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.]