Well Oil Beef Hooked
by Quinn
When people criticise labour markets as being skewed and requiring regulation, they tend to mean that the employer has far greater bargaining power than the employee. It seems obvious that the corporation has the upper hand over the individual, so we need unions and/or employment laws to protect the latter against the former. So it is interesting to read this recent(-ish) article from The Economist regarding the situation those all-powerful oil firms face in Alberta, Canada, and the problems they have in recruiting staff.
It seems that “drug abuse in the northern oil patch is more than four times the provincial average”, and that
about 40% of the workers test positive for cocaine or marijuana in job screening or post-accident tests. Companies worry about lower productivity (due to absenteeism or sloppy work) caused by drug abuse, and the safety risk. On drilling rigs and in oil-sands mines a small mistake can easily result in injury or death. Some experts believe Alberta’s rising job-site accident rate (up 17% in two years to 180,000 cases in 2006) is partly due to drug abuse.
Most of the biggest companies conduct drug tests before hiring, as well as after any accident. But many workers have learned to get around these with synthetic-urine kits from drug-paraphernalia shops. Many smaller contractors prefer to turn a blind eye for fear of losing workers in such a tight labour market. Lawrence Derry, an addiction expert at the University of Alberta, says that one contractor told him that “if I brought in drug testing, I’d lose half my crew—they’d go right over to my competitor.”
So there we go; reports of the oil companies’ evil omnipotence have been overstated, the employment market is not as simply one-sided as has been assumed, and we can all calm down a bit. Do we really need unions and protection for employees after all if they wield such power?
But doesn’t this example make the same basic point; that however much we may wish it, the market does not provide solutions to all our problems? Sometimes it will work perfectly, but at other times employees are at a disadvantage; sometimes, as in this case, it is the employer who is on the wrong end of an asymmetrical relationship.
It is probably fair to say that no employer in Alberta wants drugged up workers on its books; that some still put up with them is because they feel the market leaves them with no choice. This recalls some of the points that have been made regarding the recent smoking ban I mentioned a few posts ago; some opposed the ban on the grounds that because the market sanctioned smoking in pubs most people must have been happy with the situation. But isn’t it also very possible that most landlords, bar staff and customers would have preferred a smoke free environment, and that it didn’t happen without legislation because landlords were scared to lose custom, bar staff didn’t want to lose their jobs, and customers, subsequently faced with a choice of a number of smoke-filled venues, had to put up, shut up or stay at home.
Anthony at The Filter recently(-ish, again,) complained that the ban was down “people failing to get their preferences through the market, and therefore turning to government”; but isn’t that one way to describe market failure, and so a possible justification of a role for government? If the majority of people would prefer a smoke free environment – and whether related or not, my local is now busier than ever on a Friday night – and the market didn’t provide it, then has the recent legislation done us a real favour? And even if you feel that smoking per se isn’t a suitable area for government intervention, isn’t the principle of government intervention to alleviate a market failure sound?
Let’s face it, the market is a brilliant concept; anyone who has ever spent a chill December evening in Manchester’s St Anne’s Square with a steaming mug of gluhwein in one hand and a chargrilled bratwurst in the other cannot fail to appreciate that fact. Given half a chance I think I would prefer the market to decide on the provision of pretty much everything; but it should be the servant, not the master, it is there for our benefit, not to dictate to us. Where the market fails to provide it should never be enough on its own to allow us to just shrug our shoulders, say “well market forces have spoken”, and so justify the status quo and signal the end of the debate. Perhaps all things considered a “market failure” is a sign that we should do without; but more needs to be taken into account before we can arrive at that decision, and if necessary we shouldn’t be afraid look elsewhere – to the charitable sector, or, as a last resort, to government – to remedy the situation.
Addendum: Anthony makes some interesting points in the comments, and as a result I feel the need to clarify my position.
I am making two main points in this post; first a general one, that markets are imperfect, and so I don’t therefore feel you can justify the status quo in any given situation by simply assuming that market forces have already delivered what people want. The second point, more specific to the smoking ban, is that I can well imagine that more landlords, staff and customers would prefer a smoke free environment than wouldn’t, and so the recent smoking ban on health grounds has inadvertently addressed that situation.
