U.S. Economic Foreign Policy

I am glad to be here to discuss, with the emphasis rather strongly on the word Economic, the Economic Aspects of For­eign Policy. My remarks will fall under the four principal head­ings: (l) The Principal Conditions That Mold American Foreign Economic Policy; (II) The Objectives of American Foreign Eco­nomic Policy; (III) The Accomplishments of American Foreign Economic Policy, and (IV) Where Do We Stand and What Should we do

The Impossibility of a Perfectly Competitive Labor Market

Using the institutional theory of transaction cost, I demonstrate that the assumptions of the competitive labor market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labor market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labor demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction cost and with zero transaction cost all labor is hired as independent contractors, implying multi-person firms, the employment relationship, and labor market disappear. With positive transaction cost, on the other hand, employment contracts are incomplete and the labor supply curve to the firm is upward sloping, again causing the labor demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. Working Paper 06-0

The Non-existence of the Labor Demand/Supply Diagram, and Other Theorems of Institutional Economics

The most famous and influential diagram in modern (neoclassical) labor economics is the model of wage determination by supply and demand. Using concepts and ideas from institutional economics, I argue that the theory of a perfectly competitive labor market is logically contradictory and, hence, the demand/supply diagram cannot exist on the plane of pure theory. Four other fundamental theorems concerning labor markets are also derived, as are implications about the theoretical foundation of the field of industrial relations and the economic evaluation of labor and employment policy. In this article I accomplish four things of significance. The first is to demonstrate that the core diagram of neoclassical labor economics - the diagram of wage determination by demand and supply (D/S) - does not have logical coherence and thus has no existence on the plane of pure theory. The second is to deduce this conclusion using a core concept of institutional economics (i.e., transaction cost), thus demonstrating that the institutional approach to labor economics has theoretical explanatory power. The third is to use the transaction cost idea to also deduce four fundamental theorems concerning labor markets and wage determination. The fourth is to identify the core theoretical foundation of the field of industrial relations. This discussion also yields important implications for the economic evaluation of labor and employment policy, as well as interesting insights on the history of thought in labor economics. Working Paper 07-2