Tuesday, 13 November 2012

Who is exploiting who?

Are we all Marxists now? At least as far as the theory of the firm is concerned. In a Journal of Finance paper back in 2000 Luigi Zingales wrote,
[...] there is a clear Marxian flavor in the role played by ownership in Grossman and Hart (1986) and Hart and Moore (1990). The residual rights of control allow the owner to extract the surplus out of the worker. The key workers, thus, should control the assets they work for to prevent this “exploitation.” Unlike in Marx, however, this reallocation of ownership is not motivated by distributional concerns but by efficiency concerns. If workers expect to be exploited, they will not make valuable investments. Although I am not aware of any corporate governance paper arguing along these lines, I think this would be a reasonable literal interpretation of the property rights view of the firm.
Actually this point has been made before. In a footnote on page 5 of his 1995 book "Firms Contracts and Financial Structure" Oliver Hart wrote,
[g]iven its concern with power, the approach proposed in this book has something in common with Marxian theories of the capitalist-worker relationship, in particular, with the idea that an employer has power over a worker because the employer owns physical capital the worker uses )and therefore can appropriate the worker's surplus); see e.g. Marx (1867: ch 7). The connection between the two approaches has not so far been developed in the literature, however.
Zingales goes on to say,
[i]nterestingly, this is not the way this view has been used. Quite to the contrary, it has been reinterpreted to support the shareholders’ value maximization paradigm. The best example is Shleifer and Vishny’s (1997) corporate governance survey. They recognize that contracts are incomplete and that the allocation of the residual rights of control shapes the ex post distribution of surplus. But they argue that insiders have a better bargaining position as a result of their ability to quit. Outside financiers — they conclude — should be protected against expropriation through the residual right of control.
So, just who is exploiting who?

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