How can the market have failed to respond in this instance? I would say that landlords would have been reluctant to go smoke-free unilaterally even if they had wanted to knowing that while other pubs did allow smoking they would lose the custom of their current clientele who are smokers and their friends; it would be a gamble to hope that enough new non-smoking customers would be attracted in to replace the shortfall, and I doubt in practice that would happen. With an outright ban, however, where all pubs must multilaterally go smoke-free, there is not the same concern. There is a worry that some smokers will stay at home, but I doubt they will in any numbers if at all, and in addition pubs are now more attractive places for those who would previously have steered clear because of the smokiness.
But that is just me speculating, and what I am not saying is that I would support a government intervention because Westminster bureaucrats know better than pub landlords, and should engineer a situation to increase the popularity and profitability of pubs. If the ban were simply a case of the government trying to second-guess consumer demand then I would rather leave such things to the market. A ban designed to protect the health of staff is I feel far more justifiable, but may as a consequence have delivered what more people would prefer. Time will tell if that is correct.
As Anthony says, “perfection is not for this world”, and I don’t think the state should tinker in every little thing where is could be perceived that the market is imperfect. But neither do I think that government intervention should be criticised on the grounds that market forces would simply have sorted things out if there were a genuine demand for it.
The Obscurer 
You’ve raised a deep and broad point, so I’ll try to comment without disappearing off an irrelevant tangent, but I can’t promise…
Firstly I think it’s important to make a distinction between political decisions, and the economic rationale that may/may not be used to aid such decision. My post on the smoking ban was arguing that it’s illiberal, so I wasn’t really addressing the issue of market failure.
Regarding market failures, I completely agree that “the market does not provide solutions to all our problems”. The question is which systems are best suited to working in imperfect conditions, and as you know, I feel that markets are better at producing the incentives and knowledge required than government. That’s not to say that markets will always produce “socially optimum” results, but I do think critics have a responsibility to go beyond simply saying “this is a market failure” to actually compare the costs and benefits of government provision.
In my humble opinion, the very people who criticise economists for being ivory towered theorists, for making ridiculous assumptions about perfect information etc, are relying on those very theories for their market failure arguments. Monopoly, externalities and public goods only exist within the world of textbook neoclassical economics. I have severe doubts that they harm consumer welfare in the real world.
The only part of your post that seems to explain why landlords needed to be coerced into offering a smoke free environment is that “landlords were scared to lose custom”. You then argue “If the majority of people would prefer a smoke free environment” – I just don’t buy into this view that entrepreneurs were too risk averse to try something that Westminster-based bureaucrats knew all along would boost profits.
If people are being slow to catch on to a better way to satisfy customers needs, there’s a massive profit incentive for doing so. Once a small number experiment, and establish whether it’s a geniune opportunity or just a mirage the rest will swiftly follow. Wait until December and see how happy the punters are with their patio heaters.
Bottom line is that shit happens, perfection is not for this world. Most “market failures” are actually institutional failures (e.g. a market doesn’t exist), and apparent failures would probably cost more to “correct” than the harm they’re doing. Competitive markets seem to do a pretty good job at responding to consumer’s needs, but if there’s any examples out there of a “successful intervention”, let me know…
I’ve not much to add as I actually agree with much you have to say, and I know that you’re not an “ivory tower theorist”, although I’m not sure I agree that people who criticise textbook economics then rely on those same textbook theories to refute economists. Some economists do seem to want it both ways though; to use neoclassical theory – perhaps as shorthand – to criticise a proposal, and when questioned on the “ivory tower” nature of the point hold their hands up in horror and say “of course I believe things are more complicated in the real world” etc.
Regarding bureaucrats knowing a smoking ban will boost profits, I’m not saying that at all; that wasn’t why the legislation was enacted and I would not welcome a situation where the government went over the heads of landlords and assumed they knew what the customer wanted as they would probably call it wrong. However, I can imagine many landlords indeed being risk averse; there have been individual pubs that have gone non-smoking and have felt the need to row back as custom has dropped. It is quite a different situation when all pubs are non-smoking. As you say, we will have to see what happens and if there is a decline or increase in pub attendance; evidence from other countries is contradictory. However, if pub attendance does increase (a big if?) then perhaps in hindsight we could say that the market did fail to respond to demand.
