I'm currently looking at New Institutional Economics and I can't get my head around the assumption of the neoclassical irrelevance theorem stated by the neoclassical economics.

It doesn't matter whether the factors of production are owned or rented by their users (see Samuelson 1 957, 894: "Remember that in a perfectly competitive market it really doesn't matter who hires whom: so have labor hire ' capital, ' . . ." )

I can't seem to find an explanation for that statement. Can someone explain it in terms of neoclassical thinking?

Best Regards


As far as I'm aware, this is what it means: When we say a capitalist 'hires' labour, we are talking about the power dynamic here, where the capitalist has control over what the worker does, his/her wages etc. But in Samuelson's world, a perfectly competitive markets implies that contracts are complete, which means that the worker when agreeing to work for the capitalist has complete information over what the job is going to be like, when and whether their wages is going to be paid etc. If the worker didn't like the future work/wages, they wouldn't accept the job. So here with complete contracts, the hierarchy is irrelevant, it doesn't matter who hires whom, since both knows exactly what the future job conditions are. As you can see this assumption abstracts away from power dynamics and wouldn't be very useful in analysis of real world labour issues.


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