A Microeconomic Defence of Trade Unions

I recently had a discussion on Facebook about the value of trade unions. Two people in the discussion could not see that they had any value to the economy, one going so far as to suggest that they even made their members poorer. This post is a theoretical defence of the value of trade unions to a country’s whole economy.

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Market Participant Numbers and ZOPA Capture

I was introduced to the idea of ZOPA – zone of possible agreement – before ever turning up to business school. It’s the range of prices for a transaction over which both parties still come out ahead, so should rationally still be happy to take part in the transaction.

For example, if I’m buying a house from you, you may know the minimum amount that you will sell for, and I know the maximum amount I will pay. If I am prepared to pay more than the minimum you will accept, then we can make a deal. Obviously, we both still want to maximise our own returns from the transaction.

In a market where one side of the transaction is highly concentrated – a monopoly or monopsony –  then the other side will have to accept the price dictated by the more concentrated side. The more concentrated side will be able to claim nearly all of the economic value created by the typical transaction.

How is price determined when there are large numbers of parties on both sides of the transaction? If the number of buyers suddenly doubles without changing the transaction volume, we would expect the price to go up, but by how much?

I don’t have an answer to this, and I don’t think there’s much literature on it. I wonder if it can be usefully modeled by a game allowing sellers to alter their offer price, at a cost, and making buyers pay a certain amount to view all the sellers in the market.


I am not an economist.

Just listened to The World This Weekend on R4. The presenter talked about bubbles, speaking particularly about gold, and said something along the lines of, “The price of gold is much higher than its value”.

If you think that an asset is overpriced, I assume you mean that future cash flows arising from the asset cannot generate an adequate return compared to its price. If you think goods for consumption are overpriced, I assume you mean that you would rather forego consumption at the asking price, and keep the cash instead.

Gold is, in a basic sense, almost useless. It’s a store of value, and not much else; hence it’s an asset that is not going to be consumed. The only way you can claim it’s overpriced, I think, is if you believe that the price is going to go down before you can sell. But right now, the flight from every other asset class is propping up the price. Isn’t that going to continue for the foreseeable future? Isn’t the value of gold precisely what you think you can sell it for, much more so than other kinds of asset?

Long term modelling

An article on the BBC site discusses the long term impact of the current financial crisis, if the economy keeps growing at 2.2% per year. In short, the the economy grows its way to far more wealth, and the current situation is just a small bump on the road.

But when you start by assuming 2.2% pa growth forever, what does it matter? Growth is what everyone agrees we need, and what everyone claims to be trying to create. Given that it seems to be the variable that people are trying to exert some control over, it seems odd to start by holding it constant. Perhaps the only really valid conclusion from this article is that growth really is a good thing – but I don’t think that was ever in doubt.

Life Quickly Imitates Art, Even Sci-Fi

Charles Stross is now one of my two favourite currently publishing SF authors (the other is Iain M. Banks). I got a copy of his latest, Halting State, from Amazon a couple of days ago. I haven’t finished it yet, but so far it’s about economic sabotage in an MMORPG, set in 2016.

Like another modern Aristotle of SF, Neal Stephenson, Charles Stross seems to understand everything, including economics. More importantly, he understands why it’s important (something I only started to grasp a couple of years ago) and can explain it without killing the story. So Halting State spends some of its time discussing money supply and inflation within virtual worlds. So far ahead of the curve, so Charles Stross, I think.

Last night I picked up this week’s Economist, to find mention in the business headlines of Second Life‘s financial crisis. Halting State‘s characters refer to Second Life as a metaverse, not a MMORPG, but I still find this amazing. Theoretical GDPs and game-currency-to-hard-currency exchange rates have been published for a while now, but maybe the crossover from amusing sideline to area of serious interest is closer than even Charles Stross thinks.