Thanks for the clarification
markets are imperfect, and so I don’t therefore feel you can justify the status quo in any given situation by simply assuming that market forces have already delivered what people want
Agreed: the fundamental problem with neoclassical economics is that it assumes the market is a static state of affairs. It encourages this view that “the market has spoken”. A more dynamic approach will realise that the market has never truly spoken, it’s a constantly changing system, always in flux.
This might seem a cop out, because in the long run we’re all dead, but as I said intervention isn’t immediate, and has a tendency to produce long lasting unintended consequences. We just need to make sure we’re comparing like for like.
I don’t think there’s economic grounds to correct market failure, but that doesn’t mean there aren’t any grounds. It’s just up to policy makers to either make a stronger economic argument, or use a different crutch.
I would say that landlords would have been reluctant to go smoke-free unilaterally even if they had wanted to knowing that while other pubs did allow smoking they would lose the custom of their current clientele who are smokers and their friends
You’re basically justifying intervention on the grounds of a Prisoner’s Dilemma. I think there’s a valid reason for this, but only if you’re a utilitarian. In other words it might be economically efficient because it increases revenues, but it only does so by harming other people. The benefits might exceed the costs, but I’d argue that this intervention will ultimately undermine/reduce geniune entrepreneurship.
For example we could massively increase GDP/capita overnight if we kill the unemployed. The neoclassical economic logic is compelling.
Obviously the health effects are important but not strictly relevant for an economic argument. It may be a beneficial side effect (from the point of view of a socialised health system), but if the intention is to make us all healthier I think there’s more direct policy measures to do this – such as using incentives for us to make healthier choices.
neither do I think that government intervention should be criticised on the grounds that market forces would simply have sorted things out if there were a genuine demand for it.
Unless there’s a barrier to entry, the only way we can say whether there’s a “geniune demand” is if entrepreneurs think if it’s profitable venture. Otherwise I just think it’s a self-interested politician trying to bribe voters by directing resources to their department/constituency, using economic rationale as a veil.
Market Imperfection
I’d like to highlight a conversation at theobscurer on the smoking ban and imperfect markets, click here to take a look. Quinn makes a good point: in this instance the smoking ban ‘breaks’ a Prisoner’s Dilemma,I would say that landlords
A few thoughts:
1. Markets generally provide a reliable way of creating lean, mean service providers, but the devil take the consumer’s actual best interests, which generally get lost in favour of some simplified fake set of such. This means that markets are a fairly inefficient way of providing the customer with genuine, intelligent choices, because so much of the market’s energies are spent in competition.
2. The idea that the average consumer is a good way to measure anything apart from very specifically proscribed, easily measured, quickly attainable goals is as interesting as any faith-based system, but no way to run an essential service. The average consumer acts like—although they are likely not—a selfish, childish, myopic, attention-deficient buffoon. Nobody has yet shown convincingly how a million such buffoons generate anything except, once again, internalized friction. Note: you’re allowed to mention game theory if you’re Mark Steyn, as only he is sufficiently beyond the pale.
3. Almost every government-led privatization in the past twenty years or so has turned a public service into a proliferation of vapid, point-missing private companies. I’ve yet to meet anyone who does not wish for renationalization of the railways; I’ve yet to meet an NTL customer that sees the point of NTL. The opposite of a state monopoly would seem to be a new collective noun: a corporate mediocrity.
Markets are not perfectly efficient at meeting consumer’s demands but in general they are far better at it than any alternative. They don’t just result in “lean, mean” providers they also provide high service levels, at a price, when there is sufficient demand. Competition is the main reason why actors in a market are more efficient at meeting customers demand. If they don’t do so, then they suffer or even go out of business.
Private business may have its faults, but at least you usually have some level of choice. When you decide things by government decree (or impose a government monopoly or nationalize an industry) you remove choice.
For me, the oft-heard call to just “nationalise the railways” is a wee bit simplistic; as simplistic as the call to “privatise the railways” was a few years ago. I wonder how many people in favour of the former were in favour of the latter at the time?
Competitive markets may have their problems – think of the money wasted in crap advertising – and may not always serve the consumer’s best interests which can get lost in a drive for ever greater efficiency – like the endless menus in automated telephone helplines where you end up talking to someone in an outsourced department who doesn’t know what you are talking about – but I would generally take them over state monopolies.
