1) Una introduzione storica: come si sono sviluppati

1

Analisi economica del diritto.

• 1) Una introduzione storica come si sono
  sviluppati i Nirvana economici e giuridici
• 2) Verso una nuova relazione fra diritto e
  economia.
• 3) Analisi delle posizioni legali e
  complementarità istituzionali.

2
Letture scaricabili.

• Nicita A., Pagano U. (2005) Law and Economics in
  Retrospect. In corso di stampa Brousseau E.
  Glachant J. M. ESNIE Textbook Cambridge Un.
  Press.
• Pagano U. (2005) Legal Positions and
  Institutional Complementarities. In corso di
  stampa in Nicita Pagano Legal Orderings and
  Economic Insitutions. Routledge.
• Pagano U. Diritto in Boitani e Rodano (1995)
  Relazioni Pericolose. Laterza, Bari.

3
The common ethical roots of law and economics
the existence of God-given natural laws.

• From Aquinas Summa Theologica
• The rational guidance of created things on the
  part of God, as prince of the universe, has the
  quality of law..this we can call the eternal
  law.
• The participation in the eternal law by rational
  creatures is called natural law.
• Law must have as its proper object the
  well-being of the whole community.

Isnt the last quotation applicable also to
Economics?
4
The importance of the scholastic tradition
From H. Berman Law and Revolution(p. 9) (The
revolution is that of the Pope Gregory VII
against the Emperor)

• In the Western legal tradition law is conceived
  to be a coherent whole
• The phrase corpus juris Romani was not used by
  the Romans but by the twelfth - and thirteenth -
  century European canonists.
• It was the twelfth-century scholastic technique
  of reconciling contradictions and deriving
  general concepts from rules and cases that first
  made it possible to coordinate and integrate the
  Roman Law of Justinian.

5
Natural Law and Legal Pluralism.

• In the formative era of the Western legal
  tradition, natural-law theory predominated. It
  was generally believed that human law derived
  ultimately from, and was ultimately to be tested
  by, reason and conscience.
• This theory had a basis in Christian Theology as
  well as Aristotelian philosophy. But it had also
  a basis in the history of the struggle between
  ecclesiastical and secular authorities, and the
  politics of pluralism.
• Legal pluralism was a common legal order
  containing diverse legal systems (church vs.
  crown, crown vs. town, town vs. lord, lord vs.
  merchant).
• Legal Pluralism was a source of freedom and of
  legal sophistication and was a decisive factor in
  the foundation of Universities and the origin of
  Western Science.

6
Typical questions

• Which Court had jurisdiction?
• Which law was applicable?
• How were different legal differences going to be
  reconciled?

Institutions, like Universities, where different
approaches could co-exist, were needed and
founded in that age. This method of formulating
and discussing different hypothesis and checking
their validity of natural laws was extended
from law to medicine and to other disciplines.
7
Classical British positivism and the separation
between law and ethics

• Every law and rule is a command.
• The science of jurisprudence (or, simply and
  briefly, jurisprudence) is concerned with
  positive laws, or with laws strictly so called,
  as considered without regard to their goodness or
  badness.
• John Austin (17901859) The Province of
  Jurisprudence Determined.

A law may be defined as assemblage of signs
declarative of volition conceived or adopted by
the sovereign in a state, concerning the conduct
to be observed in a certain person or class of
persons, who in the case in question are supposed
to be the subject of his power. Jeremy Bentham
(17481832) Of Laws in General.
8
Kelsen (1881-1973) Pure Theory of the Law

• The pure theory of law separates the legal
  completely from the moral norm and establishes
  the law as a specific system independent even of
  moral law.
• The law, or the legal order, is a system of
  legal norms. The first question we have to
  answer, therefore, is this What constitutes the
  unity in diversity of legal norms? Why does a
  particular legal norm belong to a particular
  legal order? A multiplicity of norms constitutes
  a unity a system, an order when validity can be
  traced back to its final source in a single norm.

Morality ? Validity? Efficacy
9
Walras Elements of Pure Economics.

• From Smith onwards also Political Economy had
  been following a similar path of separation of
  morality that achieves its clearest expression
  with the concept of Pareto efficiency.
• Particular instructive is the case of Walras
  Pure Economics that, well before Kelsens Pure
  Theory of Law, was sharply distinguished from
  moral considerations.
• However, Walras believed in two basic principles
  of natural law
• Everyone belong to himself or herself.
• All the other natural resources belong to
  everybody.

10
The main proposition of Pure Economics.

• Production in a market ruled by free competition
  will give the greatest possible satisfaction of
  wants within the the double condition,
• that each service and each product have only one
  price in the market, namely the price at which
  the quantity supplied equals the quantity
  demanded
• and that the selling price of the products be
  equal to the cost of services employed in making
  them.
• (Walras, Elements of Pure economics)

11
Pure economics and natural law

• This double condition was also necessary for
  commutative justice that implied that individuals
  would not change their wealth because of unjust
  exchanges.
• But if the achievement of the greatest
  satisfaction was compatible with commutative
  justice it would have sustained any initial
  distribution of resources including that
  consistent with the natural laws of distributive
  justice.
• Thus, Walras pure economics was sharply separated
  from distributive natural laws but it was used to
  show that these laws were consistent with the
  maximization of material welfare.

12
Pure Economics and Pure Law.

• The separation of both disciplines from ethics
  went together with the separation between law and
  economics.
• Pure economics concentrate on the internal
  consistency (equilibrium) and efficiency of the
  decentralized decisions of maximizing
  individuals.
• Pure law concentrated on the validity of laws,
  that is the internal consistency (equilibrium?)
  of legal systems that were assumed to stem from a
  single authority or from a single grundnorm.

The two disciplines seemed to live into separate
pure Nirvanas and, besides their purities, only
a formal analogy seemed to relate them. But
there were also some hidden relations between
the two Nirvanas..
13
Two related Nirvanas?

