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c) Transaction costs
1.a) Discuss the main differences between historical institutionalism, sociological institutionalism and rational choice institutionalism. b) Why does institutionalist theory criticize the neoclassical assumptions on economic behavior of individuals? c) How has institutionalism revised these assumptions? Provide an answer using the course literature.
2. Using the course literature and class discussions, present a) the contribution of Marxism to political economy and b) the relevance of Marxism in modern political economy after the fall of state socialism.
3. How do voice and exit operate in a) a coordinated and b) a liberal market economy? Provide a brief theoretical discussion on the likelihood of exit and voice of producers in their relationship with suppliers in conditions of c) coordinated market economies and d) liberal market economies.
4. Using evidence on tea workers’ working condition from the documentary “The bitter taste of tea”, evaluate the likelihood of a) exit and b) voice strategies of these workers in the presented empirical conditions. Reflect the possible c) transaction costs and the d) relevance of loyalty in your answer.
5. Research proposal: to operationalize the studied theoretical frameworks in political economy and apply them to empirical research questions, you are invited to design a brief research proposal to investigate the following question: What is the impact of Latvia’s established welfare system on the mode of institutional change in the healthcare sector? Provide empirical evidence as background information.
a) The main differences between historical, rational choice and sociological institutionalism
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b) North argues against the neoclassical assumptions on economic behavior of individuals because they cannot explain agents’ motivation and deciphering the environment [xvi] (e.g. behaviour is not always wealth maximizing[xvii] or there is substantive, procedural or strategic uncertainty[xviii]). Behavioral assumptions are incomplete without understanding institutions (institutions matter!), even if institutions are not always efficient.[xix] “Institutions alter transaction costs and lead to ideas, ideologies etc. that shape rational behavior”.[xx]
c) “Revised behavioral assumptions: multiple equilibria possible; uncertainty exists even in repetitive situations; endogenous preferences (rational choice institutionalism); subjective and incomplete information[xxi] limits actors’ choices (initially incorrect behavior and transactions cannot be corrected through the informational feedback); uncertainty due to competition (confusing signals); actors engaging in more than rational non-cooperative behavior (against self-interest maximization); deciphering the environment: reducing complexity through understanding institutions”.[xxii]
a) The contribution of Marxism to political economy (PE)
“Karl Marx’s contribution to political economy was in laying bare the exploitative and contradictory dynamics of capitalism. His ideology was critical for simulating hypotheses, theories and policy programs”.[xxiii] Marxism gives two critiques of earlier PE theories: 1) capitalism as a historical construct; 2) analytical focus on the embeddedness of economic relations in social relations[xxiv]. Marxism “gives comprehensive historical account of capitalism, its rise, operation and fall; division of labor: extension of the classical political economy (‘who does what’, ‘who gets what’, ‘who owns what’)”[xxv]. Marx wanted not only criticize capitalism, but also show how capitalism works and drafted the form of a new societal order after capitalism.[xxvi]
Furthermore, Marxism “stresses on the economic factor in society and Marx’s analysis of the class structure in class conflict have had an enormous influence”1. According to Marx, “the capitalism is founded upon a class division between proletariat, or working class, on the one hand, and bourgeoisies, or capitalist class, on the other.”[xxvii] The central achievement of Marx’s work in political economy was an account of the “laws of motion” of capitalism and how these propelled capitalist development along a trajectory towards a particular kind of destination.”[xxviii]
b) The relevance of Marxism in modern political economy after the fall of state socialism
Burawoy argues for Marxism after Communism - a renewed critique of Marxism after collapse of the Soviet Union. To his mind establishing of capitalism in post-socialist countries has produced inequalities and injustices and denies human potential[xxix]. Marxism was abandoned after collapse of the Soviet Union in 1991 but looking at last two decades we can see that “the majority is not better off than they were before and many much worse off”. Neither markets nor democracy delivered their promise”.[xxx] To Burawoy’s mind the shock therapy was wrong for replacement of communism by capitalism (especially because of “destroying allocative efficiency without creating institutions needed for dynamic efficiency”)[xxxi]. However, in conclusion Burawoy argues that “today Marxist intellectuals have to work much harder to convince others that “they have a world to win” not just after capitalism, but after communism too”. [xxxii] Finally, in his point of view “Marxism after Communism can no longer be simply national or regional in character but reaches for global dimensions, and is especially difficult to construct.”[xxxiii]
In my response I will combine knowledge from “Varieties of Capitalism” written by Hall and Soskice and from “Exit, Voice and Loyalty” written by Hirschman.
a) Exit and voice in coordinated market economy (Germany, Japan)
Hall and Soskice point out that Germany and Japan are classified as coordinated market economies (CMEs), but US - as a liberal market economy.[xxxiv] In “the German industrial relations system wages are set through industry-level bargains between trade unions and employer associations”.[xxxv] “This system makes it difficult to poach workers”.[xxxvi] Therefore voice strategy overplays exit. Authors also conclude that “Japanese firms have developed company unions providing workforce with a voice in the affairs of the firm”.[xxxvii] “Large companies in Japan find it easier to secure employee loyalty and company-specific skills because they provide many of the social benefits”.[xxxviii]
b) Exit and voice in liberal market economy (US)
Hall and Soskice emphasize that in US “firms are under no obligation to establish representative bodies for employees such as work councils; and trade unions are generally less powerful than in CMEs”. [xxxix] “These markets make it relatively easy for firms to fire and hire labor”. [xl] Therefore in US in labor relationship exit plays more important role than voice.
