Labour Statistics show that workers aged 25 and over now spend a median of 5.1 years with their employers, slightly more than in 1983 (see chart). Job tenure has declined for the lower end of that age group, but only slightly. Men between the ages of 25 and 34 now spend a median of 2.9 years with each employer, down from 3.2 years in 1983.
Labour immobility
Sources: Bureau of Labour Statistics; OECD
It is middle-aged men whose relationship with their employers has changed most dramatically. Partly because of a collapse in the number of semi-skilled jobs and the decline of labour unions, the median job tenure for men aged 45–54 in America has fallen from 12.8 years in 1983 to 8.4. That decline has been offset by women staying longer in their jobs and higher retirement ages, which is why the overall numbers have barely changed.
One place where millennials probably are switching jobs more often is western Europe. Data from the OECD, a club of mostly rich countries, show that since 1992 in each of France, Germany, Italy and Spain, the average job tenure for workers has increased overall. But it has shortened for younger workers. However, it is far from clear that this is by the young workers’ choice. Labour-market restrictions in Europe have forced a growing share of workers into temporary “gigs”. Over half of workers aged 15 to 24 in those four countries are on fixed-term contracts.
Why old-fashioned manufacturing jobs aren’t coming back
Manufacturing has a powerful hold over politicians and policymakers in the rich world. Donald Trump, among others, wants to bring the job of making things back to America from the low-cost countries to which it has emigrated. Manufacturing is worthy of political attention. Manufacturers are more likely to be exporters than other types of businesses, and exporters tend to be more productive than non-exporting firms. But when politicians talk about manufacturing it tends to be in terms of the production line: assembling parts into cars, washing machines or aircraft, which adds less value than it once did. It is the processes that accompany assembly – design, supply-chain management, servicing – that today add the most value. Manufacturing, and jobs in manufacturing, have changed in ways that mean that the old jobs will never return to the rich world.
Because of these changes, working out how many people are employed in manufacturing is tricky. Between the 1840s and the 1960s in Britain, manufacturing’s share of employment hovered at around a third; today, official data show around one worker in ten is involved in manufacturing. In the late 1940s in America, it accounted for one in three non-farm jobs. Today’s figure is just one in 11. But the way official figures are compiled means that manufacturing’s decline has been exaggerated. Some processes that used to be tightly held together are now strung out across the world. Manufacturing companies increasingly outsource tasks such as marketing or accounting. That may mean that manufacturers employ fewer people, even if the number of people actually working on the assembly line is unchanged. As a result, the decline in manufacturing jobs looks bigger than it really is.
These trends seem set to continue. Many aspects of R&D, product design and technical testing are now looked after by separate companies, along with lots of accounting, logistics, cleaning, personnel management and IT services. A study published in 2015 by the Brookings Institution, an American think-tank, reckoned that the 11.5m American jobs counted as manufacturing employment in 2010 were outnumbered almost two to one by jobs in manufacturing-related services: added, the total would be 32.9m. In future, service providers will penetrate even deeper into manufacturers’ turf, even as manufacturers come to see themselves increasingly as sellers of services. Industrial machines and the goods they turn out are increasingly packed with internet-connected sensors. Manufacturers are thus able to gather data on how their machines perform out in the world. Intimacy with the product and the data they produce helps them to turn goods into services.
This should be cheering to politicians on the lookout for manufacturing jobs. Well-paid tasks
should increase in number as services related to manufacturing grow. In some fields innovation and production are increasingly interwoven. Capital-intensive high-tech manufacturing is often better done by working with the designers and engineers who thought up the products. As that suggests, though, the potential for new jobs in manufacturing is not quite the boon politicians would like. Advanced manufacturing provides good jobs but they demand skill and adaptability. Improved education to ensure that engineers and techies are in good supply is required, as is vocational training, along the lines that Germany uses to support schemes to update the skills of current and former workers. Simply threatening companies that seek to move jobs overseas, as Mr Trump has done, will not help. Using tariffs to disrupt the complex cross-border supply chains on which manufacturers rely, another of his favoured approaches, damages the sectors he purports to champion. Clamping down on migrants who have skills that manufacturers cannot find at home will do further harm. And policies that favour production-line workers over investment in automation will end up making domestic industry less competitive. That is why it is important to recognise what a manufacturing job looks like these days.