• Pure Economics assumes well defined and complete
  rights that are exchanged and enforced by a third
  party. Thus the Economic Nirvana requires a Legal
  Nirvana.
• Pure Law assumes that the legal ordering could be
  completed and made consistent by a single agent
  or on the basis of a set of basic norms without
  limitations due to bounded rationality, cognitive
  ability, failure of collective action and other
  limits due to the scarcity of resources. In other
  words the Legal Nirvana requires an Economic
  Nirvana.

14
Coase and the fall of the Economic Nirvana.

• Coase observed that in the world of pure
  economics all decisions were coordinated by
  prices at zero costs.
• In this world firms would not exist. We would
  live in what became later the world of the Coase
  theorem.
• In the world of the Coase theorem all possible
  externalities, including those related to
  economies and diseconomies to scale would have
  been internalized by market transactions.
• Firms, state regulation and other arrangements
  can only appear in a word where no alternative
  institution is available at zero costs.
• There is no Economic Nirvana all institutions
  are costly.

15
Fuller and the fall of the Legal Nirvana.

• Fuller defined law as the enterprise to subject
  to rules human behaviour.
• This enterprise is too costly to be carried out
  by a centralized ordering.
• The costs of Law can and are in fact decreased by
  decentralizing its enterprise to a plurality of
  orderings.
• Unions, Churches and Universities have their
  internal orderings. Firms themselves can also be
  seen as private orderings.
• There is no Legal Nirvana completeness, unity
  and consistency can possibly be the aim of a
  legal ordering but they cannot be taken for
  granted.

16
The firm as a private ordering
In a firm a central authority replaces markets
(and state authorities) in enforcing and
co-ordinating the relations among the agents.
However central governance has the disadvantage
that the agents will exercise their influence on
the central authority to enhance their
privileges. In order to work well firms need to
develop adequate forms of Private Ordering. Fulle
r the firm as a decentralization of the public
ordering Coase the firm as a centralization of
market transactions
Coase
Fuller
17
The economic consequences of Justice

• In a Coase-theorem world with zero transaction
  costs attributing the rights to a particular
  individual has no economic consequences. In any
  case rights will flow to the individual who
  values them the most. We are in a Legal and
  Economic Nirvana where judges can ignore the
  economic consequences of their decisions.
• In a world with positive transactions the
  decisions of the judges have economic
  consequences because rights will not necessarily
  flow efficiently to the individuals who value
  them the most. According to Posner (and to much
  classical Chicago, law and economics) in this
  case judges should allocate rights, according to
  criteria of economic efficiency to the
  individuals who value them the most.

18
Judges al wealth maximizers?

• According to Posner, Judges, aware of the
  economic consequences of their actions should
  behave like quasi-markets attributing the rights
  to the individuals who in a world of zero
  transaction costs would have acquired them.
• They apply the Kaldor criterion according to an
  allocation is efficient if the gainers could have
  compensated the losers.
• He claims that this is consistent with an
  intuitive view of justice. If avoiding some
  damages is very costly for some agents and not
  costly for the others, the latter are guilty for
  the damages.

19
Fading boundaries?

• Posner view is extreme. Clearly, in most cases,
  economic efficiency cannot be only criterion for
  the administration of justice. But it shows how
  difficult is to separate efficiency and justice
  considerations in a world of positive transaction
  costs.
• The impossibility of defining sharp boundaries
  becomes even more clear when we accept Fullers
  view (and also Hayeks and Bruno Leonis
  views!) all sorts of public and private
  orderings co-exist in the economy and they all
  face the problem of compromising efficiency and
  (other types) of justice considerations.

20
Posners public ordering Nirvana.

• In spite of these interesting implications for
  the activity of the judiciary, Posner pushes to
  extreme consequences the economists implicit
  assumption of a legal Nirvana where judges can
  efficiently fix the problems of the market
  economy.
• This assumption implies that the judiciary is
  not limited by any form of economic scarcity
  (both in terms of cognitive and physical
  resources).

21
Williamsona symmetric private ordering Nirvana?

• While Williamson rejects the idea of an efficient
  public ordering, he assumes that private
  orderings can efficiently fill the gaps that are
  left open by the incompletness and the efficiency
  of the public ordering.
• Firms and the organizations of private governance
  are explained by their efficiency attributes.
  They fix the problems due to the incompletness of
  public domain contracts.

22
Posner vs. Williamson.

• There is an evident (and explicit!)
  contraddiction between Williamson NIE and
  Posners law and economics each one is making a
  Nirvana assumptions about one different domain.
• The Nirvana domain is fixing the inefficiencies
  of the other domain and, therefore, there is no
  feed-back of its inefficiency on the other
  domain.
• In both cases there is no mutual interaction
  between the possible inefficiencies of the two
  domains. The Nirvana domain does best whatever
  the other domain does.

23
The institutional complementarities research
programme.

• No institutional domain has Nirvana
  characteristics. All institutions are humans made
  and they are limited by several types of economic
  scarcity.
• The agents of each domain take as given
  institutional parameters the arrangements of
  other domains.
• Multiple equilibria can characterise the mutual
  interactions among different domains.
• The interactions can be usefully expressed in
  terms of institutional complementarities.

24
The nature of institutional complementarities.

• The existence of institutional complementarities
  implies that individuals of each can do better if
  their decisions fit the arragements taken in
  other domains.
• Institutional complementarities are strong when,
  independently of the degree of rationality of the
  agents, the mismatch between the domains cannot
  last over time.
• Institutional complementarities are weak when
  rational individuals will have a tendency to make
  the two domains fit each other.
• Observe that, even when different domains fit, we
  may be in a situation of inefficiency if they can
  fit each other in multiple ways.