The problem is that you need meaningful competition. I don’t feel that is what we have got with most of the privatisations, such at the railways (if you need the 8:50 train you need the 8:50 train, regardless of who provides it) or the utilities (where the gas or electric you receive is exactly the same, and competition is largely based on choosing which letterhead you want for your bill and how bad a level of customer service you can put up with). The BT privatisation has been fortunate as technological developments have injected a decent level of competition largely absent from the original plans.
So I would agree, Tim, that “competition is the main reason why actors in a market are more efficient at meeting customers demand”; but what do you do when there isn’t any competition?
re: “So I would agree, Tim, that “competition is the main reason why actors in a market are more efficient at meeting customers demand”; but what do you do when there isn’t any competition?”
The fact that the private sector typically has competition (esp. if your excluding from consideration, cases when the government regulates away the competition), is a huge benefit to having private sector / market solutions over political/government solutions.
But it isn’t the only benefit. A private monopoly is generally much less desired then a situation where there is good competition among private businesses, but even when you have a private monopoly there can often still be benefits over a government solution. For one thing if the private monopoly isn’t protected by government it will typically still face the possibility of private sector competition if it raises prices too much or otherwise tries to “screw the customer”. And even if it didn’t have to consider potential competition it still has to satisfy the customer to some extent in order to continue to get business, and it has to be efficient enough to make a profit, rather than engaging in wealthy destroying activities. Governments can tax the money they need, so their activities do not have to be economically beneficial or wealth creating (or even wealth neutral).
Which doesn’t mean that government doesn’t have a role, or that private business will never do a bad job, or that market competition is a panacea for all problems. Market failures and externalities do exist. Finding one doesn’t automatically mean that the government should act (it can act and have a “government failure” that is worse than the market failure), but it does at least provide an area where government action should be considered. And also, while anarcho-capitalists might disagree, I’m skeptical of the idea that we can implement good market solutions to keeping basic order. I wouldn’t call for police, military, the court system, etc. to be replaced by private/market based systems. (Private businesses can and do play a large role here, with security guards, military contractors, arbitration and settlement businesses etc., but that role will probably never be total, at the margin they might replace the public sector, but the public sector will remain important in these areas).
The problem with private trains is often that you don’t have the demand in most places to make it profitable. Generally not having the demand would mean that something shouldn’t be done, but an argument can be made that public transport creates positive externalities, and that some degree of train service makes sense in the light of these positive externalities. So a completely private solution might arguably provide to little service (or hemorrhage money if its forced to provide a lot of service). OTOH even if you accept that argument a public system is likely to provide to much service. Even if you consider these positive externalities to be real and serious, and you count them in to the equation, there are many public train routes that probably don’t make any sense, and that on the balance destroy more wealth than they create.
if you need the 8:50 train you need the 8:50 train, regardless of who provides it
True, but I bet that doesn’t apply to everyone on the train. And that’s the point: you may have highly inelastic demand, but as long as there’s some people on the margin, their behaviour will send the necessary signal.
I actually think that the problem isn’t “not enough competition in transport”, but “not enough competition in companies” – I think that flexible working is the way forward.
Yes, I see what you’re saying, but I wonder how many people do shop around when it comes to public transport. When I go into Manchester on the bus to do some quality drinking I don’t need a specific bus at a specific time, but I do religiously get on “the first bus to happen along”, regardless of the bus company. So I would query that the “necessary signal” is often being sent in this context. Some sort of signal may be being sent, but if demand is very inelastic won’t the signal be so weak as to have little to no effect?
Re: getting on the first bus.
If you want to analyze that action in economic terms, it could be said that the cost of waiting, or perhaps even the cost of spending time thinking about which bus to take, exceeds the benefit you might get from a possibly lower priced bus that arrived later.
But as aje points out, you only need a relatively small number of people to shop around by price in order to exert some control over prices. You don’t even really need anyone normally shopping around based on price, at the moment. If people shopped around by price in the past, or if there is some other reason for the transit companies to believe that people would abandon their service if they increased prices to a higher point that other companies, you still get a degree of market control over prices. In the real world markets are often more “sticky” than the perfect Econ 101 picture, they don’t adjust to equilibrium instantly, but that just means that the forces work slower and perhaps less perfectly, not that they don’t work at all.