Policy Market Blog

Why you should have an economist on retainer?

Martin Kennedy - Thursday, October 12, 2017

"Why should I have an economist on retainer?" he asked. 

It's a fair question of course.  My answer...

"Maybe you shouldn't."  Isn't that how any decent economist should answer?  Besides, most people I talk to didn't get to where they are in life by letting other people blow smoke in their ear.  But, the second part of my answer is this...

Mystery novelist, Agatha Christie, is reported to have said that she never imagined she’d ever have enough money to buy a motor car but neither be so poor as not to have any servants. It’s an interesting illustration with respect to changes in relative prices.  Yet, it's more than that.   
Why do firms hire employees at all, ever? There’s a marketplace in which myriad bids are being offered and taken. Some participants are free agents while others enter as groups, big and small, that we call firms. But, why? Why are there firms? 

 Answer: Transaction costs. 

Suppose a firm needs a contract reviewed. They can hire an attorney to do that, and only that. But first, they must shop for an attorney and negotiate the contract and fee etc. – transaction costs. A couple clicks of a mouse and a phone call or two? Sometimes that’s all it is, but quite often it’s more involved. 

Snags and impediments emerge. Does the contract need to be re-worked? There are honest misunderstandings? Or, are they?  Can you trust this contractor?
In a firm, the contract is handed to an in-house attorney for review. No transactions cost. On the other hand, firms have their own inefficiencies. Is there enough work to justify having an in-house attorney?  Employees have to be managed. If you think that's always easy, maybe you're not ready to consider retaining someone.   

Back to Agatha Christie and domestic servants. Having a domestic servant – a maid, a butler who did the gardening, or a nanny – was not unusual for many (less than super-rich) American families in the 20th century (Christie was British). Currently, only the very affluent have domestic help, but many, mid-range income households have their grass cut, their house cleaned, and use day care services.   

Households have moved from having employees to contracting with businesses and independent agents.  Why?  The cost of having / managing employees has risen.  The key then is to realize the benefit of having an employee with only the cost of having someone on retainer.  

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