25
Legal positions and institutional
complementarities.

• In the paper that has been indicated as the
  background reading of this talk we consider two
  major examples of strong and weak institutional
  complementarities.
• Legal positions are claimed to be characterised
  by strong institutional complementarities.
• The relations between legal entitlements, taken
  as a whole, and the technology of production is
  claimed to be characterised by weak institutional
  complementarities.
• In this talk I will concentrate on the first
  case. I will have the time to consider the other
  cases in my other seminars.

26
Strong Complementarities and Social Scarcity.
In some cases the existence of some arrangements
in certain domains is a necessary condition for
the feasibility of other arrangements in other
domains. These extreme cases of complementarity
are more common than one may expect. Legal
relations are cases of strong complementarity
related to the problem of social
scarcity. Ex-ante an individual may expect to
have a right even if nobody else perceives the
corresponding duty. However, ex-post, one can
benefit from a right only if somebody else is
accepting to perform the corresponding duties and
give up the related liberties.
27
First order jural positions

Example 1 boat in danger. Boats that are in
danger enjoy some legal right to be helped by
other ships. This right is necessarily correlated
with the duty of other boats not to leave when
another ship is in danger. This duty does also
necessarily entails that other boats do not have
the liberty to leave and that boat that is danger
is not exposed to the liberty of other boat of
refusing help. Hohfeld W. N. (1919) Fundamental
Legal Conceptions Commons J. R.(1924) Legal
Foundations of Capitalism
28
Second order jural positions

Example 2 liberty of speech If, because of the
existence of a Bill of rights the State has no
power to change legal entitlements and restrict
my liberty of speech (Simmonds, 1986 p. 132),
this means that in this respect I have no
liability towards the state or, in other words,
an immunity against its power that is correlated
to the corresponding disability of the State.
29
Hohfeld vs Commons.
According to Hohfeld first order and second order
relations should necessarily fit as logical
necessities. In Commons approach the
expectations of the individuals could differ
widely ex-ante and the purpose of law was to make
ex-ante claims and expectations consistent with
each other. Second order relations are used to
make first order relations fit. Both public and
private orderings contribute with authorised and
authorative transactions to this goal. Mismatch
between legal positions is always costly. There
is clearly institutional complementarity between
the legal positions occurring in the different
domains and consistency makes individuals better
off. However consistency is a logical necessity
only ex-post.
30
Legal Positions and Social Scarcity.
The ex-ante mismatch of legal claims is not only
possible but also very likely. Legal positions
are characterised by the fact that the same
relation must be consumed with opposite signs by
different individuals. Legal relations involve
the consumption of positional goods like power
and status. While ex-ante legal disequilibrium
is likely it is very likely to occur because
positional goods are a case that is polar to
public goods.
31
Public and Positional Goods
Pure private good other individuals consumes a
zero amount of what each individual chooses to
consume. Pure public good each agent must
consume the same positive amount that other
agents decide to consume Pure positional good
given the consumption choice of an agent, the
other agent must consume a corresponding negative
amount of what the other agent chooses to
consume.
32

33
Legal Relations and the Oversupply of Positional
Goods
While public goods are undersupplied, positional
goods suffer from the opposite problem and they
are oversupplied. As Bobbio has pointed out the
oversupply of rights and liberties that are not
matched by the corresponding duties and exposure
to liberties is (in spite of Kelsen) an intrinsic
characteristic of the productions of laws.
34
Private property and institutional
complementarities

• The right of exclusive use of assets by some
  individuals has to be correlated to the duties of
  others not to consume these resources.
• 2) The liberty that the owners have to choose
  among different uses of the resources is to be
  correlated to the exposure of others to these
  liberties.
• 3) The power that the private owner has to
  transfer her title has to be aligned to the
  liability that the other agents have towards
  these transfers of property.
• 4) The immunity of the owner against having his
  title altered or transferred by the act of
  another is to be aligned to the disability of
  others to perform these acts.
• Ex-ante the legal positions defining private
  property may be inconsistent. Ex-post they become
  identities.

35
An example the elettricity industry.

• Besides private property competitive markets rely
  on other characteristics. Individuals must have
  the liberty to enter any market which means that
  no incumbent has the right to exclude other
  individuals from other markets and they must be
  exposed to this liberty. When this liberty does
  not exist the value of property goes down there
  is no clearcut distinctions between the
  characteristics of the markets and the nature of
  property.
• In the case of elettricity industry this liberty
  and the simple exposure to it are not enough.
  Entrants have also a right to be connected to the
  network which requires the active cooperation of
  the incumbent. Incumbents must not simply be
  exposed to the liberty of the entrants but have a
  correlative duty to act to provide
  interconnection.Legal disequilibrium may easily
  arise
• If Liberties and Rights of the entrants are set
  up in Brussels at community level
• The corresponding exposures and duties are
  articulated at national level.