Why India scrapped its two biggest bank notes
In a surprise televised address on the evening of November 8th 2016, Narendra Modi, the prime minister of India, delivered a bombshell: most of the money in Indians’ wallets would cease to be accepted in shops at midnight. The two most valuable notes, of 500 and 1,000 rupees ($7.50 and $15), were to be “demonetised” – in other words, taken out of circulation. Indians were given until the end of the year to visit banks to either exchange their cash against newly printed notes or deposit it in their accounts. After that, the old notes would become mere pieces of printed paper with no value at all. The notes being nixed represented 86% of all cash in circulation. Citizens and businesses faced weeks of disruption as the new currency was deployed. So why did the Indian government do it?
The government justified the move in part due to concerns over a proliferation of counterfeit notes (not unusually, it pointed the finger at neighbouring Pakistan), which it claimed was fuelling the drug trade and funding terrorism. But the main target was “black money”, cash from undeclared sources which sits outside the financial system. Perhaps 20% of India’s economy is informal. Some of that is poor farmers, who are largely exempt from tax anyway. But the rich are perceived to be sitting on a vast illicit hoard. Though a large part of that sits in bank accounts in predictable foreign jurisdictions, a chunk of it was held in high-value Indian notes. Purchases of gold or high-end real estate have long been made at least in part with bundles (or suitcases) of illicit cash.
The impact of the move was that everyone had to disclose all their cash or face losing it. Those with a few bundles of 500-rupee notes clearly weren’t the target: the government said tax authorities would not be informed of deposits of less than 250,000 rupees. But its sudden announcement put those who had amassed large piles of notes in a bind. An amnesty programme for “black money” had just come to an end, so the tax man was unlikely to look upon undeclared cash piles with sympathy. As they queued up to exchange their notes, the comfort for the poor was that the greedy, tax-dodging rich would suffer more, as they struggled to launder their suitcases full of cash by year-end.
That was the theory, anyway. But a report from the central bank, the Reserve Bank of India (RBI), in August 2017 revealed that of the 15.4trn rupees ($241bn) of banknotes withdrawn, 15.3trn rupees, or 99% of them, had been accounted for. Either the “black money” never existed or, more likely, the hoarders found ways to make it legitimate. Defenders of the demonetisation scheme insisted that it was merely one plank of a wider fight against informal economic activity and corruption. Officials had once privately salivated in hope that maybe a quarter of the money, if not more, would remain in the shadows. Social-media rumours had suggested that this could finance a one-off dividend to be dished out to all Indians. But with 99% of the money accounted for, the dividend would have amounted to only 100 rupees per person. The whole episode dented the RBI’s reputation for independence and competence. It also hit national pride: the demonetisation scheme constrained economic growth, thus handing back to China India’s coveted crown of being the world’s fastest-growing large economy.
The roots of the gender pay gap lie in childhood
It is well known that parenthood tends to hurt women’s careers but not men’s. Numerous studies have shown that having children lowers women’s lifetime earnings, an outcome known as the “child penalty”. A wide range of individual decisions account for this effect. Some women work fewer hours, or not at all, when their children are young. Others switch to jobs that are more family-friendly but lower-paid. There is substantial variation in the size of the earnings decline, ranging from zero all the way up to 100% (in the case of women who stop working altogether).
Yet there is an intriguing factor that helps to predict whether the reduction in a woman’s income due to having children is likely to be large or small: the choices made during her childhood by her own mother. A study by Henrik Kleven from Princeton University, Camille Landais from the London School of Economics and Jakob Sogaard from the Danish Ministry of Taxation analysed administrative data from Denmark, which covers the country’s entire population for generations, to quantify the child penalty, defined as the amount by which women’s earnings fell behind those of men after having children. From 1980 to 2013, the long-run child penalty was found to be about 20%. Because the overall pay gap between men and women shrank during that period, by 2013 the child penalty accounted for almost the entire remaining difference in the sexes’ incomes. Before becoming mothers, women’s compensation more or less keeps pace with men’s. Only once they have children do their economic trajectories begin to lag.
