Do you work to live, or live to work?
We’re having more fun with economic models this week, exploring how changing the rules of various games we’ve played so far can shift bargaining power and create win-win scenarios that can help level the playing field between you and your boss.
Welcome to the fifth week of Econ 101. If you haven’t already, read Chapter 5 of the Core Econ textbook “Economy, Society, and Public Policy.”
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Key takeaways
At the end of our last lesson, we noted that many scenarios laid out in this textbook might feel abstract or even cartoonish.
That’s still the case in this chapter, but the economic models have become more complex. In order to make sense of them, it’s important to learn how changing “the rules of the game” can create fairer, more efficient outcomes for everyone.
Economists call those rules “institutions”: They’re the social norms and laws regulating how people interact, including who does what job and how they’re compensated.
Much of the chapter focuses on Angela, a farmer, and Bruno, the owner of the land Angela cultivates. Their economic relationship and their bargaining power shift in different scenarios, including slavery, independence and and democracy. Even when Bruno has total power over Angela, output is constrained by what’s physically possible for Angela to produce.
This chart should look familiar, but it now takes Angela’s biological needs into account. She needs 2.5 bushels of grain to survive, so the shaded area shows all the feasible combinations of hours worked and grain produced. So how much should Bruno make Angela work? How much can he make her work? What’s his cut?
The answer depends on what institutions are in place. What if Angela can refuse to work for Bruno and instead receive subsistence rations of 2.5 bushels per day from the government? Bruno then has an incentive to give her at least three bushels for a day’s work. That extra half bushel is Angela’s economic rent — what she gains for taking part in the exchange, above and beyond her fallback option.
As the rules for Angela and Bruno’s arrangement change, so do their bargaining powers. If Angela gets subsistence wages, or a minimum wage, or even the ability to walk away from the deal, she has more bargaining power. Models can help us find a mutually beneficial arrangement, and the specific institutions at play can help make the allocation of that surplus fairer.
Important definitions
- Institutions: The rules, laws and social norms that define how individuals interact. Institutions can influence who has bargaining power.
- Economic rent: What both sides of an interaction gain from an exchange, above and beyond their fallback option. The joint surplus is the total of all parties’ economic rent and may be distributed any number of ways.
- Gini coefficient and Lorenz curve: A formula and a model, respectively, used to measure inequality.
David Brancaccio’s thoughts on Chapter 5
I found buried treasure in the textbook this week.
The story of the Royal Rover, an 18th-century pirate ship, makes the case that rules and regulations are better than a free-for-all when it comes to people mutually profiting from economic relationships.
Pirate crews were often bound by contracts that offered many more rights and benefits than those of legal merchant ships. The Royal Rover, which attacked and plundered off the coast of West Africa, had a kind of written constitution that outlined rules of behavior, gave voting rights and guaranteed fresh food and decent drink to everyone aboard. As for profit-sharing, the captain and the quartermaster got two shares of anything captured. Other senior staff got between a share-and-a-half and share and a quarter. Everyone else got one share. This is a startling level of pay equality that stands in sharp contrast to so many modern-day corporations.
If pirate ships exploited their crew, fed them poorly or failed to give them decent compensation, crew members were likely to go rogue and run off with the bounty.
An analogy comes to mind regarding world trade. When countries simply wing it with their trading policies, a few powerful players win and there are many losers. Enter the World Trade Organization, an institution that specifies the rules of international commerce, arbitrates disputes and enforces penalties for violators. This is based on the economic principle that when people with different goals, skills or types of property interact with each other, they stand a better chance of mutually benefiting if there are institutions enabling them to negotiate and enforce the rules of the game.
The book also talks about working conditions in the absence of laws and rules. That often, even now, takes the form of slavery.
Human bondage is an abomination that scholars say underpinned economic development. Slavery “helped turn a poor, fledgling nation into a financial colossus,” Matthew Desmond wrote in his excellent exploration of the origins of American capitalism for The New York Times’ “1619 Project,” which later became a Hulu series. “What made the cotton economy boom in the United States, and not in all the other far-flung parts of the world with climates and soil suitable to the crop, was our nation’s unflinching willingness to use violence on nonwhite people and to exert its will on seemingly endless supplies of land and labor.”
Slavery was outlawed in the United States in 1865. It persists in various forms throughout the world. A shocking number: 50 million people were enslaved around the world as of 2021, according to the most recent estimates (PDF).
The textbook also links to a TED talk by Kevin Bales, a professor and anti-slavery campaigner, who says that when corruption undermines laws, slavery flourishes.
Next week
In Chapter 6, we’ll learn more about economic rents and how they influence the effort workers give on the clock.
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This course was written and edited by Ellen Rolfes, Erica Phillips, Tony Wagner and David Brancaccio. It was originally published in February 2023 and updated in November 2024.
Revisit previous lessons: