TGIF: The Capitalist-Socialist Asymmetry

Free-marketeers have long pointed out a particular asymmetry between capitalism and socialism (whether of the international or national variety). While anyone in a capitalist society would have a right to engage in socialism (as anyone can do now in our hampered market economy), the reverse would not hold: under socialism—that is, a centrally planned economy, democratic or not—no one would be free to engage in "capitalist acts between consenting adults" (to use Robert Nozick's phrase from Anarchy, State, and Utopia). It would upset the plan.

In other words, in a fully free society, no legal barriers would prevent people from setting up communes, worker and consumer co-ops, etc., but in a socialist society, money exchanges of land, producer goods, and labor services (and perhaps even consumer goods) would be outlawed. Goodbye, entrepreneurship, free private enterprise, and economic calculation via trade-generated market prices.

That asymmetry speaks volumes, does it not? It ought to end the debate between the proponents and opponents of capitalism. Do you wish to live as a socialist with a clear conscience? Embrace the free market.

But socialists will have none of that. For them, individual choice is unimportant, if not destructive. In their view, voluntary capitalist relations are exploitative regardless of how the participants see them. So they must be forbidden. Socialist planners and their court intellectuals know better. Thus, for their own good, mere people must be controlled.

That is the height of presumptuous and arrogant elitism. The appropriate question for the socialist is that quintessential American retort: "Who asked you?"

How do the socialists know that transactions are exploitative? We can be sure that at the time of the transaction, the parties demonstrably prefer what they give up to what they receive. "No, no!" cry the socialists. One party is weaker because he must eat, work, obtain shelter, etc. What socialists refuse to acknowledge is that market relations are how we cope with a world of natural scarcity, a world in which resources—that is, natural stuff for which human ingenuity has found uses—are finite, costly to obtain, and usable in a variety of ways. (By all means, see this video from Stephen Davies and the Institute of Economic Affairs.) Scarcity is not a capitalist plot. On the contrary, the combination of the division of labor, technology, and trade is the only way to push back the constraints of scarcity. Most of today's eight billion people live much better now than one billion did in 1800.

How do the socialists know that employees are exploited? Apparently, they just do. It has something to do with the market return on goods sold being greater than the wages employees are paid. The "surplus" collected by employers is seen as stolen. That actual employees value their wages more than the effort they expend to earn them is irrelevant as far as the socialists are concerned. But again, who asked them?

Those with only a scant acquaintance with economics often find Marx's exploitation theory plausible. However, they overlook a critical factor: time. When something happens matters to us as much as what happens. Eugen von Böhm-Bawerk, the second-generation Austrian economist who delved into this matter, put the point rather nicely:

The completely just proposition that the worker is to receive the entire value of his product can be reasonably interpreted to mean either that he is to receive the full present value of his product now or that he is to get the entire future value in the future. But … the socialists interpret it to mean that the worker is to receive the entire future value of his product now.

People value present and future goods differently. Other things equal, we prefer the results of our actions sooner rather than later. Asked if you'd want a dollar today or a dollar in a month, you'll take it today. But asked if you'd want a dollar today or two dollars next month, you may choose to wait if the extra dollar will make the wait worthwhile. If two dollars won't do it, maybe three dollars will. The time element is what explains interest. I'll let you use my money for a period if you promise to compensate me later. It's perfectly legitimate. (For more, see this.)

The employment relationship involves time too. Employees typically don't want to wait until the consumer or producer goods they work on have been sold. Most prefer to be paid regularly, predictably. Nothing wrong with that. But in that case employers who advance (lend) their employees wages out of previous savings will have to wait for the sales—which may not take place if no buyers are interested. Why shouldn't employers be compensated for doing what their employees are unwilling to do: namely, assume the risk and uncertainty of waiting? If socialists don't like it, let them start businesses. (Gene Epstein points out that unions are flush with money from their members' dues. Why don't they start worker-owned firms? Why don't the union members demand it?)

