Tuesday, December 2, 2008
The Trend Towards Self-Employment
While I support the labor theory of value as an accurate explanation of prices in a static economy, find it contradictory to support both self-employment and the labor theory of value at the same time. Self-employment will only be profitable when the agency costs or risks exceed the economies of scale. In more technological or creative industries, the agency costs of employing workers are very high, because it's hard for employers to determine the compensation for the workers. In creative jobs, such as software development, web design, composition, engineering, and the arts, managers would find it hard to set the salaries for the workers, due to too many variables, so the individuals working in these sectors would more likely to work be self-employed instead of working as an employee for others, due to agency costs. Also, in more creative areas, the worker's ability vary greatly. For instance, the top 10% of the best computer programmers are 100 times more productive than the average programmer. Therefore, all of the computer programmers would find self-employment better than working for an employer. A fortiori, the "labor theory of value" does not fit in more creative jobs. However, in our current technological trend, the agency costs and risks becomes larger, due to the overhead costs of compensating workers. An employer does not have the ability to judge one's creative works or methods, thus does not have the ability to find good salary rates for the workers. In labor-intensive industries, however, the agency costs are smaller. Due to the low agency costs in these sectors, the economies of scale are more important. Therefore, sectors involving intensive labor would have larger and more hierarchical firms. The physical ability of the workers in labor-intensive industries do not vary much, so it's easy for managers to estimate an hourly wage. However, in more creative jobs, it's hard to estimate an hourly wage because it's possible, unlike physical strength, for workers to have huge mental differences. This is why in some of the "service sectors," employers would offer "salary compensation" instead of constant wage-rates. But in even more creative jobs, employers would not have the ability to estimate the salaries, since there are too many variables and greater risk. Sharing profits are less likely in more creative sectors, since individuals have different abilities. This is another reason of why the economies of scale will not influence the creative sector as much. Knowledge is abundant. So individuals would specialize in knowledge. It is therefore impossible for employers to know all of the knowledge including his employees, and this raises the principal-agency costs. In the knowledge economy, information, such as software, is available for re-use, so workers do not have to laboriously retype all of his code. This encourages creativity instead of labor. The availability to re-use information would make individuals focus on creating more specialized information. This increased specialization of knowledge will make it even more harder for employers to accurate compensate his workers, since he lacks knowledge which has similar effects of asymmetrical information. Also, because labor intensive industries are not creative, the workers would not find any reason to complain "I know how to do this better than my boss." (At least compared to the more creative sectors.) Contrarily, in the more creative jobs, the workers would always complain to their boss if they work for an employer. For example, since there are many different ways to how to write a computer program or design something, the workers would dispute against their employers, so they would rather work in self-employment to avoid these disputes. Additionally, creativity involves risk. Suppose I want to invest a portion of my wealth in labor intensive industries involving capital goods. The risk is very small, since labor intensive industries produce a constant rate of return. However, if I invest the same amount of wealth to develop an invention, this would be very risky, because the invention might not develop. Therefore, in more creative jobs, people would find it very risky for an entrepreneur to borrow money in order to invest in an invention (since the invention might not develop). Thus, the time-preference distinctions are less important. The distinction between the capital-holders (having long time-preferences) and workers in the creative sector will diminish. Thus, there is an increasing trend towards self-employment in more creative jobs, due to risk. Due to the inelastic demand for creative works compared to labor-intensive capital industries, this increases the risk of creative jobs, thus may cause a moral hazard if creative workers work for an employer. A third reason of why economies of scale are ineffective in creative sectors is because, unlike getting a constant and secure profit from the return on capital from labor-intensive industries; in more creative sectors, capital is very insignificant in determining the successfulness because creativity marginalizes it. In the increasing competitiveness of creativity, workers will be more motivated to innovate under self-employment rather than innovate under employment for others. This is because the agency and overhead costs of estimating compensation for creative inventions are very subjective; self-employed workers will have the opportunity to reap all of the profits of their invention instead of sharing his profit with his employer; and inventing under self-employment would make workers have a greater incentive to keep a trade secret, instead of disclosing it to his employer. In this way, in the creative sector, self-employment would outcompete employment. In the creative sector, workers are all entrepreneurs. Inventors, artists, graphic designers, software developers, and composers, are all taking high risks, since creativity does not depend on labor. Working a hundred times longer or even a thousand times longer in the creative sector, unlike working in non-creative laborious jobs, does not guarantee more profit than working for one hour. Thus, while I do not find supporting either the labor theory of value or self-employment as contradictory, I find that supporting both of these positions as contradictory. Only primitivists would advocate both self-employment and the labor theory of value at the same time. (That is, it is impossible to advocate both the labor theory of value (that is implicitly advocating labor-intensive employment) *and* self-employment at the same time, unless you want to go back to the stone age where there are no economies of scale or division of labor.) Mutualists do not appear to even understand the marginal utility theory. I find the increasing trend of self-employment as a positive thing, as it signifies increasing technological development and more creative, less tedious, jobs. There is also a decreasing trend of the amount of labor that determines the value, as creativity does not depend on labor. So in the age of technological development and the emerging knowledge economy, the labor theory value as a sound explanation of the economy will be obsolete.