In an Alchian-Demsetz firm, marginal product is not defined.
Think of a business that has exactly one full-time tax accountant (TA). In a sense, the marginal product of the TA is zero, since the TA contributes zero output. On the other hand, the tasks performed by the TA have tremendous value, allowing the firm to remain in business and keeping the owner out of prison.
What determines the compensation paid to the TA? It cannot be less than the TA’s best alternative, or opportunity cost. It cannot be more than the firm’s best alternative, which could be to hire a different TA, outsource to an accounting firm, or try to automate the process using software. If there is lots of competition on both sides of the market, then compensation will be driven to some unique level. Otherwise, there may be a range of plausible outcomes.
Remember that most of us are Garett Jones workers. We do not produce output. We produce organizational capital. So most of us have undefined marginal product.
So, my wife’s boss went to bat for her to his boss that she deserves a raise because she is so valuable to the company. The big boss said “she’s only valuable because of all the value the company has imbued to her.” What would be the economic-based-retort to this?
BTW, I told my wife that he’s not using economics, he is using rhetoric. Per the blog post, doesn’t this explain most if not all of the uncontrolled for sex wage differential?
Couldn’t we calculate the marginal product of the accountant’s activity as its incremental effect on the expected (and possibly risk-adjusted) present value of future profits?
PS We might not actually be able to perform this calculation very well. But this does constitute a definition.
Maybe this relates to the Handle/Baumol (sic?) theory? if you can easily define the marginal product of a worker, you’re dealing with a series of relatively straightforward tasks. Tasks that can more or less be automated away. Thus, the only jobs left are those are Garrett Jones’ organizational capital type jobs.