Thursday, March 19, 2015

You Could, You Know, Actually Talk to Managers

Sorry for the long hiatus in blogging, I overcommitted between work and my MBA and something had to give.

But a rather good post on rents in the modern economy by Evan Soltas mentioned something that I had to talk about. It's a great post with some great ideas about how to build a research program within economics that would better define and detect rent seeking. However, it also exposed gave full display to some of the frustrations I have with the pedestal given to economic thinking when it is so limited in its methods.

Specifically he mentions "Is it really possible that, as Bloomberg put it, Larry Ellison is "still a bargain" to Oracle at $100 million a year?" and later mentions "To Bivens and Mishel, executives would still do what they do even if they were paid less -- Larry Ellison is not about to sail off in his America's Cup yacht -- which means that executives are, in fact, being paid above their opportunity cost. (The logic here is, if their pay falls below opportunity cost, they would go do that other, next-best project which determines the opportunity cost.)"

The problem is that a fairly big chunk of this compensation problem is commonly and openly talked about in businesses, limiting your methodology as strictly as economists do cuts them off from picking some really low hanging fruit to resolve this problem.

Firms pay top management outrageous salaries because it is a way to reduce total compensation costs. You pay everyone else in the firm far less than they are worth and motivate them by getting them to struggle to gain that golden ticket that will lead them to the top. It reduces total compensation, motivates employees, and shifts consumer surplus from consumers and employees to shareholders and top executives.* Its no mystery, many of my management professors have mentioned this in passing, its widely accepted by both the left leaning members of the profession and the staunch right wing members. This is a natural, and probably inevitable, byproduct of shareholder capitalism.

The social costs of this are, in my opinion, terrible. Many people are unwilling to join the rat race, they want to be compensated fairly now not compete for decades in the hope of a reward that may or may not be rewarded on merit. These people never choose to compete for high power careers, sharply reducing the talent available to business, of course businesses never observe this since these people are not on their radar. Furthermore, there are not enough top positions to go around, this results in up or out promotion systems in many firms, practices such as forced rankings, and in some firms, mandatory retirement to keep the system going; further limiting the matching of available talent to open positions. Other problems are associated with the demands put on lower ranking employees, they have signed up for a major gamble and this drives reckless, and sometimes unethical, behavior, which harms their health, leads to psychological and physical stress associated with poor quality decision making, and drives many talented people to self select out rather than continue in high powered careers. The remnant which eventually gain leadership positions tend to be highly narcissistic (since they don't realize early on how low their odds of making it to the top are), highly motivated by money (since why give up so much of their life to get where they are), and prone to reinforce these norms because they take rightful pride in having made it to the top in such a cutthroat environment after having sacrificed so much.**

This results in an awful business culture that is highly self destructive. The norms formed by it are very powerful, which is the answer to the inevitable question of the libertarian is why doesn't a company defect and recruit the people dropping out of the rate race. Of course, these norms mean that you know before you even start that you are facing 60+ hour weeks, that you are expected to sacrifice your health and well being to the company, and that you need to show early on a willingness to put the needs of the company before your own to get to the top. This means that the best people never step forward, people suited for top management positions tend to be socially and group oriented and value their lives and families above the company, they are never in the running. There is no way to select for them because young people today know what is required of them and the best of them choose careers that will not demand this level of sacrifice, knowing the odds and having a realistic idea of the possibilities and sacrifices involved mean that you have to have a very specific type of personality to even consider aiming for a high powered career these days. So the company seeking to defect from these norms can't find anyone to select for because the people they need know better than to advertise the character traits that the rest of the business world is selecting against.

It's a huge collective action problem, a rather classic one actually, well explained in social sciences outside of economics. It's obvious that companies have developed norms designed to drive income to the top, to use this to motivate employees rather than to induce them monetarily, and that this serves to maximize profits for shareholders more readily than actually focusing on building long term careers for people while recognizing their other needs. It makes everyone but shareholders and winners of the career lottery worse off and since it is social and normative there is no way for markets to correct it. But while this can easily be observed through interviews or even through questionnaires it remains invisible to much of the economics profession.

