Stephen Laniel’s Unspecified Bunker

Attention conservation notice: 1500 words on Gary Miller’s Managerial Dilemmas. MD tries to figure out what works and what doesn’t in organization design, but along the way I wonder if Miller is just recapitulating a moral principle or two that we all ought to be feeling anyway.

Working together is a public-goods problem: if all of us on the team work except for me, then I get the advantages of the team’s production without doing any of the work. But all of us on the team have the same incentives, so we all have an incentive to avoid doing work. But if we all avoid doing work, the team produces less than it could, and we all suffer. In the jargon, “everyone shirks” is a Pareto-inefficient Nash equilibrium: it’s where the process would settle because no one has an incentive to change what he does (the “Nash equilibrium” part), but it’s worse for everyone (the “Pareto-inefficient” part) than if everyone worked hard.

One way for managers to address this public goods problem is called “Taylorism“: study very carefully how much time and effort it takes people to accomplish a specific task, then insist that they accomplish that task in that much time. If the time-and-motion guys tell you that you can produce ten automobile hoods per day, you’d better produce ten per day or they dock you. This gets rid of one information problem: under the assumption that the workers want to shirk, take away their power to shirk by rigorously defining what their job is.

This “piece rate” system has obvious flaws. The time-and-motion guys need to measure actual workers doing actual work. The workers know this. So when the time-and-motion guys come around to measure, the workers will work slowly. And if a worker produces more than the piece-rate system says he can, his coworkers will not take kindly to it: they know that any consistently higher rate of production will only make them work faster, or it will lose them a job when the company realizes that it can do more with fewer workers. Some companies are real scoundrels about it and adjust the per-piece rate downward, so that the per-day rate that they pay workers stays constant.

So a piece-rate system, unless accompanied by a promise that you won’t be a scoundrel, appears to be a non-starter. And the company has every incentive to be scoundrels, if it will make them more money to do so. Or at least they have “every incentive” to do so if they look at the short term only. In the longer term, worker enmity may well offset these incentives. Workers may quit and go to other companies that aren’t as exploitative. They may institute a work-to-rule strike. There are lots of ways workers can get back at draconian management.

If I’m reading Managerial Dilemmas right, these sort of utilitarian calculi have never worked because economists have taken the short-term static view: we should do X to prevent Y, because that maximizes our income in the short term. The better approach is to take a long-term dynamic view. One way to model these sorts of problems is as an iterated Prisoner’s Dilemma: you (as my boss) and I (as the worker) are going to have to interact over and over again, so we can’t always act selfishly. If you always act selfishly, it’s in my interest to do the same. So then we both act selfishly, and we both lose.

Here’s the point where every exposition of the iterated prisoner’s dilema has to mention Robert Axelrod, specifically The Evolution of Cooperation. Gary Miller does not disappoint. Here’s the big message that I’ve now had beaten into my brain approximately 100 times: The Tit-For-Tat Strategy Does Really Well. That is, if you start your repeated game by not shirking and only shirk if your boss is a scoundrel, you’ll do all right. When he’s a scoundrel, retaliate. When he treats you well, quickly forgive his earlier trespasses. Everyone and his brother has made something huge out of Tit-For-Tat’s success. Bowles and Gintis even turn it into a moral about the politics of fairness.

The message for managers seems to be that they should learn from iterated game theory and apply what they learn to the structure of their workplace. Chief among these is that they need to find some way to make employees cooperate rather than defect. The only way to do this, in the long term, is to solve a commitment problem — in other words, for the employees to promise that they’ll go against their short-term self-interest and not shirk, and for the managers to promise that they’ll go against their short-term self-interest and treat the employees as valuable people. There are various ways to do this; Miller goes through several in the final third of the book. One is to convey a culture of openness: Hewlett-Packard apparently left doors to its labs unlocked, and encouraged employees to take equipment home. During economic downturns, some companies convince employees of their good faith by refusing to lay anyone off; they may impose pay cuts, but no one loses his job. The general way to describe these commitment strategies is that they are costly and difficult to fake. “Irreversible” might fit in there too: restructuring a factory to accommodate team-focused production is hard to reverse; the employees know you’re in it for the long haul.

