Book reviews
German-U.S. labor economics
Economic efficiency
Labor, Business and Change in Germany and the United States. By Kristen S. Wever, ed. Kalamazoo, MI, W.E. Upjohn Institute for Employment Research, 2001, 177 pp., softcover.
This collection of articles explores the feasibility of mutual learning ‘on the ground’ between two nations competing in a global market. It is the result of a 2-year German-American project.
The lead article by Batt and Darbishire on telecommunications furnishes an excellent lesson. They argue, like new institutionalists, that failure to place economics within a socio-political setting is a barrier to cross-national learning, thus giving overdue consideration for values other than those of the market. For example, they demonstrate that, in order to protect jobs, German work councils’ participation in industry decisions slowed adaptation to the point of never fully implementing new telecommunications technology. They contrast this to the U.S. abandonment of the implicit labor contract for which AT&T had been the prototype. Consequently, in lieu of cost-cutting technology, German market strategy focused on revenue-enhancing, high-end products.
In both countries, technological evolution was challenging
regulated monopolies. In Germany, telecommunications was an official state
monopoly. Prior to its breakup, AT&T had functioned as a quasi-official
monopoly that subsidized local phone service through its higher charges to
business and long-distance customers. No less a market decision, local rates
depended on political goodwill. Innovations allowed MCI and others to sell
profitably, in the spread between AT&T’s long-distance and local service,
technologically advancing long-distance service. The U.S. setting required legal
challenges to AT&T’s monopoly, which were successful.
The new era of competition following the AT&T breakup had implications for organized labor. The authors contrast labor weakness as a social institution in the United States with the strong position of the aforementioned German worker representatives by pointing out the willingness of the Communications Workers of America (CWA) to bargain on the effects only of management decisions.
Consistently noting the welfare costs of downsizing in their analysis, the authors assess the cost to post-breakup AT&T, in the loss of skilled workers to the new industry and the lowered cooperation of those who remained. The losses, consequently, involved substantial investment in hiring and retraining.
In another article, Finegold and Keltner provide a full inventory of training and educational resources for management development in the United States and Germany. They do not address the corporatist structure of German institutional constraints. In attributing rigidity to the State, for example, they might have discovered a more nuanced story in the fate of the adaptive comprehensive university, the Gesamthochschulen. The university establishment opposed this State response to changing educational needs.
Casper’s substantive article describes in telling detail the competitively driven response of the U.S. and German automobile manufacturers to the challenge of Japanese just-in-time (JIT) inventory models. The problem was one of apportioning the high-cost risks of defective deliveries. Summaries cannot do justice to the wealth of information provided by Casper. German assemblers faced a law intended to protect the weaker small-business suppliers. They needed creative legal solutions. American manufacturers faced a lack of qualified plant employees whose counterparts in Japan and Germany could inspect deliveries. The solution forced them to cooperate in developing a cross- industry quality control statistical standard, which they found in a Defense Department model. In each case, the institutions that served as instruments of adaptation were modified by their application to an economic challenge.
The chapter by the editor of the volume, Kirsten Wever, together with Fichter and Turner, sums up implications for industrial relations in the two countries. Competitive disadvantages of a higher average living standard on the German "high road" are contrasted to competitive advantages resulting from a more widely dispersed income distribution on the American "low road." They foresee trouble along the high road from the liberalizing effects of the EU on the German economy, while they hope for a more equitable solution in the United States from a strengthening union movement. The Bureau of Labor Statistics 2001 report on union membership, however, gainsays their optimism.
The collection breaks new ground in its integration of indepth research with masterly theoretical argument. The reader has the impression of being plunged into the midst of change while being guided by a firm hand.
—Solidelle Fortier Wasser
New York region,
Bureau of Labor Statistics
By Richard O. Zerbe, Jr. Northampton, MA, Edward Elgar Publishing, Inc., 2001, 328 pp. $95/hardcover, $35/paperback.Economic Efficiency in Law and Economics.
Economic Efficiency in Law and Economics explains and defends Zerbe’s improved version of benefit-cost analysis, which is used to assess the anticipated economic effects of a change, such as new legislation, a precedent-breaking court ruling, or the breakup of a monopoly. In both previous models and in Zerbe’s new "KHZ analysis," predicted gains and losses to parties are assessed to determine whether a proposed change will result in a net overall gain or loss to society. If a net gain results, the economic system becomes more "efficient."