*Most people in business seem to believe that this also helps to recruit quality people and get the most out of them, though I believe this is a bunch of self justifying bullshit and have yet to discover any methodologically sound evidence of this. Though there is a lot of self confirming nonsense of the form that everyone does this so it must be good, with no effort to reject the hypothesis that this is simply normative behavior disconnected from performance.

**Something I noted from a lot of my management classes is that the managers that outperform the average are people that are not on the fast track to top spots, they tend to be group oriented people unwilling to make the sacrifices required of a high powered career. They tend not to get noticed but in the cases they get tapped they perform well. Current selection methods do a great job at motivating and selecting for front line and mid level management but there are sharp discontinuities between what selects for these individuals best vs. what is necessary at the top. Since proven performance is what boards and managers are looking for by the time they are selecting individuals for the top spots there is no one ideal left because the selection methods used at earlier levels of the process have selected against all the good people. It's crazy, but that's what it is.

Tuesday, October 14, 2014

Quick Thoughts on Norms, Institutions, and Inequality

Something that has been really bothering me since starting my MBA is the extent to which the actual operations of business are run by norms and institutions rather than by economics. Specifically, we seem to have a serious hangover of agrarian norms and institutions that cause serious damage when applied to a market based society. Instead of studying for auditing like I should be I am going to try to use my lunch hour to use this concept to tie together a few disparate blog posts that I believe are tied together by this concept.

Yesterday, Paul Krugman wrote:
Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
It isn't clear to me why righteousness is so one sided, on what ethical or moral basis does the debtor bear more blame then the creditor? Going back to biblical times wasn't usury considered sinful and the lender not the debtor the one morally suspect?


Linked to this question we get Mark Thoma's column today regarding the best way to fight rising inequality. In it he writes that "This debate brings up an important question: what is the best way to fight economic inequality? I think most people would agree that the best approach is to provide good jobs to working class households, and to make sure workers receive their fair share of the value of the output they produce." And further down he adds "And if workers have not received the income they deserve – their contribution to the value of the output they produce – as has been the case for the last several decades, then progressive taxation and redistribution returns income to its “rightful” owners. It’s the fair and right thing to do," with some excellent analysis and suggestions in between.

What is tying these concepts together, I think is mentioned in a post by Steve Roth at Angry Bear commenting on Piketty and some remarks by Bill Gates. Steve makes some excellent points on the need to distinguish wealth from capital, however the part I am interested in is his point that:

Important: that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future. Most of that stock is not specifically claimed, but it is that whole body of real capital that the market it trying to value properly via pricing of claims — basically, holding up its collective thumb and squinting.
To me, this is the crux of the problem regarding widening inequality. How do we as a society assign claims on capital in the form of "knowledge, skills, and abilities, business/organizational systems, and similar unmeasurables"?

In my MBA program we focus a great deal on the stakeholder perspective of the firm. This is all well and good, this is pushing back against the norms portion of those agrarian attitudes that I mentioned or that Krugman is describing as the sense of righteousness about debt. This is probably far too little to have a measurable impact on its own, though shifting norms is a necessary first step for social change.

The deeper problem here is institutional, in our society providers of fixed capital generally have a stronger claim to those "unmeasurables that constitute the bulk of real capital." They receive this claim through a series of institutional features. The first is the relative ease with which providers of fixed capital can combine together in unions of capital, commonly called corporations. This provides them with far greater bargaining power regarding the bulk of capital in our society than other stakeholders with an equal, or greater than, interest and role in the production of the unmeasurables which constitute our capital.

[Lunch hour is over and I am posting this incomplete as I do not know when I will have time to continue this. Hopefully there will be a part two in a semi-reasonable timeframe.]


Saturday, September 20, 2014

How Much of Our Current Political Insanity Can Be Attributed to Early Childhood Brain Damage?

Kevin Drum had a recent blog post on how incarceration rates are down among younger people and up in older populations and the links between this and lead.

This led me to thinking about how a lot of the problems of the last 30 years are commonly attributed to many of the same characteristics that are often associated with criminality such as selfishness and a short term orientation. Since behavior is highly associated with social context, it stands to reason that these traits would be expressed differently in people with higher socioeconomic status then the low status people that are often incarcerated for crimes.