c) Exit and voice in producers-suppliers relationship in coordinated market economy (Japan)
In my response I have used paper “ Comparative Supplier Relations in the U.S. and Japanese Auto Industries: An Exit/Voice Approach” written by Susan Helper. Author concludes that a voice system of supplier relations is both effect and cause of coordinated market economy structure. To her mind “the slower advent of mass production promoted the development of voice-based relationships in Japan”.[xli] It means an “infrastructure of capable suppliers which smaller automakers can draw on”.[xlii] Voice-based relationships are the cause of two important factors in Japan: “governance by trust” and balance between cooperation and exploitation.[xliii]
d) Exit and voice in producers-suppliers relationship in liberal market economy (US)
In Helper’s point of view, “for US automakers, the combination of fast growth and industry consolidation gave opportunity to use voice within their organizations while moving toward exit relationships with outside suppliers”.[xliv] Afterwards she sum up that “the greater final product market power, faster growth, and better access to capital of US firms made possible the use of exit-based supplier relations”.[xlv] For example, Ford and GM were able to seek supplier relationships that left them in favorable bargaining position even at some cost to efficiency[xlvi]. However, to author’s mind “domestic automakers now are trying to switch back to a more voice-based system – a difficult task given the exit/vertical integration system’s legacy of mistrust, complacent automaker divisions, and weak independent supplier firms”.[xlvii]
Hirshman’s model can be applied for employees who are dissatisfied with a company they work for. “Exit is the decision to quit a job when an employee is dissatisfied; voice is the ability: to articulate grievances through a trade union”.[xlviii] Hirschman argues that exit should be achieved only after voice has failed (therefore many people participate in demonstrations) and once worker have exited, he/she have lost the opportunity to use voice[xlix].
In the case of countries in documentary (Kenya, India, Sri Lanka and Bangladesh) “unemployment rates are high or the available job alternatives are unattractive, therefore workers are disinclined to choose exit.”[l] Employees cannot exit because if they leave company, it is hard to get another work or voice because if employees act against company, they will be fired. Also Dowding et al. have come to conclusion that exit is very costly.[li]
As Elizabeth Hoffmann has pointed out in her research the tea industry “has such significant exit costs that the workers can not leave.”[lii] As was indicated in the documentary if workers complain, managers tell them to quit. For example, in Bangladesh workers have family of approximately ten poeple and only one member of family works, they live in poverty and have lack of food, therefore they cannot exit because they need to work.
In the case of tea industry we use concept of “collective voice”2 – “actions where the intention of the individual in acting is to contribute to the desired effect through that action.”[liii] “Collective voice” can be subject to collective action problem (Olson 1971)[liv]. “Barry (1974) criticizes Hirshman for not taking the problem of collective action seriously enough in his ‘cost-benefit’ analysis of the motives for exit and voice”.[lv]
Finlay’s or Unilever’s “workers are less likely to anticipate using voice to resolve workplace problems”.[lvi] In the class we have discussed that nowadays it is not so costly to express voice, for example, workers can write e-mail. I disagree with this opinion because to my mind workers in these case may not have excess to internet or have low literacy. Moreover, in the case we observe voice involves not only material or moral costs but can be also punished.
The movie is of year 2008 but in 2009 the changes have taken place. There are tea plantations lead by Unilever (Lipton) also in Pakistan where workers expressed their voice and it was taken into account! In Pakistan workers had the same problems as in other countries we have seen in the documentary: temporary contracts instead of permanent employment, low daily wage (less than three dollars a day), no social security, medical benefits or pensions3 even in the case when the worker has worked for many decades – some of workers have worked even for 30 years. Temporary workers receive a wage that is 1/3 of the permanent workers’ wage. Moreover, workers are hired on 3 months contract basis, afterwards fired and then hired again. This is similar to case in Poland that we have discussed in the class where multinational companies are hiring on permanent contracts and paying less but if workers work more than three months, he/she should be hired on permanent terms, therefore workers are hired and fired by multinational company all the time.
1 From other side, some “Marxian concepts are not applicable to today’s transnational capitalism because of growth of foreign direct investments, internationalizing civil society including labor movements. In the 21st century the class-based society is beyond national borders. Because of global labor standards and NGOs activities, divergent interests within the capitalists class and class consciousness not matter so much”. (W1 lecture, slide nr. 25) Moreover, nowadays concept “working class” has become very blurry. Also Marx has not defined concept “class” clearly.
2 However it is sometimes difficult to distinguish individual and collective voice.
3 As was pointed out in the case of India, people who have been retired for 15 years still haven’t got the money. “They probably never will”, told one of the workers. But in the case of accident with the worker in Sri Lanka widow got pension only after addressing this problem by journalists.
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