36
The limits of private property.
Like the Coasian firm, in a world of zero
transaction costs, the main advatage of private
property disappears. Private property entails the
liberty to change the use of goods without having
to transact with other individuals - an advantage
that only holds in a world of positive
transaction costs. In a world of positive
transaction costs private property may be
advantageous even when there is a limited
exposure of the other individuals to the
liberties of the owner. At the same time the
labour contract cannot be considered as a
temporary private property of somebody else
labour. This is efficient only in the standard
neoclassical model where leisure and not work
enters the utility fuction so that the workers
can sell their labour and be indifferent among
its uses.
37
Private property and capitalism.
The genuine neoclassical solution would involve
that there is a price for each use of labour.
There is no symmetry between capital and labour
(despite Samuelson). For capital the price is the
same in each use!!! The symmetric treatment of
capital and labour makes labour a fictious
commodity over which temporary private property
can be defined. It does not describe an
unqualified economic Nirvana but the Nirvana for
capitalism! Workers cooperatives have been ofter
claimend to be alternative to this model. If
capital has no preferences for its use in
production choosy labour should hire malleable
capital! There are well-known limitations with
this solution and other alternative have involved
the unbundling and the redistribution of the
rights that define classical capitalism.
38
Models of capitalism and social scarcity
1) Classical capitalism Liberty of the employers
vs. workers' rights to care about the allocation
of their work. No private exercise of this
liberty without a damaging exposure to this
liberty. Complete liberty to use machines. 2)
Company workers' capitalism. Right to a job of
unspecified definition in a particular company.
The liberty of capitalists to use their machines
with all possible workers is umbundled and
redistributed as a job right for the present
workers of the firm. 3) Unionised workers'
capitalism. Exclusive right to job of specified
definitions in all the companies. The liberty of
the capitalists to employ their machines workers
with all sorts of qualifications is unbundled and
redistributed as job right for the workers
belonging to a certain craft.
39
Each one of the model of capitalism that we have
just considered is defined by different domains
such as markets for capital and market for labour
that must fit each other according to the tough
conditions of the strong institutional
complementarity due to social scarcity. There
is no Nirvana domain that, independetly of its
historical evolution involves an overall
efficient solutions for all of them. There is
not even a relative Nirvana because each model of
capitalism may end up developing particular
comparative institutional advantages due to the
symbiotic relations between its system of rights
and its technology. The curiosity for this
institutional diversity may perhaps compensate us
for all the lost Nirvanas of Law and Economics!
40
A more general definition of institutional
complementarities.
It is desirable to capture the case of
complementarities by referring to a more general
case where the institutional arrangements
occurring in one domain are simply favouring the
institutional arrangement in another domain but
they are not a necessary condition for their
(ex-post) existence. Samuelson statement In a
perfectly competitive economy it doesn't really
matter who hires whom...." It implies a double
neutrality. Technology does not influence rights.
Rights do not influence technology. One may
want challenge this statement by observing that
some technological arrangements do simply favour
some property rights and other organizational
safeguards and vice versa (and not that the
former are impossible when the latter do not
exist).
41
The Notion of Institutional Complementarity
(Aoki, 2001)

• Economic agents face different domains of games
  in selecting their choice in a given
  institutional framework choices in one domain
  act as exogenous parameters in other domains and
  vice-versa
• EXAMPLE
• two domains of choices X and Y X1, X2 and Y1,
  Y2, with agents i choosing in X and agents j
  choosing in Y, according to their utilities
  (respectively, u for i and v for j).
• a) for agent i
• b) for agent j
• There can be one Nash equilibrium, but also two
  pure Nash equilibria (institutional arrangements)
  for the system as (X1,Y1) and (X2,Y2).
• When such multiple equilibria exist, we say that
• (i) X1 and Y1 are institutional
  complements
• (ii) X2 and Y2 are institutional
  complements.

42
Different cases of weak complementarities

• Property rights and technology.
• Skills and Intellectual Property Rights.
• Financial Structure and Specificity of the
  Investments.

43
New Institutional theory has emphasized that
owners of specific and hard-to-monitor resources
tend to acquire rights and safeguards more than
the owners of general purpose and easy-to monitor
resource. This claim can be stated as (1) In
the property right domain, a property right
system PC is marginally better than another
property right system PL if the corresponding
technology Tc instead of the technology TL
prevails in the technology domain. Where Tc a
technology where capital is intensively used as a
specific and hard to monitor resource TL
technology where labour is intensively used as a
specific and hard to monitor resource PC a
governance system where the owners of capital
have strong rights and safeguards PL a
governance system where workers have strong
rights and Safeguards.
44
Inverting the Argument.
In a word of positive transaction costs the
owners of resources enjoying rights and
safeguards tend to become more specific and hard
to monitor than those without rights and
safeguards. This claim can be stated as (2) In
the technology domain a technology TL is
marginally better than a technology Tc if a
property right system PL instead of property
right system PC prevails in the property right
domain. This is an argument that has been
typical emphasized by radical economists against
the efficiency predictions of NIE. However, it is
consistent when NIE when one assumes positive
transaction costs.
45
(1) In the property right domain a property right
system PC is marginally better than another
property right system PL if the corresponding
technology Tc instead of the technology TL
prevails in the technology domain. (2) In the
technology domain a technology TL is marginally
better than a technology Tc if a property right
system PL instead of property right system PC
prevails in the property right domain. Where Tc
a technology where capital is intensively used
as a specific and hard to monitor resource TL
technology where labour is intensively used as a
specific and hard to monitor resource PC a
governance system where the owners of capital
have strong rights and safeguards PL a
governance system where workers have strong
rights and safeguards. We can have multiple
equilibria (PC, Tc) and (PL, TL ) PC and Tc and
PL and TL are, in this case, institutional
complements.
46
Pagano Rowthorn 1994
(2) Inverted argument Under capitalist
ownership (PC) firms maximise Rc Q (k,K,l,L)
- rk RK wl (HW)L (1) -----gt(Tc)
Under labour ownership (PL) firms maximise RL
Q (k,K,l,L) - rk (ZR)K wl WL (2)
----- gt(TL) (1) Original NIE argument
Capitalist property
rights PC can prevail if Rc ? RL or, ZK
- HL ? 0 (3) lt----- (Tc)
workers' property rights PL can prevail if RL
? Rc, or HL - ZK ? 0
(4) lt----- (TL) We can have multiple
self-enforcing equilibria (PC, Tc) and (PL, TL )
that are institutional complements.
47
Conditions for organizational equilibria