All of this sounds to me like fancy game-theoretic garb for a not-very-complicated idea: be good to your employees, and they will be good to you in return. I’m not convinced that these economic arguments will actually make anyone be nice to his employees or his superior. If you were already morally committed to the golden rule, you will still be morally committed to the golden rule. If you weren’t, it’s unlikely that this economic argument will suddenly swing you over. If game theory doesn’t already support the golden rule, so much the worse for game theory. On the one side we have sensible, deeply-felt moral principles; on the other we have an economic model that’s highly sensitive to assumptions about human behavior that we’re only just coming to understand. The moral principles win in a rout.

I felt the same way about Bowles and Gintis’s Recasting Egalitarianism. It might sway some people at the margins — people who believe in helping out the less fortunate but worry about the economic pitfalls of doing so. I wonder how many people are in that margin, though. I suspect that a great many people are morally committed to asset redistribution; Recasting Egalitarianism will not change their minds, though it will give them more reasons to advance at those asset-redistribution cocktail parties you hear so much about. On the other side from the egalitarians are those folks who are rightly suspicious of grand plans to put wealth where wealth wouldn’t go of its own accord; RE will do little to allay their fears of heavy-handedness.

For that matter I feel the same way about John Rawls: if you need to travel to a notional world in which you could be less fortunate than you are, in order to justify helping out the impoverished, will reading a few hundred dry academic pages really sway you? Isn’t this part of Rawls just a restatement of Matthew 25:35-40?

For I was an hungred, and ye gave me meat: I was thirsty, and ye gave me drink: I was a stranger, and ye took me in:
Naked, and ye clothed me: I was sick, and ye visited me: I was in prison, and ye came unto me.
Then shall the righteous answer him, saying, Lord, when saw we thee an hungred, and fed thee? or thirsty, and gave thee drink?
When saw we thee a stranger, and took thee in? or naked, and clothed thee?
Or when saw we thee sick, or in prison, and came unto thee?
And the King shall answer and say unto them, Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.

The first 2/3 of Managerial Dilemmas is quite useful and thought-provoking. It’s an analysis of exactly why designing hierarchies that work is difficult. The analysis of what’s wrong with piece-rate systems is a good example: few other authors go into much detail about exactly which organizational structures have been tried, which have failed, and what’s worked.

One result, which recapitulates Miller and Hammond’s paper “Why Politics is More Fundamental Than Economics: Incentive-Compatible Mechanisms Are Not Credible, is particularly captivating. It argues that in any hierarchy, it will always be necessary to “bind the king’s hands,” because the king (or the CEO) will always have an incentive to amass more wealth rather than do what’s efficient for his kingdom (or his company). No self-guiding economic mechanism will get you out of the fundamental political problem.

I’d recommend reading the first 2/3, then politely returning Managerial Dilemmas to the library.

(Attention conservation notice: 1300 words starting with historical shocks in the price of coffee, and veering over into some thoughts on protecting ourselves from uncontrollable risk.)

There’s an interesting little article in the New Statesman, critically reviewing a book entitled Starbucked. Starbucked seems mostly unconcerned about poor coffee farmers, says the review, even though they’ve historically suffered through price collapses that left them desolate. The U.S. government instituted coffee price supports during the Cold War to keep the poor folks on our side, but the end of the Soviet Union said goodbye to all that.

One might reasonably ask how price booms and busts of this sort can happen in a free market, but it occurs to me that maybe it’s built into the process. Suppose coffee prices rise to some tantalizingly high level — because bad weather killed a lot of coffee trees, say. I, as a coffee farmer, expand my plantation: I plant more trees, maybe buy more land, hire more help, and so forth. Workers take time to train and trees take time to grow. By the time they’ve borne fruit, J. Random Webpage suggests that six years will have passed.

Unfortunately, over those intervening six years, lots of other coffee farms have planted more trees. There is now a glut. Prices plummet. Farms go out of business. Other farmers decide to plant their crop of choice (coca, maybe) on the new land that they’ve acquired. So now a lot of coffee trees have disappeared. Hence supply goes down. Demand is as high as it’s even been, so we’re back out of equilibrium. Prices rise, and we’re back to where we started.

This is all nicely self-correcting, but in the meantime a lot of people have lost their shirts and a lot of families have gone without food. A basic respect for one’s fellow-man would make one howl in outrage. No one has misbehaved here: the market is not punishing those who’ve taken unnecessary risks. Rather, the market has punished people for doing what the market tells them they ought to do — namely plant when prices are high and pick another line of work when prices are low. Microeconomic actors have been subjected to macroeconomic forces over which they have no control. I think Michael Pollan says somewhere in The Omnivore’s Dilemma that all agricultural products are inherently ripe for price supports, and that pure free-market allocation for agricultural products just doesn’t work; this may be why.

