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POWER RELATIONSHIPS

The idea that "workers" are being exploited by "owners" is based on the notion that workers always have less negotiation power than owners and this seems to be somehow unfair. The power imbalance in negotiations is true albeit it can benefit either party. But such imbalance is never "unfair". In order to understand why this is so, we need to understand the basis for this "power balance/unbalance".

The relationship between different BVAs in a given business is -mostly- controlled by the following factors:

1. Time preference
2. BVA's share of true interest
3. Group negotiation
4. Market conditions

Time preference

One of the main ideas of communism was that as the compensation of workers from their work in companies is far less than the compensation of owners; workers are thus "exploited" by the owners. This idea was revolutionary at the time and it looked quite correct. The error in this analysis was not simple nor trivial and it took the entire economic profession (in the form of Austrian Economics and more precisely Mises) to understand it. What Mises realized was that workers are paid less simply because of their time preference. Workers want their wages now while owners had to delay their enjoyment of their investment for very long times. This preference in getting satisfaction now as opposed to later had a price and this price was lower wages for workers while higher profits for owners. BVAs with higher share of true ownership typically tend to be the ones who had chosen to delay the satisfaction of their needs (what we used to call "owners"). On the other hand, BVAs with a lower share of true ownership tend to be the ones who want satisfaction now (what we used to call "workers"). But these characteristics are not written in stone and they change from time to time and business to business.

BVAs share of true interest

The second element in the negotiation balance of power is BVA's share of true interest. In the graph above, we depicted only one scenario. However in real life there are an infinite number of possible scenarios. Purely as a classification convenience, we have split them in three classes which we call:

• Case #1 - Employee power
• Case #2 - Balanced
• Case #3 - Infrastructure power

In these cases we assume that only individual BVAs enter negotiations. We can see these classes below.

This is the scenario where the business' infrastructure has very little capital value. Most of the capital value is brought in by people working for the company. These types of business are typically service-oriented business where "human capital" is critical. The infrastructure is perhaps a rented office with a few computers, phones and faxes. The product is a service and good service can only be delivered by personnel who are good at what they do. Every person delivering said service that decides to leave the company will inflict a severe loss of capital to the business, capital which will cease to produce profits. Thus, most of the bargaining power is on the side of employees.

This is the scenario where the business' infrastructure has about the same capital value as the one brought in by people working for the company. These types of business are typically high-tech where expensive and complex equipment is necessary but without talented people all that equipment is worthless. These companies deliver a complex product which must work. Employees leaving the company will inflict non-trivial damage.

This is the scenario where the business' infrastructure has most of the capital value when compared to the one brought in by people working for the company. These types of business are typically medium-tech with very high initial investment costs and very long investment horizons such as electricity generation, refineries, chemical manufacturers and so on. These companies deliver a medium-complexity product which must mostly work, but there is some room for error. Employees leaving the company will inflict low to trivial damage since most of them require average training.

Group Negotiation

The third element in this balance of power is the modality in which people approach negotiations. In this section we assume that multiple employees enter negotiations simultaneously and in a unified group (e.g. union negotiations). Individuals surrender their individual BVA true interest to the group for maximum negotiation power. As with the previous section, we have three possible scenarios:

• Case #1 - Employee power
• Case #2 - Balanced
• Case #3 - Infrastructure power

In these cases as employees coalesce in a group, employers have the tendency to do the same. Thus in these cases the balance of power is decided as the sum of all individual contributions in each group. This total group BVA's true interest can be seen in the graphs below as the areas (red and green respectively) under the curve. For those mathematically inclined, yes, we are talking about the value of the integral under the curve.

We can see these cases below.

In this case it is obvious that the total invested capital belonging to employees is superior than the total capital invested in business infrastructure.

In this case the total invested capital belonging to employees is equivalent to the total capital invested in business infrastructure.

In this case the total invested capital belonging to employees is far smaller to the total capital invested in business infrastructure.

Market conditions

The last element controlling power balances is the environment in which BVAs must operate. There are many such conditions, and we will separate them into two classes; the ones affecting employees and the ones affecting the business itself.

For employees we have:

1. The first issue is unemployment. If unemployment is low then business will have incentives to negotiate since replacing an employee is always costly in terms of searches and training. On the other hand, if unemployment is high, employees are more easily replaced. In a truly free market, unemployment is always very low.
2. The second issue is population age. If the average age of potential employees is low, then business will have an incentive to replace older employees with younger ones who can work more efficiently and for lower wages. The opposite is also true. In a free market as unemployment is always very low, employee age is almost never an issue.
3. The third issue is entry barriers. If employees have low entry barriers to the creation of competing business, employers will have higher incentives to retain employees. The opposite is also true. In a true free market as there are no copyright issues nor taxes, entry barriers are typically much lower than the ones in current managed markets.

For businesses we have:

1. Market conditions which could be booming or declining. In booming conditions hiring needs will be higher while the opposite would be true in opposite conditions.

Note: please see the Glossary if you are unfamiliar with certain words.