Let (kc,,Kc, lc, Lc) argmax Rc (k, K, l,
L) (5) (kL,
KL, lL, LL) argmax RL (k, K ,l, L) (6)
Then a firm will be in
a capitalist organisational equilibrium (COE)
if ZKc - HLc ? 0
(7)
and in a labour organisational
equilibrium (LOE) if HLL - ZKL ? 0
(8)
Or
48
Multiplicity of organizational equilibria
Kc/Lc ? H/Z
(7') KL/LL
? H/Z
(8') Because
(HW)/R ? W/(ZR) we have
Kc/Lc ? KL/LL
(9) We have therefore 3 cases 1) Kc/Lc ?
H/Z ? KL/LL
(10)
(multiple organisational equilibria). 2)
Kc/Lc ? KL/LL gt H/Z
(11)
(only a COE exists). 3) H/Z gt Kc/Lc ? KL/LL
(12)
(only a LOE
exists).
49
Organizational equilibria and complementarities
a) because of (1) and (2) when a property right
system PC (instead of the property right system
PL) prevails, a technology Tc (characterised by
a higher ratio K/L than a technology TL) does
marginally better than TL. b) (3) and (4) imply
that, when a technology Tc instead of a
technology TL prevails PC, does marginally better
than PL. Thus, the supermodularity conditions
are satisfied in the model and we can have
multiple organizational equilibria where PC is an
instituional complement of Tc and PL is an
institutional complement of TL
50
Institutional Complementarity between ownership
of intellectual property rights and firms
capabilities.(Pagano, Rossi EJLE 2004)
We interpret the NPR approach as a model of
allocation of IPR. The firms and individuals that
that are more capable to make investments
specific to the improvement of these assets
should acquire them.

• The argument can again be inverted If
  transaction costs prevent property rights from
  being attributed to the efficient owner,
  whoever is the current owner will find it more
  convenient to invest in human capital specific to
  the assets.
• A double relation of causation should be
  considered. If property rights are chosen on the
  basis of given technologies and abilities, also
  the opposite is true abilities and technologies
  are chosen on the basis of existing property
  rights
• HIGH FIRM CAPABILITIES AND A RICH PORTFOLIO of
  IPR are institutional complements. And,
  unfortunately also low firm capabilities and a
  poor portfolio of IPR are institutional
  complements.

Firms Capabilities
Intellectual Property
51
Institutional Complementarity between financial
and technological structures. (Nicita-Pagano ALEA
2003, revised 2004 )
Williamson (1988) describes a direction of
causality moving from asset specificity to firms
financial structure, and then to firms
governance Prevalence of specific assets ------gt
Equity Finance Prevalence of general-purpose
assets -----gt Debt Finance
In the language of institutional
complementarites Equity finance is marginally
better than Debt Finance in the financial domain
when a technology characterised by a prevalence
of specific assets over general-purpose assets is
adopted in the technology domain.
52
In word of positive transaction costs the
argument can again be inverted
Equity Finance ------gt Prevalence of specific
assets Debt Finance -----gt Prevalence of
general-purpose assets
In the language of institutional
complementarites An asset-specific intensive
technology is marginally better than a general
purpose technology in the technology domain when
a financial structure with equity funding over
debt funding is adopted in the financial
domain. A high degree of equity finance and a
prevalence of specific assets are institutional
complements and, similarly, also a high degree of
debt funding and general purpose assets are
institutional complements.
53
The US Tayloristic model
(PA) A distribution of rights that gives
shareholders and management strong liberties
including the liberty to fire easily the workers.
The workers are exposed to this liberty and have
no right to a well-defined occupation or to some
generic job within a certain firm. The firm can
be traded as a commodity and takeovers often
imply that the implicit contracts of the workers
can be easily broken by new management. (TA)
The centralization of knowledge in the hands of
management and top-down co-ordination and
innovations workers at the bottom of the
hierarchy perform very detailed jobs and have to
execute very narrow and rigid instructions.
54
The Tayloristic model as an organizational
equilibrium
PA -----gt TA Weak rights decrease the intensity
of Labour as a high-agency cost factor. TA
-----gt PA Because workers tend to be
low-agency-cost factors they rarely have
organizational or occupational rights. Self-reinf
orcing organizational equilibrium -----gt PA
-----gt TA -----gt PA -----gt The U. S a.
Market-led economy? (i) market for low-skilled
jobs (ii) market for companies.
55
The Japanese Model.
(PJ) A distribution of rights limiting some
shareholders and management liberties including
the liberty to fire the workers who hold the
right to a job of unspecified nature in the
organization. Main banking and cross-shareholding
isolate the firm from the stock exchange and
protect the workers implicit contracts from the
risk of take-takeovers. (TJ) The
decentralisation of a great deal of knowledge and
some bottom-up co-ordination and innovations
workers have to rotate among different jobs and
acquire remarkable firm-specific jobs as well as
an overall vision of the way in which production
could be improved.
56
The Japanese Model as an Organizational
Equilibrium.
Also here -----gt PJ -----gt TJ -----gt PJ
-----gt PJ -----gt TJ Because workers have rights
in the organization some agency cost (monitoring
and specificity risk) are "cancelled". This
biases the technology towards a high intensity of
high-agency-cost labour. TJ -----gt PJ Because
the technology is intensive in high-agency-cost
workers (very specific and difficult-to
-monitor), more agency costs can be "cancelled"
by giving them rights in the organization.
57
The German Model property rights
(PG) A distribution of rights limiting some
shareholder and management liberties including
the liberty to organise some aspect of the
division of labour and of job specification. Unio
ns and employers' associations acquire the right
to interfere with the organization of production
of each single firm. Co-determination with
union representatives hold for the firms with
more than 200 employees. Banks have an important
in corporate governance through credit, direct
acquisition of shares and proxy voting, they make
it very difficult hostile take-takeovers and
their presence in many board of directors favours
the co-ordination among firms.
58
The German Model Technology.
(TG) The decentralisation of a great deal of
knowledge and some bottom-up co-ordination are
also a characteristic of the German system jobs
are standardised across firms and workers can
change organization finding equivalent
occupational slots in the different firms that
share a similar division of labour.
59
The German Model as an Organizational Equilibrium
PG----gt TG Occupational Rights bias technology
toward firm-general-purpose but occupational
specific rights. TG ----gt PG A technology
intensive of occupational specific rights makes
it convenient to decrease the agency costs of
occupational skills through the attribution of
occupational rights
60
Rigidity and Flexibility
American Capitalism organizational and
occupational flexibility. Japanese
Capitalism organizational flexibility and
occupational rigidity German Capitalism organiza
tional rigidity and occupational flexibility