Like mother, like daughter
April–May 2015
Source: “Children and Gender Inequality: Evidence from Denmark” by H. Kleven, C. Landais and J. Søgaard
As the researchers explored potential causes for this phenomenon, they noticed that women who grew up in families in which the mother worked a lot relative to the father tended to suffer relatively smaller child penalties. Conversely, those who grew up with stay-at-home mothers were more likely to scale back their careers. This suggests that women are heavily influenced by the examples set by their own mothers when deciding how to balance work and family. Tellingly, the working patterns of a woman’s parents-in-law made no difference to her child penalty, suggesting that women’s decisions are not influenced by preferences that their partners may have formed during childhood. All of which is a lesson to those mothers who want their daughters to bridge the gender pay gap. Their wishes are more likely to come true if they lead by example when their girls are young.
Department of white coats: science, health and the environment
Can young blood really rejuvenate the old?
The vampire jokes write themselves. In the past few years a steady trickle of scientific papers has suggested something straight out of an airport horror novel: that the blood of young animals, infused into the old, has rejuvenating effects. Scientists are excited enough that at least two clinical trials are being undertaken in humans. But is it true? And if it is, how does it work?
The answer to the first question seems to be a qualified yes, at least in animals. The rejuvenating effects of young blood are seen when lab mice are joined together in a rather gruesome procedure called parabiosis. That involves making cuts in the skin of two animals, then suturing them together at the site of the wound. As the cuts heal, the pair’s blood vessels grow together and merge. The result is two animals that share a circulatory system, with both hearts pumping both sets of blood around both bodies. Doing this with an old mouse and a young mouse has some spectacular effects. As with humans, old mice have a harder time than younger ones healing from injuries. But link an old mouse to a young one and it becomes able to repair muscle injuries nearly as well as its younger counterpart
. Similar benefits are seen in liver cells and the nervous system. And it works in reverse, too: old blood can have a decrepifying effect on the young.
Exactly how this all works is much less clear. The best guess is that some combination of hormones, signalling factors and other ingredients in the young blood affects the behaviour of stem cells in the old animal. Like everything else, stem cells – which are vital for healing wounds and for general maintenance – begin to fail with age. But that process seems to be reversible, with young blood restoring the cells’ ability to proliferate and mend broken tissue. Another theory is that the old animal benefits from access to the organs (kidneys, liver and so on) of its young companion. It may be that both explanations are correct: experiments in which animals are given quick transfusions, rather than being stitched together for weeks, still show benefits, though not as many as with full-on parabiosis.
That uncertainty has not stopped people jumping into trials with humans. One company, called Alkahest, has recruited 18 people with Alzheimer’s disease. It plans to give them regular blood transfusions from young donors. The trial is primarily designed to prove that the treatment is safe. But because blood transfusions are already routine, Alkahest hopes that will be easy, and plans to look for mental benefits, too. Another company, Ambrosia, has raised eyebrows by charging people $8,000 to take part in its clinical trial, which will see people over 35 receiving blood from under-25s. It is far from clear whether any of this will work (anti-ageing research is dogged by cycles of hype and disappointment). And if it does, there is already a perennial shortage of donated blood, and it is needed for surgery and medical emergencies more than for speculative anti-ageing therapies. The best-case scenario is that blood compounds will indeed turn out to be responsible for the salutary effects; that scientists will be able to identify them; and that biochemists will work out a way to mass-produce them as drugs. Even then, the result would not necessarily be a life-extension potion. The hope instead is to extend “healthspan”, keeping elderly people hale and hearty for longer. Not the immortality of vampires, then, but still an outcome worth pursuing.