Adam Gifford

A Constitutional Interpretation of the Firm

When members of a firm make firm-specific investments they will earn rents. Potential rent-seeking on the part of the owner of the firm and other employees reduces the value of an employees firm-specific investment and, as a result, reduces the level of those investments. In this context the firm can be thought of as a set of interdependent relationships where the actions of any one individual can affect the rents of all others. The owner of the firm will desire to set up an institutional arrangement to protect the individuals property rights in specific investments as part of his effort to maximize profit. Establishing this institutional arrangement is similar to the establishment of a constitution by the state or other organization. This constitution protects the property rights of the members of the firm and as a result encourages the creation of property, that is, the firm-specific investments. The constitution of a firm consists of a set of interdependent explicit and implicit contracts between the firm and its various members, as well as mechanisms for enforcing and monitoring these contracts.As a practical matter, it is obvious that workers normally do not enjoy costless or near-costless mobility, and thus an ordinary “at will” employment contract may no longer be sufficient to induce workers to join a firm. If, in order to function productively within an enterprise, individuals have to accumulate, and pay for, firm-specific capital assets, the simple neoclasical logic fails (Furubotn, 1988: 167).

Levels of Selection and Methodological Individualism

Whitman argues that group selection is consistent with methodological individualism. He begins by defining a weak form of methodological individualism in which agents are not necessarily self-interested or rational and shows that this form is consistent with Sober and Wilson’s model of group selection. However, Sober and Wilson’s group selection is also consistent with a methodological individualism in which the individuals are rational and self-interested, and consistent with individual selection as well. A version of group selection similar to what Hayek may have had in mind when he talked about groups out-competing other groups is presented, however, this is not a version of group selection that is compatible with methodological individualism.

On nationalizing private property and the present value of dictators: Reply

John Lott and David Reiffen (1986) argue that our explanation of socialism is both inconsistent with rational behavior on the part of government leaders and empirically unsupported. They also assert that our revenuemaximizing inframarginal taxes are incorrectly specified. We feel that their comments are a result of a misreading of our paper (1984). Our primary concern was with the capture of the inframarginal rents of labor suppliers, rather than the return on capital. Labor returns in a capitalistic society typically comprise 70 to 80 percent of income, and are therefore a potentially large source of governmental wealth. Although in framing our argument in a way consistent with Brennan and Buchanans (1980) framework we choose to evaluate alternative tax regimes, such taxes actually take the form of a governmental labor monopsony. All firms are nationalized and workers become government employees. By choosing wages which just cover substance, governmental profits are increased by what would be workers rent in a capitalistic economy. Although substance may vary from worker to worker, the government would not know this variation and wages would realistically be set at a level sufficient to draw most of the population into the work force. Any variation in wages seen would reflect not differences in productivity in the usual sense, but rather differing political pay-offs according to the workers service towards maintaining the political regime, or conversely, his potential to disrupt it. The resulting wage structure would be independent of economic productivity, and the government would have to rely on some form of directed labor allocation. The resulting economy would correspond to the Soviet model of communism, with a total elimination of non-governmental employment opportunities. In Western European countries socialism does not appear to be motivated by the desire to maximize governmental revenue, but rather as part of an attempt to achieve employment or other political goals. The existence of a private sector economy of a significant size precludes the exercise of monopsony power in the labor market. (It is interesting to note that these Western socialized economies do not prohibit out-migration. Coun-