Occupational rigidity
Organizational flexibility
Occupational flexibility
Organizational rigidity
61
Changes in the Biodiversity of Capitalism
Different rights -----------gt Different agency
costs-----gt Different factor prices------gt
Different Institutional Comparative Advantage
-------- (Because of Globalization)---------gt I
ncreased specialization in the sectors where the
country has an Institutional Comparative
Advantage -------------------gt
Institutional Specialization ----------gt
------gt Increase in inter-country
Institutional Biodiversity ------gt Decrease
in intra-country Institutional Biodiversity
62
Globalization may increase the Biodiversity of
Capitalism
Thus, as a result of Globalization, the variety
of models of capitalism should not tend to
decrease. For instance, the U. S. should
specialize even more its institutions in goods
and processes requiring top-down co-ordination
and innovation while Germany and Japan should
specialize its institutions in different goods
and processes requiring bottom-up co-ordination
and innovation. All models could co-exist
increasing and exploiting their institutional
differences according to the well-know principles
of comparative advantage.
63
The commodification of intellectual capital a
global revenge of Taylorism?
Increasing biodiversity good picture of the
eighties? Even then American attempt to imitate
Japan. In the nineties the situation got
completely reversed and America seems to be the
model that everyone should imitate. What
happened? Here, we should consider
Globalization not simply as cultural and economic
integration but as a new set of political
conditions that has allowed the global definition
and enforcement of property rights and, in
particular, of intellectual property rights.
64
Intellectual property rights are global rights.
Intellectual property rights cannot be locally
defined and enforced like the rights on physical
assets. For a physical asset the existence in a
given location implies that it is not used in
other locations. For intellectual assets
non-rivalry in use implies that the enforcement
of property rights should be global. In nineties
the downfall of the Soviet Union made it possible
a much stronger definition and enforcement of
Intellectual Private Property Rights.
65
When there is weak enforcement of IPR (80')
a) More technologically advanced countries give
free knowledge to less advanced countries.
Catch-up is possible. b) Top down co-ordination
and innovations systems, based on the
transmission of precise and formalised knowledge,
are easily exploitable by bottom-up co-ordination
systems based on informal and tacit knowledge.
The knowledge developed by the former can be
appropriated by the latter while the opposite is
not possible.
66
When there is strong enforcement of IPR (90)
a') More advanced countries can exploit with
monopoly prices less advanced countries. A
widening gap is possible. b') Top-down
co-ordination and innovation systems, based on
the transmission of precise and formalised
knowledge, are better suited for the production
of IPRs than bottom-up systems that produce
informal and tacit knowledge. Thus, the global
enforcement of IPR favoured the U. S. in both
respects. This may explain the change from the
eighties to the nineties.
67
A revenge of Taylorism?
There is pressure to adopt this new version of
Taylorism where commodified knowledge (or reified
intellectual) capital separates conception from
execution. Fundamental difference between
private property of intellectual and physical
assets - The exclusion from access to a
physical asset is a local exclusion access to
other similar assets in different locations is
usually possible. - The exclusion from access to
an intellectual asset is a global exclusion
access to other similar assets in other locations
is not usually possible.
68
A new model of accumulation?
The New Property Right Approach has stressed the
incentive effect of ownership of specific assets
in a world of incomplete contracts. However,
these incentive effects are much stronger for
intellectual regime.
The complementarity between the accumulation of
skills and intellectual capital may generate
increasing inequality
-----gt Ownership of Intellectual Capital -----gt
Incentive to acquire new IPR-specific skills
-- -----gt Ownership of more Intellectual Capital
- --------gt
69
Cutural standardisation another dimension of
globalization

• Markets are complicated instituions that require
  also important cultural changes.
• We will consider
• The relation between culture and division of
  labour in agrarian societies.
• The relations between them in market and
  industrial societies.
• How the relations changes with globalization.

70
This seminar draws on
Bowles S., Pagano U. (2003) Economic Integration,
Cultural Standardisation and the Politics of
Social Insurance. Quaderni del Dipartmento di
Economia Politica N. 408 Università di Siena.
Forthcoming in Bardhan P., Bowles S., Wallerstein
M. (2005) Globalization and Egalitarian
Redistribution Russell Sage Foundation and the
Princeton University Press, Princeton D'Antoni
M., Pagano U (2002) National Cultures and Social
Protection as Alternative Insurance Devices.
Structural Change and Economic Dynamics, Vol. 13
pp. 367-386 . Pagano U. (2003) Nationalism,
Development and Integration the Political
Economy of Ernest Gellner. Cambridge Journal of
Economics V. 27 N. 5 pp.623-646. Pagano U, Rossi
M. A. (2004) Incomplete Contracts, Intellectual
Property and Institutional Complementarities. The
European Journal of Law and Economics V.18 pp.
55-76. .
71
Babbage Principle of the division of labour.

• "That the master manufacturer, by dividing the
  work to be executed into different processes,
  each requiring different degrees of skills or
  force, can purchase exactly that precise quantity
  of both which is necessary for each process
  whereas, if the whole work were executed by one
  workman, that person must possess sufficient
  skill to perform the most difficult, and
  sufficient strength to execute the most
  laborious, of the operations in which that art is
  divided."(Babbage, 1832 pp.137-8).

72
According to Babbage

• The division of labour entails
• - the exploitation of the principle of
  comparative advantage (because it allows each
  individual to perform only that activity in which
  she is comparatively more gifted).
• - a dramatic saving of training time.
• If each worker is performing all the tasks
  necessary for a certain productive process , it
  also becomes necessary that each worker learn all
  these tasks.
• By contrast if a very detailed division of labour
  happens to be introduced, and each worker is
  assigned only one task, then she obviously has to
  learn only that task.