If this association does exist it would help to explain how our society shifted away from the more communal values of the 1950s and 60s when business and government were both moving towards a more inclusive vision that engaged diverse stakeholders* to the time since the 1980s when ideas such as shareholder capitalism began to take hold and dominate public discourse. Today the upper reaches of business and government are dominated by people who are in the age groups that are being associated with higher crime and incarceration rates. If there is an association between lead and criminality in people of low socioeconomic status it would hold to reason that there is a similar influence on people of higher status, perhaps helping to explain some of the extremely short term thinking that has become common on issues like the environment and inequality among people of high status.

*limited of course by holdovers of earlier inegalitarian social relationships and the prejudices of the time, but these were times of progress rather than regress

Monday, June 30, 2014

This Week in the Supreme Court: Protecting the Powerful Against the Weak

Just wanted to say that I think the Hobby Lobby decision is atrocious. The institutionalization of the corporate form is all about separating the corporation itself from those that finance it in return for the protection of limited liability. Further eroding the separation of ownership from direct control of the corporation is terrible on its own terms. Furthermore, it further reinforces the claims of owners relative to other stakeholders in a corporation. This is an appalling decision the further erodes the rational for giving corporations limited liability. If they are going to have full control over the assets their liability should be unlimited as well. There is no reason for the government to give the most powerful people in society something for nothing. Especially something that gives these powerful individuals even more power relative to ordinary Americans.

Saturday, June 14, 2014

Didn't Weber Already Cover this Ground Adequately?

Just a little annoyed at the Washington Post presenting the linking of religion and economic growth as some new thing. Weber covered this over 100 years ago. While great writing and excellent for spurring thinking on how sociology, economics, and political economy all influence each other the underlying thesis didn't hold up to careful analysis. While this is an important topic in survey courses and something any generally educated person should know I don't really see how there is much of anything new worth saying on the topic.

Sunday, May 11, 2014

Individualism and Racism

I'm a bit late to this, but reading about Sotomayor's dissent in the Supreme Court's recent case regarding affirmative action has gotten me to thinking about how racist the right wing version of individualism is.

Something that always strikes me in public discussion of race is how the right wing so often proposes policies that would have disparate impacts on individuals of different races, such as cutting funding for inner cities, or to hearken back a few decades, the midnight raids to make sure people receiving AFDC didn't have a man cohabiting with them.  In some cases these policies and denials of racist motivations are undoubtedly dissembling by people who are really racists, like Cliven Bundy, who are rather more common than those on the right are willing to admit. However, I feel that more often the policies being made are based on a deep commitment to a rather extreme form of individualism. And it is this doctrine, rather than any particular animus towards other races, that is extremely racist.*

The strong reaction to accusations of racism by the right wing, and their insistence it is the left that is racist for recognizing race matters, results from the threat that the continued persistence of racism poses to their beliefs in individualism and meritocracy. After all, if race and the previous distribution of wealth didn't matter in outcomes why is the distribution of wealth, income, and status so uneven between racial groups? In writing about these issues conservatives are forced to navigate between a Scylla of denying individualism to admit that group matters in American life and a Charybdis of making blatantly racist remarks that are a direct consequence of their individualist philosophy.

We see two basic strategies used by conservatives to cope. One strategy is to say that American culture uniquely frees the individual from group concerns, only in American culture can individuals really act as individuals. Other cultures are in some way bad and hold individuals back. If anyone actually thinks about it these kinds of arguments are obviously self-refuting, the arguer has already acknowledged that culture matters which means that more than individual merit and effort matters for results in life. This should lead to thinking about American culture a bit and realizing that there are a rather large number of factors outside the individual that matter in life. Obviously this step is not often taken, though subgroups of conservatives, like the paleo-conservatives over at The American Conservative,** show that there is room for conservative philosophy to abandon unrealistic assumptions about individualism to use a more accurate and nuanced conceptualization of the human condition.