Zerbe is well qualified to write such a book. He is a professor of public affairs at the Daniel J. Evans School of Public Affairs and an adjunct professor at the University of Washington Law School. He has authored or co-authored related articles and papers, as well as a textbook.
Zerbe improves on previous versions of benefit-cost analysis by including the costs of transactions (sales of assets) that predictably will occur because of a change. The recognition of transactions costs is justifiable, as such costs are indeed among the consequences of a change in economic factors.
Zerbe also recognizes the fact that people tend to value rights or possessions they already have more than rights or assets they contemplate acquiring. A purely commercial asset, defined as one desired only for the income it can generate, is an exception to the rule and is valued equally whether one owns it or not. Thus, in estimating the effects of a transfer of a noncommercial asset, the analyst should recognize that the asset’s value to the old owner may differ from its value to the new owner. The subjective cost to the old owner in giving up the asset may exceed the subjective gain experienced by the new owner. Furthermore, perceived ownership—whether one believes one owns an asset or not—as opposed to objective ownership is relevant to how one values the property or right. Zerbe makes a convincing argument that perceived ownership should be entailed in benefit-cost analysis.
Zerbe also emphasizes the "regard for others" as part of his analysis. The preferences of the general public, as well as those immediately affected by transactions, should serve as a basis of some of the costs and benefits to be counted. Through the "regard for others," KHZ analysis can entail societal demands for justice and concern for future generations. Zerbe does emphasize, however, that KHZ analysis is not an infallible guide to the right course of action; instead, KHZ analysis is a tool to provide information to be considered before a decision is made.
Values to be counted in KHZ analysis are in terms of the amounts that parties would be willing to pay to acquire a right or possession, and amounts that parties would be willing to accept in exchange for a right or possession. No other means of quantification is apparently available, yet a certain weakness of KHZ analysis arises from that means of measuring benefits and losses. Specifically, the wealth or poverty of a party can affect the party’s ability to buy, or willingness to sell, a possession or right. Therefore, the values used in KHZ analysis reflect the parties’ economic status as well as their desire or need for the commodity or right at issue. KHZ analysis, then, tends to favor the more affluent.
This tendency is not much emphasized by Zerbe. He does mention that utility, as opposed to willingness to pay or to accept payment, cannot be quantified. Therefore, the problem is apparently impossible to solve, as monetary amounts to be paid or received must be the terms used in KHZ analysis. Just the same, Zerbe might give greater emphasis to an apparently serious shortcoming of KHZ analysis—that it tends to favor those who have greater assets. The "regard for others" as a factor in KHZ analysis may prevent blatantly unjust determinations, but regard for others does not completely nullify the more favorable position of those who can more easily pay a certain amount to acquire an asset, gain a right, or change the law to their advantage.
An additional criticism of KHZ analysis can be made. While transactions costs are to be counted, "the costs of enacting a rule change are not to be included in determining whether or not a new rule is efficient." Because such costs are, by definition, costs, they logically ought to be included. Zerbe defends his decision to exclude such costs in a way that is somewhat difficult to interpret and apparently not empirically tested.
After briefly reviewing the history of benefit-cost analysis and revealing his new form of it, Zerbe criticizes the theory of market failure, arguing that KHZ analysis is a much superior concept. He then goes on to apply KHZ analysis to issues including abortion, theft, rape, and slavery. He argues that societal changes—such as changes in technology, institutions, or public sentiment—can make previously efficient rules inefficient in the sense that a more efficient set of rules becomes possible. Finally, he shows that the common law naturally arises in a manner such that it fosters economic efficiency. He illustrates his claim by analyzing the historic issues of dueling, cannibalism, and the 19th century Gold Rush.
Zerbe’s new book is high-powered and potentially important. Its style, however, is mostly dry and may be difficult for the layman to follow, despite the juicy illustrative topics. Economic Efficiency in Law and Economics is recommended for those who are particularly interested in the topic of economic efficiency, either professionally or personally.
—Bill Goodman
Current Employment Statistics Division,
Bureau of Labor Statistics
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