73
Babbage and Taylor

• Braverman (1974) pointed out how the three main
  principles of Taylor's "scientific management"
  implied respectively
• a) the dissociation of the labour process from
  the skills of the workers
• b) the separation of conception from execution
• c) the use of management's knowledge of the
  productive process to plan and control each step
  of the productive process.
• In this respect "Taylorism" can be considered as
  a detailed set of corollaries of the
  Gioia-Babbage principle.

74
Hierarchy and the firm

• The Gioia-Babbage principle gives powerful
  reasons for the relative efficiency of an
  authoritarian and detailed division of labour. It
  offers a normative justification for the
  hierarchical structure of the firm hierarchies
  increase productivity, and therefore human
  welfare, because they save on the learning
  necessary to acquire new skills and use more
  efficiently given skills because of the principle
  of comparative advantage.
• Command giving and taking save on training costs.
• Firms exists because the evaluation of command is
  costly?
• (Indeed, the great informational advantage of
  command is that you do not have to evaluate it)

75
Smithian principles of the division of labour.

• The difference in skills more a consequence
  than a cause of the division of labour. There is
  little comparative advantage to be exploited
  before the introduction of the division of
  labour. The differences in skills arise as a
  consequence of the introduction of the division
  of labour.
• Smithian principles of the division of labour
  improved dexterity, saving of time otherwise
  spent on changing occupation, and invention of
  machines by workmen. Specialization favours the
  acquisition of job-specific skills.

76
Smith vs. Babbage.

• Babbage concentrate on the advantages due to an
  optimal utilization of given skills
• Smith the advantages of the division of labour
  due to a better acquisition of new skills,
• Babbage the division of labour increases
  productivity because it minimises the amount of
  learning which is required for doing.
• Smith the division of labour increases
  productivity because it maximizes the amount of
  learning acquired by doing.
• For Babbage the learning necessary for the doing
  should be minimized
• For Smith the learning due to the doing should
  be maximized.

77
Time profile of Smith and Babbage principles.

• The benefits of the Babbage principles is
  different occur immediately by reducing the
  training time
• The Smithian principles take more time. They
  occur after that the workers have acquired
  additional skills because of the learning by
  doing process.
• Overall optimization problem of productivity over
  time often involves some compromise between the
  degrees of specialization suggested by the
  Babbage and the Smithian principles.

78
Degrees of specialization.

• The Smithian principles involve a less detailed
  division of labour than that which the
  Gioia-Babbage principle does.
• Increases in specialization decrease the
  learning required for doing certain activities,
  but, after a certain point, they may also inhibit
  the future advantages to be gained from the
  learning by doing process. In this case enlarging
  the job may be a way of exploiting the Smithian
  advantages.
• Work satisfaction (also enphasized by Smith)
  points in the same direction.

79
Babbage-type and Smith-type workers

• Up to now we have spoken in terms of an optimal
  average degree of specialization involved by the
  two principles.
• In actual market economies some workers enjoy the
  Smithian advantages of learning by doing and
  others are employed in such a way to minimize
  training time.
• In the global economy this has also become often
  a distinction between workers of core
  industrialized countries and of third world
  countries.

80
The market and the division of labour.

• According to Smith the market is the ultimate
  cause of the division of labour and its size
  limits the extension of the division of labour.
• However, as Marx and Coase, pointed out some
  years later firms have a division of labour
  without exchanges. Moreover in primitive and
  agrarian societies there is a sophisticated
  division of labour but there are very
  underdeveloped markets.
• So, what is the link between specialization and
  market economies?

81
According to Gellner,

• Markets may inhibit the division of labour.
• The job mobility that is typical of markets
  implies that acquiring job specific skills may be
  more dangerous than in agrarian societies. How is
  this problem overcome?
• Here the role of cultural standardisation and of
  nationalism becomes very important.

82
Agrarian vs.. Market Industrial Economies.
Agrarian societies Horizontal and vertical
cultural and linguistic diversity are a product
and a cause of social and economic
immobility. Linguistic/cultural diversity and
socio/geographical immobility are complementary
elements of a very stable institutional
equilibrium.

Industrial societies Horizontal and vertical
cultural and linguistic standardisation are a
product and a cause of social and economic
mobility. Linguistic/cultural homogenization and
socio/geographical mobility are complementary
elements of a very stable institutional
equilibrium.
83
Institutional Equilibrium of the Agrarian Society
----gt Economic stagnation ----gt No structural
changes ----gt Immobile division of labour ----gt
Vertical and horizontal cultural
differentiation (no nationalism) ----gt No
reward for productive effort and innovation ----gt
Economic stagnation ----gt
84
Institutional Equilibrium of the Industrial
Society.
----gt Economic development ----gt Frequent
structural changes ----gt Mobile division of
labour ----gt Social mobility and cultural
homogenisation (nationalism) ----gt Rewards for
productive effort and innovation ----gt Economic
development ----gt
85
Stable Institutional EquilibriaAgrarian Society
Social and Economic Immobility
Horizontal and Cultural Diversity
86
Stable Institutional EquilibriaIndustrial
Society
Social and Economic Mobility
Horizontal and Cultural Standardisation
87
Transition from agrarian to industrial societies.
It requires a marriage between a State (a
potential National State) and a High Culture to
be spread on the majority of the population.
Ideal initial conditions (France and England) a
single State ruling on a territory with a shared
view of the dominant high culture. Italy and
Germany a groom (National State) for a bride (a
high culture). Belgium and Switzerland symmetric
cases? The difficult Balkans no groom and no
bride?
88
Political conditions and cultural- linguistic
differentiation
89
Gellners Problem.
Adam Smith a market economy entails the
learning by doing advantages associated to the
division of labour Marx underlined how a complex
division of labour pre-dates market economies and
Coase (and Marx) how the division of labour is
organised also by other institutions such as
firms. Gellners problem contrary to Smiths
intuition the highly mobile market economy would
be the most unfriendly environment for promoting
the acquisition of job-specific skills. Gellners
Solution complementary institutions (mainly
nationalism), promoting cultural standardisation
and social protection, make market mobility
compatible with a complex division of labour
90
According to Schumpeter

• Industrial mutation ..... incessantly
  revolutionises the economic structure from
  within, incessantly destroying the old one,
  incessantly creating a new one. This process of
  Creative Destruction is the essential fact about
  capitalism. It is what capitalism consists of and
  what every capitalist concern has got to live in
• The problem may be reformulated by saying that
  the fear of future "Destruction" may seriously
  inhibit the "Creative" element of Capitalism.
  Specialising in new skills and equipment may be
  inhibited by the fear that they will soon become
  old and redundant.

