Thursday, October 6, 2011

Lunatics Never Combine

In a 1927 speech to the London Liberal Candidates Association, Keynes told an anecdote about "a friend" who had recently visited a lunatic asylum. "How is it," the friend asked a warder, "that it is safe for you to run the concern with such a small staff?" "Oh," came the reply, "lunatics never combine."



Actually, the apocryphal story and its punchline can be traced back at least to the 1880s. But the point remains that under some circumstances it is sheer lunacy to not join into combination. This applies equally to unions, industrial cartels and users of common pool natural resources like fisheries or forests.

Recall that Sidgwick distinguished between the baleful combination of workers for the purpose of limiting output and the beneficial combination of fishers limit fishing so to sustain the fish stocks. Keynes added business firms to the mix, arguing that under conditions of decline or stagnation, individualistic competition can be ruinous. Surveying social overhead costs from the perspective of a super combination, John Maurice Clark asked "If all industry were integrated and owned by workers, what would be the relation of constant to variable expense?" His answer was that "…it would be clear to worker-owners that the real costs of labor could not be materially reduced by unemployment."

Taking his cue from Chapman's analysis of the hours of work, John R. Hicks hailed the productivity enhance role of unions when he argued that "a very modest degree of rationality on the part of employers will thus lead them to reduce hours to the output optimum as soon as Trade Unionism has to be reckoned with at all seriously…" Henry Fawcett had proclaimed a similar verdict 60 years earlier when he speculated that "masters would, in every instance, be compelled to yield" when workers had as strong a case for shorter hours as had the Newcastle engineers who struck for a nine-hour day in 1871.

What are the implications of all these rational combinations for methodological individualism? Is Homo economicus a lunatic?

2 comments:

  1. You often mention John Maurice Clark. Can you recommend a good resource for those unfamiliar with his work?

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  2. Studies in the Economics of Overhead Costs. Chicago: University of Chicago Press, 1923

    "Some Social Aspects: An Application of Overhead Cost to Social Accounting, with Special
    Reference to the Business Cycle." The American Economic Review, Vol. 13, No. 1, Supplement, Papers and Proceedings of the Thirty-fifth Annual Meeting of the American Economic Association (Mar., 1923), pp.
    50-59.

    ReplyDelete