In market-oriented but not fully free economies, we see few if any worker-owned businesses. Why? Probably because most people don't want the risk and responsibility of ownership. So they forgo some money in return for the relative security of employment. That's their right. But employees should not begrudge employers because the latter earn profits (which comprise both interest on the loans to employees and entrepreneurial rewards for spotting price discrepancies that others overlooked).

Socialists who dislike conventional enterprise should stop complaining and set up worker-owned firms. On the other hand, it's easier and less risky to complain about capitalism. Admittedly, in one respect, socialists would not be free to engage in socialism. They could not force anyone to go along.

TGIF: Are Bosses like Rulers?

What does the libertarian philosophy have to say about business management as an institution? Is it analogous to the state or something entirely different? Since we libertarians generally dislike seeing people being bossed around, whether by the state or anyone else, we may be tempted, as I've certainly been, to think that a free and just society would spontaneously dispense with the traditional employer-employee relationship. After all, libertarians have good reasons to at least be suspicious of all hierarchies and subordination, right?

So freedom would achieve its glorious pinnacle through flat bossless worker-owned co-ops, small partnerships, single-proprietorships, and peer-to-peer arrangements that lack even Uber's central ownership.

But maybe not.

The prediction that managerial specialists are due for extinction, however, looks more like wishful thinking in light of solid economic theory and empirical evidence, write economists Peter G. Klein and Nicolai J. Foss in their new book, Why Managers Matter: The Perils of the Bossless Economy. (This is not intended as a formal book review. Listen to Klein's conversation with Keith Knight of Don't Tread on Anyone.)

Klein and Foss's thesis grabbed my attention because, as I've experienced firsthand, drawing an analogy between the state and the traditional firm is seductive. On the other hand, I've known and respected Klein, an economist of the Austrian school who teaches at Baylor University's Hankamer School of Business, for many years. I take him seriously. (Foss teaches at the Copenhagen Business Schools in Denmark.)

The case against the traditional firm has this touch of plausibility: because government interventions in mixed economies can make quitting a job artificially costly, people might feel trapped in bad work situations. To the extent that the government deliberately or inadvertently creates obstacles to starting businesses or relocating (through licensing,  zoning, and more), or through a tax system that ties medical insurance to one's job -- to that extent, the government can in effect block employees from leaving bad workplaces or reduce their bargaining power. Such interventions provide a politically derived advantage to employers over actual and prospective employees that could not be achieved in the market.

But employers can create these impediments. Politicians and bureaucrats can and do.

For libertarians, the obvious remedy for politically bestowed advantages on employers is freedom, specifically, the freedom to compete, to start businesses, to move where the terms are better, etc. Ready options increase employee bargaining power. (Adam Smith in The Wealth of Nations decried the English laws that barred workers from moving to other areas in search of better pay.) Competition is the universal solvent.

The case against government policies that favor employers (again, not necessarily by design) should not facilely be extended to managerial hierarchy or traditional employment per se. Socialists haven't been the only ones to equate employment with servitude. Even the great classical liberal philosopher Herbert Spencer compared it to slavery. (Ironically, the pre-Civil War South's most eloquent defenders of chattel slavery denounced the wage slavery of the free labor market.) However, in a free market and even in a mixed economy like ours, the problem isn't distinct ownership and management. It's politicians and bureaucrats.

This is a big subject, and I'm certainly no expert, so I can only scratch the surface here. But Klein and Foss specialize in the economics of industrial organization and are an important reality check on those who think managerial hierarchy is morally objectionable and economically superfluous or worse.

Morally, of course, as long as neither side of a transaction, including the employer-employee relationship, uses force against the other, the transaction passes muster. It is irrelevant that one side can be said to have a "greater need" than the other for that relationship at that time. It is no employer's fault that people need to earn a living. One might even praise the employer for providing the means to do so. But let's remember that no firm is founded to provide jobs. Firms exist to make money for their owners by producing something of value for others. To do that they will typically hire people. Like other market transactions, all these exchanges produce mutual gains.

People start businesses with plans to produce something specific. Until they decide that a new objective is needed, the owner (or owners) will want to motivate and guide the staff to carry out the mission. Exactly who decides how the mission is carried out is a management's judgment call that depends on many factors. That's what management is about, and managing is real work, as the early classical liberals understood. The owner of an Indian restaurant is unlikely to hire chefs who insist on the autonomy to add other kinds of dishes to the menu. It would be wrong to think that those chefs are oppressed or stripped of their dignity.