91
Keynes and illiquidity.

• From the General Theory
• capital equipment will differ from another "(a)
  in the variety of the consumable in the
  production of which they are capable of
  assisting, ......(c) in the rapidity with which
  the wealth embodied in them can become "liquid",
  in the sense of producing output, the proceeds of
  which can be re-embodied if desired in quite a
  different form"
• Extending the Keynesian concept the lack of
  liquidity of specialised (human and non-human)
  capital may inhibit specialised investments (in
  both human and non-human investments). It may
  favour Babbage over Smith.

92
Williamson and the safeguards for specific
investments

• The degree of specificity of investments is
  measured by the percentage of these investments
  and it is not substantially different from the
  concept of (lack of) liquidity considered above.
  When complete contracts are not possible, agents
  who make specific investments cannot defend
  themselves against opportunistic behaviour by
  moving their investment to alternative relations
  with new partners. They need safeguards for these
  investments.
• Job rights and safeguards are not necessarily
  inefficient limitations to market mobility but
  they can rather be efficient ways of encouraging
  human capital investments

93
Williamson and the market economy dilemma.

• The mobility of market economy could inhibit the
  "specific" investment in human capital that are
  typically associated to the Smithian advantages
  of the division of labour.
• A market economy would find itself in this
  dilemma
• either to give up the productivity improvements
  that come with the learning by doing Smithian
  advantages,
• or to give up that mobility among occupations
  that is the most typical characteristics of
  markets.

94
Gellner and New Institutional Economics.

• A) Cultural standardisation can eliminate a lot
  of specificy. Liquid markets emerge with cultual
  nationalism. The large majority of assets are
  specific in agrarian societies. Specificity or
  liquidity are not technologically given but they
  can be altered by national policies.
• B) National solidarity can reduce the risks of
  specificy. Unemployment benefits and subdised
  retraining imply that one has more time to find
  the right employer and to retrain if he is not
  available.
• C) The specifity risk re-appears in the form of
  specificity to a certain culture. Investments in
  this culture require appropriate poltical
  safeguards.
• D) Only, when all this fails, we are in
  Williamsons world of private governance.
• E) Institutional complexity related more to
  liquidity than to specificity.

95
Globalism the highest stage of nationalism?
Like nationalism, globalism favours a
self-reinforcing interaction between cultural
standardisation and various forms of market
mobility. (But, because of globalism a new
diversification emerges in many national
states). Unlike nationalism, globalism does not
stress the complementarity aspects between social
protection and cultural standardisation.
Economic integration is not associated to
redistribution and risk- sharing among the
individuals sharing the same culture. Social
policy becomes a divisive issue. Some individuals
(the cosmopolitans and/or the rich) can more
easily replace social protection with cultural
standardisation than other individuals (the
provincial and/or the poor).
96
Globalism is unrestricted cultural and economic
integration without social protection (offered at
international level). But can nations still
offer social insurance at national level in a
global economy? Can the gains due to
international trade fund the insurance
expenses due to the risks of increased
specialization?
Social insurance can be provided if there is a
sufficient number of sectors in the
economy. Specialization and economic integration
increase collective risk and imply that
countries find it more difficult to offer social
insurance. The optimal degree of specialization
should involve that the marginal gains from
specialization should offset the increase in risk
due to specialization. However, the number of
sectors is a public good and private agents will
tend to overspecialize the national economy.
97

• If globalism is economic and cultural integration
  without
• social protection, it implies
• a) Increased international cultural
  standardisation among nations
• but increased vertical cultural diversity within
  nations (cosmopolitans and provincials).
• Neo-agrarian characteristics of the modern
  globalised world?
• b) Decreased social protection due to the absence
  or the weakening of international and national
  social protection. The argument can be also based
  on the tendency to overspecialise according to
  the standard theory of comparative advantage.

While international institutions provide enforce
IPR and various standards they provide little
insurance for the specialised economy. In this
sense globalization is also a transition to a
world of uncertainty where the different sectors
cannot insure each other.
98
Globalization summing up the argument

• 1) Globalism is (like nationalism) characterised
• by cultural standardisation and economic
  integration.
• Unlike nationalism, the process occurs in an
  international environment
• without forms of social protection.
• Moreover specialization, which is carried out
  according to the
• standard principle of comparative advantage may
  imply that each
• country overspecialises and it is unable to
  offer social insurance
• for the losers.
• 2) Specialization according to the principle of
  comparative institutional advantage may imply
  that for some countries there is counter-tendency
  (as long as social protection and job rights
  allow some form of Comparative institutional
  advantage).
• 3) However, this countertendency may be rather
  weakened by the fact that globalization is also
  associated to stronger and upstreamed IPRs.

99
Globalization are we moving towards a
neo-agrarian society?

• There are some paradoxical similarities between
  the inequalities of
• the modern world and those of agrarian societies
• a) Vertical and horizontal cultural diversity due
  to differential
• access to the global culture.
• b) Lack of social security and solidarity.
• c) A new cosmopolitan aristocracy based on
  monopolies
• on Intellec