RISK
Yet another aspect that we need to explore is risk. This factor has very little -if any- impact on power relationships but it is important because it helps us understand why it is inherently fair that BVA's with larger capital investments make large profits.
When entering into a negotiation, typically either side does not care much about risk. Granted, there are certain exceptions but for the vast majority of the jobs the question is one of capability to perform the job and not one of risk acceptance capacity. For example if you interview for an office job, the question is whether or not you are computer literate, not if you are willing to put your salary on the line as a collateral for a corporate loan.
Yet, risk is always present in any business. There are at least two types of risk:
- Internal risk which is related to an error in economic calculations (e.g. a flawed business plan, the wrong price point, the incorrect product, the wrong season and so on).
- External risk which is related to changing market conditions.
BVA's with large capital investments (typically infrastructure) are severely affected by these types of risk. BVA's with low capital investment are affected considerably less. This is so because the first type of BVAs' profits are tied to business performance. Think in terms of profit distribution to shareholders, performance bonuses and so on. The second type of BVA's wages are typically not related to business performance. Companies offering widespread performance bonuses are very few. For most employees risk levels are fixed because the only options are either losing the job if the business collapses or staying in the payroll with the same salary level regardless of profits. Have you ever wonder why are there so few co-operatives? This is the answer. Most people abhor risk and becoming part of a co-op means accepting the risk of BVAs with large capital investments although with smaller real capital investments. This can be visualized better in the graph below.
We have mentioned before that larger profits for BVAs with large capital investments are fully justified by their decision to go against the time preference. However, as you can see, they are also accepting a much larger dose of risk while at the same time sheltering their employees from it. Thus, their profits are further justified in terms of risk.
Lastly, if we look at the "filthy rich" scenario in terms of risk, it is true that "the" filthy rich person won't much care if the business goes broke because they are already set for life. However, all the Vice Presidents, and Directors and Managers and Supervisors do care a great deal if the company collapses. They are ones facing the brunt of the risk and are very much affected by it. Just because there is one person who won't be affected by risk, this does not mean that the business won't be.
SKILLS
Many employees complain that their bosses are making fortunes by doing nothing in a business that it is so, but so stupid and easy to do that even a monkey can do it. Yet, they don't compete with this business. Why?
In a word? Entrepreneurship.
Much that a business may look simple, typically it is not. This is so because although business skills can be learned, entrepreneurial spirit cannot. We either have it in sufficient quantity to start a business or we do not. Entrepreneurial spirit is a scarce human property just like any other. In the same manner that most of us are not prepared to go through medical school and become neurosurgeons, most of us are not prepared to become full-fledged entrepreneurs. Paraphrasing a "street" saying, it is simply not in our blood. However, we should not be ashamed of this condition. This is so because just like any other condition it is statistically distributed in the population. Most of us don't have it. Nature is evil but there is nothing we can do about it. The lesson to be taken from this is simple; entrepreneurs (or BVA's with large capitals at stake) earn more because they can do what we can't. Simple supply and demand. Yet, by so doing the markets are not evil; they are actually kind because they have found a way to compensate for nature's evilness. By handsomely rewarding capable entrepreneurs the market ensures that capable people are in charge of creating the correct products in sufficient quantities at a price we can afford to satisfy our needs. Quid pro quo.
UNLESS
All these conclusions are valid if and only if BVAs are operating in either free or managed markets (as appropriate). However, should markets become compulsory for whatever reason, all bets are off. For example, a communist market is a compulsory market where you can only work where and where you are told. Similarly, if BVAs need to operate under dictatorial conditions (either military or civil) then an entirely different set of rules apply and power relations in negotiations are typically overwhelmingly biased towards employers. This is so because employees are considered "destabilizing elements" or "terrorists" or "contrary to national security" and so on.
SO EVERYTHING IS OK, RIGHT?
Not a chance. Let's be clear. We wish there would be a magical way to satisfy the needs of all people so that there would be no bosses, no hardships and no misery. If you know a way, a way that truly works, please, please, please do not keep us in suspense and let us know right away!
Yet, in the meantime, this is all we got. This is the absolutely best we can hope for. It is convoluted, complicated, messy, pathetically inefficient and cruel. We give you all of that, but we repeat:
It is the best we have.
We know from all the studies that have been done that humans only wish to work up to the point at which the work breaks boredom. All extra work beyond that point is hardship. Psychologically we know this. We also know that almost every working person is way past that point. We also know this. We know that there are plenty of people working shitty jobs in shitty places during shitty hours (yes, shitty). We know that too.
And we are with you because as our motto at the top of the page says, we are just like you.
We are here to tell you that however shitty your situation may be, it was made shittier because of government action and even if governments would not exist, it would still be shitty, just far, far less. Borrowing from a TV show, we call this to "embrace the suck".
But it is not all bad. It does not have to be. The flip side of the coin is that it is up to you to make it better. You can. We can. Everybody can. Of course, should governments would not exist this would be far, far easier and it is thus for this reason that we are Austro-Libertarians. And you can be too.
All you have to do is to understand that governments are not here to help you; only you can help yourself. Sure, occasionally governments will toss you a freebie. When that happens, take it. Previous generations already paid for it. But you should not depend of the state, you should depend on yourself. And your family. And your friends. And your business partners. And of the notion that everybody is selfish but that this is OK because their way forward is to serve your needs.
We are here to tell you that relationships between employers and employees will never be satisfactory but at least in a free market there is a valid reason for it. And this reason is based on the capacity to benefit the business that each party brings in. This is inherently fair although not satisfactory. It is for this reason that we urge you to become a better entrepreneur, so that you break your dependency from this unsatisfactory relationship. Again. It is up to you.
CONCLUSION
The idea that workers are systematically exploited by business is a fallacy. In order to understand this fact we must analyze the power relationships of BVAs at the negotiation table. These relationships vary with at least four factors which in term vary from business to business and from moment to moment. These relationships sometimes favour employers and sometimes favour employees. But whichever the actual negotiation scenario may be, even in managed markets, this scenario is always fair. This is so because employers (typically BVAs with high capital investments) are accepting a disproportionately large amount of risk and delaying the satisfaction of their needs for very long times.
Negotiation power changes with market conditions but one of the most remarkable insights is that managed markets invariably bias negotiation power in favour of the employer. This is clearly contrary to the "intent" of politicians through the application of laws and regulations, yet this is the final result. Yet another reason to prefer truly free markets over managed ones.
Another interesting insight is that whether a person negotiates by itself or in a group, power relationships are also fairly balanced and dependent upon the four factors. It is for this reason that some Unions are very successful while other Unions are not. Just because there is group negotiation process this does not automatically mean that the power is on either side. All four factors still apply and each case is different. Which means that Unions are overrated indeed.
All these conditions are not economic science fiction but reality. Probably the closest example we can get to a minimally managed market is Singapore (we talked about it in our article What Entrepreneurship Looks Like).
And so, there you have it. The mysteries of the relationship between "workers" and "owners" revealed. Not too complicated, right? Of course, all these explanations only hold if you want to enjoy a maximum of goods and services to satisfy your needs at minimum prices. But perhaps you enjoy not having choices for goods and services and perhaps you enjoy your needs not being satisfied and perhaps you enjoy not being able to afford satisfying them. That's OK. It's your choice. We? We won't be joining you anytime soon.
Note: please see the Glossary if you are unfamiliar with certain words.
