Thursday, January 19, 2017

Notes On High Skill Transaction Costs Versus the Baumol Effect

What forms of transaction costs have become most problematic? Often, they involve time based product which requires a great deal of knowledge use preparation and investment beforehand, as these costs ultimately need to be shared throughout a broad range of systems. Even though one hears complaints of Baumol's disease in terms of, say, medium skill work which adjusts income levels via coordination alongside higher skills and more productive work; often it is high skill work, which requires a higher level of compensation for individuals wherever they may live, which poses the more substantial societal costs.

How might one think about these productivity differences, in terms of time based product? For instance: even though citizens of prosperous regions pay more for a wide range of skill levels in their vicinity (some of which cost far less elsewhere such as hairdressers), most citizens are expected to travel to prosperous regions to gain the expertise of professionals, and pay the same costs to those professionals as other local citizens - regardless of existing wide variance in the income levels of their own regions.

Again, think about the difference in aggregate. Medium skill levels which are subject to Baumol's disease, can appear unproductive in relation to nearby high skill and other productive work. Yet since local high income levels can still directly coordinate for many of these skills costs via their own means, medium skill levels don't carry the same (societal) cost burdens as the costs of high skill time based product. Nevertheless: even though medium skill levels tend to command less income in less prosperous areas, most high skill work is presently subject to higher costs (income compensation at a multi institutional level) regardless of where or how social coordination takes place.

These transaction costs, which in the U.S. are shared by consumers, governments, municipal budgets and businesses alike, need to at least be addressed at the margins, in order to maintain system viability in the foreseeable future. Might it be possible for regions which are beginning to falter under these circumstance (bankruptcy, etc.), to adopt a new institutional structure which is capable of reducing these otherwise built in transaction costs?

Firms in recent centuries were able to reduce transaction costs, in part because many divisions of labour were more flexible and required less extensive investment, beforehand. In "Theory of the Firm", Wikipedia notes:
According to Ronald Coase, people begin to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.
In the present, the more important concern is not one of further divisions of labour for a non market environment to generate separately existing product, but divisions of labour which would allow individuals to coordinate their time via direct free market terms. Hence the equilibrium corporation would be different from the traditional firm, for it would restore local market platforms to make more complex forms of economic activity possible.

Rather than removing divisions of labour functions from the marketplace, the equilibrium corporation would seek to bring multiple time based functions back to the marketplace - albeit in a somewhat changed form. Whereas the single entrepreneur in the Coase model was responsible for the coordinated activity of large groups - so as to facilitate the complicated production processes of tradable sectors, participants in an equilibrium corporate construct would assume entrepreneurial responsibility for their own time value. What makes it possible to take this approach, is the fact these non tradable service sector settings don't involve the numerous level of production processes that have often been required by tradable sector activity.

There's another important factor for the transaction costs which comprise local coordination of time based services. Once a region becomes more prosperous, it often seeks to control local entry and access, so that only a certain amount of medium skill participation remains possible. Indeed, some economists have recently noted this self limiting Baumol effect. Prosperous municipalities can achieve these limits via control over local real estate values.

Whereas lower income regions don't necessarily have the same ability to control local factors for the skills levels they may seek. Since many professional skill sets include considerable sacrifice and investment, individuals who seek these opportunities, may not have the option of locating where lower income levels are hard pressed to compensate them. Areas with lower incomes could especially benefit from a new institutional structure, which would also build new markets for high skill levels which otherwise might not be locally possible.

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