Owners or their managerial agents, then, select the company's ends. However, the authors say, in the new information economy, it makes more sense than ever to leave the means to frontline employees. "We agree that the new environment suggests the need for a redefinition of the traditional managerial role." But they add: "Despite all the changes that have occurred, there is a strong need for someone to define the framework. In the knowledge economy, the main task for top management is to define and implement the rules of the game." Managers are also important for coordinating different divisions of a company that depend on each other.

Nuance, then, is the order of the day. Klein and Foss clearly are not dogmatically pro-hierarchy: "Indeed, some companies have excessive corporate fat: layers could often be cut, and empowering employees might increase productivity."

But the authors note that although the new technologies have revolutionized business, "the laws of economics are still the laws of economics, human nature hasn't changed, and the basic problem of business -- how to assemble, organize, and motivate people and resources to produce the goods and services consumers want  -- is the same as it ever was."

Any firm or noncommercial organization, for that matter, requires a focus on both the forest and the trees, the long and short term. Why would we be surprised that different people have different skills and different preferences in this regard? Skills, of course, are not evenly distributed throughout a population. A division of labor, knowledge, and inclinations is to be expected. Many will want to concentrate on a specific job, without having to think about management, long-term planning, and such. Lots of people dislike sitting through meetings.

Moreover, people differ in their preferences for risk-taking. Some prefer a regular paycheck in return for less overall responsibility.

The upshot is that human diversity makes noncoercive hierarchies perfectly understandable, inevitable, and beneficent as long as the market is free. That in no way means that bosses can't be stupid, obnoxious, or abusive. Of course they can and are. But if they have to compete without government privilege, abuse and stupidity won't survive because profits will go to the better-run firms, which will attract the best employees. 

In interviews (as in his and Foss's book), Klein emphasizes that one size surely does not fit all companies. As a Hayekian, he understands that nonmanagement workers possess local and tacit knowledge that managers don't -- and that good managers will want their employees to capitalize on that knowledge and reward them for doing so. "[T]here are many benefits to decentralization, as well as costs, and these vary widely with context and circumstance," Klein and Foss write.

Klein and Foss intend their book to correct the impression given by many current writers on management philosophy that hypes the spread of nonhierarchical companies and predicts a future marked by this new way of doing business. It's not true, Klein and Foss respond: "... echoing Mark Twain ... the death of hierarchy has been greatly exaggerated and ... its bad reputation is largely undeserved."

Their point is not simply that some degree hierarchy is more efficient than none at all, but that bosslessness poses perils to businesses, such as discoordination and -- perhaps counterintuitively -- lack of flexibility.

As you can tell, this is a rich thesis. I'll close with a couple more quotes:

Writers [who favor bossless firms] ... are fiercely critical of traditional hierarchy, but we think they exaggerate its problems and neglect many benefits.... The near-bossless companies -- and there aren't many of them -- with their self-managing teams, empowered knowledge workers, and ultra-flat organizations are not generally or demonstrably better than traditionally organized ones. Bosses matter not just as figureheads but as designers, organizers, encouragers, and enforcers....

[I]f you look more closely at ... ostensibly bossless companies, you see that they do have formal [or informal] bosses.... Right away, this suggests that perhaps the whole bossless company narrative is a bit of a head-fake -- a way to draw attention to the charismatic, influential leaders who create and promote flat structures..... Contrary to popular opinion, the world is not becoming dominated by flatter, even bossless, network organizations.

The market is an efficient decentralized information-generating process. Through private property, voluntary exchange, free enterprise, and the price system, we learn things that we can't learn in other ways. This is as true for the best management methods as it is for the many other things we look to the market for. Government should never impede worker-owned enterprises, but it shouldn't help them either. Freedom is for all. 

Related reading: "Free Men for Better Job Performance" by C. L. Dickenson, published by the Institute for Humane Studies in 1966. It is posted here and here.

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