In the longer term, you’d hope for people to realize the pattern they’re in: don’t invest too much capital ahead of time, knowing as they do that it’ll take six years to reap the reward. Larger institutions surely get the message here: banks are probably all too aware of the risks in coffee planting; they may well deny startup capital to small farmers. Conglomerates that can pool their risk — by planting coffee when it’s dear and other crops when it’s cheap — will probably pull ahead here.

The booms and busts of coffee prices, though (right, courtesy of the International Coffee Association), suggest that a great quantity of the world’s coffee may well be produced by smallholders. If it were an oligopoly, I’d expect less variability.

With that much risk involved in planting coffee, I suspect that a lot of people who would be great coffee farmers forego it and do something else altogether. When you have to keep your family in food, you’ll avoid high-risk, high-reward options in favor of low-risk, moderate-reward ones. If the poor were more risk-tolerant, they might be able to bootstrap themselves out of poverty. If they were protected from certain kinds of unavoidable risk — crop failure, macroeconomic collapse — people might stay in the jobs for which they’re best suited, rather than having to take second-best jobs that are safe bets.

This is essentially the guiding insight behind Samuel Bowles’s and Herbert Gintis’s essay “Efficient Redistribution: New Rules for Markets, States and Communities,” in Recasting Egalitarianism. Poor workers are risk-averse for the reasons mentioned, whereas wealthier people are assumed to be more risk-tolerant. With some economic protection beneath them against uncontrollable risks, poor workers may take the first step up out of poverty.

Bowles and Gintis’s novel contribution is to suggest that this risk-protection happen via asset redistribution rather than income redistribution — giving them houses and machinery rather than a guaranteed income, for instance. The great virtue of private property is that it connects costs and benefits with actions: if I own a house, it’s now in my financial interest to help keep my community safe; that same feeling of responsibility does not attach to renters. Likewise: workers in employee-owned firms may have more of an incentive to work hard and catch their coworkers slacking than do workers in traditional hierarchies. (Neither Bowles and Gintis, nor any of their 15 respondents, checked whether firms granting stock options performed better than those that didn’t. Not sure why, other than that poor people tend not to get stock options.) Asset redistribution, in a word, is more economically efficient than income redistribution. Hence it’s more likely to be politically palatable than is income redistribution via taxation. (A whole host of questions will naturally arise for you here, among them: isn’t there a cost associated with taking assets from one group and giving them to another? I’m skipping over these in the interest of brevity, but you can be sure that Recasting Egalitarianism addresses them.)

After Bowles and Gintis’s leadoff essay, we find any number of responses from any number of angles — though, sadly, nearly all of those angles are from the left. One would have enjoyed seeing someone like Greg Mankiw throwing in a more conservative position. As it stands, the essay collection sometimes sounds like 5-year-olds arguing over whether they’d rather have a pony ridden by a magical fairy princess, or a unicorn with a chocolate fountain spilling forth from her horn. Only with more jargon. And with endless academic tones. In all honesty I couldn’t stand most of the book.

I did love the two Bowles and Gintis essays, however: the opening one, and the wrapping-up response to their critics. The latter is in many ways just a restatement (or possibly prestatement — I’ve not checked the dates) of their essay “Is Equality Passé? Homo Reciprocans and the Future of Egalitarian Politics.” Humans, says Bowles and Gintis, may well be wired to give certain kinds of help to their fellow-men and not give other kinds. We want to insulate people from uncontrollable risks, but we don’t want to insure their bad behavior. We want to punish people if they abuse our generosity. And we want to forgive them fairly quickly if they correct their errors. This is the recipe for a just society. More to the point, it may be the only recipe that’s consistent with some innate ethical norms that we all carry.

The message from Recasting Egalitarianism is that asset equality makes good economic sense. The message from The Conscience of a Liberal is that economic equality reduces political extremism. And the message from The Great Risk Shift is that without a radically amplified “insurance society,” we’re going to return to the bad old days before the New Deal. Equality, for lack of a better word, is good. Equality is right; equality works.

Hopefully liberals are back in the business of taming the market’s outrages.

([mag: New Statesman] article on coffee via Crooked Timber. Pointer to Recasting Egalitarianism via Cosma Shalizi’s del.icio.us feed.)