I've
got a couple of concepts rambling around in my head that are challenging my
economics world-view. I've been wrestling with one of these challengers
for a while; the other challenger is new. Readers of my blog know the Unrepentant
Capitalist is a disciple of the Adam Smith, David Ricardo, and Milton Friedman
school of laissez faire, free market economics, but these two challengers are
in conflict with the core tenets of conservative economics—limited
government and the profit motive.
Limited
Government (Less is More)
The
Smith-Ricardo-Friedman school says the government's role in economic
affairs should be kept to a minimum. They'd also tell you the government can serve the economy and society best by
setting the rules (the fewer the better) and then enforcing them fairly.
Government ownership of businesses or crafting policies to favor
particular industries or companies are counterproductive and cause an economy to undershoot
its potential. They would argue the Department of Commerce is entirely
unnecessary and would oppose government spending to 'goose' the economy during economic downturns.
While
I buy the limited government argument, I also have difficulty explaining away
the long term benefits that our economy has realized from many years of
government spending on technology. Starting in World War II, and
continuing to current day, the Pentagon has been a major buyer of technology.
Government fueled demand for jet airplanes, satellites, nuclear power
systems, and all the electronic components inside this stuff greatly advanced
the state of the art. Does anyone really believe that our commercial aircraft
industry would be where it is today without years of DoD spending
on military aircraft?
The
physicists and engineers would have invented the transistor and the integrated
circuit, but didn't Pentagon requirements (and lots of procurement dollars) to make electronic gear process faster, weigh less, run cooler, and
use less power push these innovations to occur sooner than they would have if
driven by consumer demand alone? With the invention of the integrated
circuit, and the demand for better performance from military and
NASA programs, the microprocessor was born. Would we have been able to
establish our leading position in our various Information Technology industries
as early as we did without the microprocessor coming along when it did?
In short, haven't many things powering our modern economy—software,
mobile phones, the Internet, flying coast to coast in 6 hours—enjoyed a healthy
tailwind courtesy of DoD spending? How many companies have been born, and how
many high paying job have been created over the years to help commercialize all
the Intellectual Property originally created by defense spending?
I
can hear Milton Friedman's rebuttal. Do the economic
benefits justify the staggering sums of public money spent on all this stuff?
I don't know how to do the business case on that one, but didn't the Cold
War force us to spend that money? Wouldn't have consumer demand
eventually driven development of these technologies anyway? Probably, but in the
absence of government demand, would we have had these technologies as early as
we did? Imagine a 2013 where we're playing pong, talking on Gordon Gekko
mobile phones, and marveling over the 'state of the art' 747.
The
positive effects of government spending on our various technology industries,
and the benefits to the larger economy has been a difficult question for the
Libertarian leaning Unrepentant Capitalist to come to terms with. While I
wrestle with this question, some things are clearer. I'm sure the
Pentagon is inefficient in how they spend vs. private companies. I'm
deeply skeptical of government crafted trade policies seeking to protect
certain industries (the track record here is very bad) or investing public dollars in companies (Solyndra).
Profit
Motive (Driving Proper Economic Decisions)
In
his 2009 book Drive, author Daniel Pink presents some compelling
arguments that question the power of the profit motive as an effective driver
of economic behavior.
The
profit motive says the goal of business is to turn a profit. The profit motive
is a beneficial guiding force in that it ensures resources are being allocated
to their highest and best use. If something is worth doing, there's a
profit to be made. If there's no profit, the market is telling you the
resources used to create that something are being misallocated. The
profit motive works for the individual too. People will be drawn to jobs
where they can make good money.
Pink's
book says the profit motive alone may not work as a motivator, and in some
cases, may be counterproductive in a modern economy. Pink suggests that until recent times, money as a motivator works reasonably well. But, as we evolve towards an economy with a heavier reliance on knowledge
workers and need more innovation and creativity from our workforce, money
alone isn’t enough. The author says that once a worker hits a base level of compensation (or as the author says, "with the question of money taken off the table") additional money as a motivator hits a point of diminishing return.
Bonuses don't work as we've been taught to expect. Once that base level of compensation has been met, motivation begins to shift to softer things
like worker autonomy, skill mastery, and work with a higher purpose.
Pink
cites numerous examples from our new economy to support his assertion that
money is not the ultimate motivator. To make his case, he presents an
interesting hypothetical. Suppose you go back to the mid-90’s and ask people to
predict the eventual winner among products from two competing
groups. One product is from a well-known company with many
commercial successes. This company has assembled a well-compensated team led by bright, capable managers. The other team is loose-knit band of unpaid volunteers
with no formal management team and plan to charge nothing for use
of their product. Traditional economic thinking tells us the product from the first group will be the
heavy favorite. But once we pull back the curtain to reveal the
products in question, we know Wikipedia won this battle, and Microsoft pulled
the plug on Encarta years ago. The tech world has other similar examples
of great free stuff developed by unpaid workers including the Firefox browser and the Linux operating system.
Drive makes a lot of good arguments about
teams and individuals achieving higher levels of creativity and productivity with
autonomy, mastery, and purpose deliberately added to the workforce
equation. But didn’t we already know this? To consider money as
the sole source of motivation seems very simplistic. The new information
here is the diminishing returns of incremental compensation as a motivator. So, if we
all agree the soft components are also a requirement, how do we evaluate a
company on these criteria? How do we measure a company to know that it’s
offering its workforce opportunities for autonomy, mastery, and purpose?
How do we know the company’s efforts to motivate its workforce are effective and creating value? Old
fashioned as it may be, profit (or loss) is an objective indicator telling us
that something is (or is not) worth doing. Profit can be measured. Given
my left brain orientation, I need some data. Pink is on to something here, but I need some
instrumentation to properly pilot the ship.
While
it might appear the Unrepentant Capitalist has taken a small step toward Europe, I continue to fundamentally believe that free market capitalism is
the best driving force to organize our economy—less government is better than
more government, businesses exist to make a profit, brush and floss twice a day.
Having said all that, I also believe that strict adherence to one school or the
other without taking time to honestly consider the other side’s argument is unwise.
At the risk of edging up to the slippery slope, I believe the best answers can
sometimes be found somewhere between strict ideological poles. The Unrepentant
Capitalist continues to operate close to the Libertarian camp, but I’m not in
the elder’s tent.
______________________________________________
Invisible Hand – a phrase coined by Adam Smith in The
Theory of Moral Sentiments (1759). Smith tended to be a bit
wordy (if you like wordy, check out Herman Melville's work) but, in essence he said the economy is guided
by an Invisible Hand that is the collective result of individuals pursuing
their own, narrow economic self-interests in a free marketplace. The Invisible
Hand determines the goods and services available, the prices charged, and the compensation to those who help bring those goods and services to
the marketplace, etc, etc, and does all this to society’s ultimate benefit.
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