The second method relies on various strains of "academic" racism, such as The Bell Curve.*** The common thread in these rationalizations is that they seek to preserve the myth of the individual and meritocracy by arguing that other races in general are inferior on some significant measure of ability. These beliefs help protect a belief in individualism and meritocracy by claiming that while a lack of ability leads to statistically lower achievement, individuals of high ability from these groups are just as likely to succeed as individuals from other more advantaged groups. This explanation obviously cuts rather closer to the racial animus conception of racism and gets shouted down rapidly, but it is less problematic for ideological individualism than the cultural explanations.

The hard work of refuting these claims is well beyond the scope of this post, though famous studies which compare how likely someone with a distinctly black name is to be called back for a job relative to someone with a white name are sufficiently well known that I only need mention their existence. What I am hoping to make clear, however, is that in discussions of race, conservatives and liberals are often talking past one another. When conservatives are talking of individualism, liberals hear racism, and when liberals talk about race, conservatives hear attacks on individualism.

This isn't to say, however, that there is some sort of moral equivalence to both sides. The continued persistence of racism and its well established sociological components really are arguments against strong versions of individualism and meritocracy. Liberals should do more to attack this philosophy directly, it is the root source of much of the institutional racism in American society. The facts simply don't agree with the philosophy and we should be more direct with saying this, rather than tiptoeing around it because individualism and meritocracy have positive connotations in American society. Incorrect is incorrect, whether or not we moralize the incorrect belief.

* In applying the label racist to someone I feel this is a distinction without a difference. But if the intent is to debate the issue and win arguments in the general public sphere I think it is important to distinguish between simple racial animus and ideas with racist consequences.

** Not meant as saying I've never read anything that isn't somewhat racist over there, but it is not the kind of racism I am writing about here that originates in a strong philosophical commitment to ideological individualism.

*** See this post at Noahpinion for some recent discussion of academic racism, particularly follow the link to Gelman.  The only thing I really have to add is that if someone really wanted to look into this there should be the possibility of looking at genetically distinct subpopulations that are sociologically similar, such as variation between groups of African Americans which are genetically distinct. This may easily have been done, but what I have been exposed to on the topic is normally looking at sociologically distinct groups, whether black/white or groups like Ashkenazi Jews, which seems a rather backward way of investigating the relative weight of genetic and sociological factors.

Sunday, April 27, 2014

Power Disparities in the Workplace: The Indignity of Background Checks

My current job is switching me from a contract to a permanent position, part of this involves a thorough background check. Every time I go through one of these I am struck by how undignified the whole process is and how many employees have to go through this even though it has little bearing on their actual jobs. My particular case doesn't fit this, my position in the accounting department would present a number of opportunities to an unscrupulous individual.

However, reading over the fine print of the documents shows that they are not simply seeking targeted, job relevant information. Instead, the checks are very open ended and seek to gather as much information as possible. This is what I find disturbing, its a huge invasion of privacy. Yet, it seems that few privacy advocates seem inclined to take on this issue, all I ever hear about is attempts to curtail the governments information gathering, or in rare cases companies gathering information through the web, and never serious attempts to limit companies' ability to get potential employees to piss in a cup.

This dynamic represents one of the more obvious signs of the inequality between capital and labor in our economy. If we were all equal autonomous actors freely exchanging our labor for income then surely we would demand a large premium for this intrusion into our lives. Yet, coordination* among employers has rendered this individual negotiation impossible, mandatory background checks are a requirement of employment just about everywhere. Strangely enough, where they do begin to decline in frequency (but never really disappear) is at much higher levels in the economy where companies are even more vulnerable to a bad actor.

While this kind of dynamic doesn't impact me personal, beyond the indignity of it all, these practices do serve to keep labor down by creating a pool of individuals who find it difficult to compete on an equal footing for work due to having infractions that will show up on a criminal background or credit check. It would be far more equitable if employers were required to defend their background checks to only screen for items that would be directly job relevant, like drug abuse for a pharmaceutical company, theft or other property crimes for an accounting position, or serious violent crimes for any position. Yet, we see close to no pressure to force companies to restrict this practice, and certainly no pressure from individual level market participants who have no power to press their claims against employers who have an overwhelming advantage in forcing potential employees to acquiesce this invasive and undignified sacrifice of privacy.