Worker Satisfaction and Economic Performance

Morris Altman

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000161441
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Success

This book challenges some of the fundamental tenets of "free market" economics that have had a profound impact on public policy and the plight of the American worker. These include the beliefs that high wages inevitably mean low profits; that a "free" market will automatically reduce discrimination and pay inequality; that anti-trust legislation hinders competitive market forces; and that minimum wage laws and trade unions negatively impact the economy.

Using both theoretical analysis and real-life examples, the author shows that these myths are a product of unrealistic behavioral assumptions on the part of "free market" economists about the typical worker. In fact, as the author makes clear, the level of workers' satisfaction with their jobs, as a reflection of how well they are paid and treated by their employers, has a direct impact on the quality level of the products they produce and, inevitably, the economic performance of the firms.

1

Introduction

Revising the Microfoundations of Economics

Although Worker Satisfaction and Economic Performance is much to do about economic theory, it is also fundamentally a work about public policy and economic welfare. In this book I attempt to lay more realistic micro-foundations for analyzing a wide array of public policy questions. This alternative theoretical infrastructure subsumes the mainstream neoclassical worldview along with its related analytical predictions and their implications for public policy. The alternative analytical framework is akin to a general theory wherein the neoclassical narrative becomes one possible analytical tale, or a special case, among a variety of alternatives that are articulated in Worker Satisfaction and Economic Performance. I argue that whether or not the mainstream view holds critically depends on the behavioral assumptions that underlie the theory and upon the social and institutional context of the events that the economic theory is designed to explain. If the underlying assumptions of the mainstream theory prove to be the exception to the rule, which is what I argue, then the public policy recommendations that flow from this theory would be faulty, and this would have significant implications for public policy and economic welfare. Therefore, unlike the mainstream worldview, I maintain that the assumptions underlying economic theory matter. Faulty assumptions yield faulty analytical predictions or at best faulty conclusions relating to cause and effect, with potentially disastrous consequences for society.

The general theory presented in this book focuses on one set of alternative and more realistic behavioral assumptions that yield analytical predictions that are more in tune with the stylized facts of economic life and that recommend public policy and private choices that often stand in stark contrast with what flows from the neoclassical worldview. In particular, I make the case that what happens within the firm, in particular how workers are treated in the context of the firm’s general human relations or industrial relations environment, plays a fundamentally important role in determining the economic performance of the firm and, thereby, of the economy as a whole. Moreover, I argue, what happens within the firm is subject to the discretion of the decision makers inside of the firm. This is true even in a perfectly or extremely competitive product market. Individuals can choose the type of industrial relations system to be adopted by the firm. Market forces do not dictate what system must be adopted. Much ultimately depends on the power relationship among workers, management, and owners, which is in turn affected by market forces and labor market-related institutions, as well as by the preferences of the economic agents. There is no unique solution to what happens within the firm. This conclusion—that individuals have a certain degree of freedom in deciding how workers are treated within the firm even in a competitive environment—stands in sharp contrast to what is predicted by mainstream neoclassical microeconomic theory. Indeed, this contrary perspective also is opposed to the worldview held by many economists of a radical or more institutional bent, for whom market forces or noneconomic factors predetermine the choices made by individuals inside the firm. In the neoclassical world workers, managers, and owners ultimately construct the inner workings of the firm so that the firm is maximizing output per unit of input. In the neoclassical firm the best that can be done is accomplished. All opportunities for gain are exhausted. Economic agents and the firm are performing efficiently given the various constraints that they face. These constraints, most economists agree, include transaction and information costs.¹

Technically speaking, the firm is operating along its production possibility frontier, where this outermost boundary for maximum obtainable output is determined by traditional inputs such as labor, human capital, capital, land, and technology. Practically speaking, individuals are therefore assumed to be working as hard and as well as they can. This is the manner in which individuals operating within the firm must behave to survive in a reasonably competitive environment. This is the classic analytical position of what has been dubbed the “Chicago School,” whose core is clearly articulated in Milton Friedman’s essay on the methodology of economics, an essay that has found its way into the very heart and soul of contemporary economic theory (chapter 3 below; Friedman 1953a; Reder 1982). Market forces make economic agents perform invariably in an economically efficient way. In effect, individuals are assumed to be working as hard and as well as is possible by dint of market forces. Any other choice spells disaster for the firm. Therefore, no choice is truly afforded to individuals as to how they do behave within the firm when it comes to deciding on the level of efficiency. Economic efficiency is a product of an economic imperative. Part and parcel of the assumption that economic efficiency is a given is the notion that individuals always choose the most efficient technology. They must. This again is a product of an economic imperative. Any other choice yields relatively high and uncompetitive production costs.

Moreover, implicit in economic theory in general and most especially in its neoclassical variant is the assumption that individuals behave efficiently as a product of a moral imperative, one that is ultimately geared toward maximizing the material welfare of the firm (Reder 1982). Deirdre McCloskey has eloquently expressed this fundamental principle of contemporary economic theory as the “American Question” or the “Axiom of Modest Greed”: “The Axiom of Modest Greed involves no close calculation of advantage or large willingness to take risks. The average person sees a quarter and slides over it… he sees a $500 bill and jumps for it. The Axiom is not controversial. All economists subscribe to it, whether or not they believe in the market … and so should you” (1990, 112). Therefore, even in the absence of serious competitive pressures, even in a world dominated by monopolies, few economists would expect or predict that the typical individual will pass over reasonable opportunities for gain. A bit of small change might be overlooked on the sidewalk but certainly not a $500 bill or bills of even larger denominations. This particular axiom also presumes, quite implicitly at that, that all economic agents within the firm are interested in maximizing the material welfare of the firm and that they all stand to gain by working as hard and as well as they can. From this perspective, the existence of a relatively competitive product market is not a necessary condition for the existence of economic efficiency. Nevertheless, it goes without saying that the existence of severe and increasing competitive product markets serves to reinforce the view that economic agents have no choice but to be efficient in the market economy.

For those who do not necessarily buy into the argument that economic efficiency is a product of a moral imperative, the notion that it is an economic imperative, whence there is no escape, has been made ever more stridently in more recent years as globalization has become the catchword for a much more intense competitive environment forcing individuals to behave efficiently or perish in the whirlwind of market forces. Economists, other scholars, and experts from a wide spectrum of political proclivities, ranging from the left to the right, repeatedly make this point. Moreover, in the realm of economic theory, the theory of contestable markets developed by Baumol (1982) suggests that product market competition is even more severe than traditional measures of competitive productive markets imply since what counts is not simply the number of firms in a market and their market share, but also the credible threat of entry of new firms into a particular product market, even in a world dominated by oligopolies and monopolies. Only by protecting an economy from unbridled market forces can the economic imperative be somewhat circumvented, but only at a loss of material welfare to society at large. However, once exposed to market forces, individuals have no choice but to behave in a prescribed manner. Individuals are forced to behave efficiently.

It is important to note that according to mainstream theory, efficient behavior is expected to take place by dint of a moral or economic imperative irrespective of the specific institutional framework within which economic agents work unless, of course, institutions are designed to protect the inefficient, relatively high-cost economic entities from market forces or to prevent economic agents from realizing their ingrained moral imperative to perform efficiently. Indeed, it is expected that institutions evolve that are compatible with and conducive to economic efficiency, for otherwise the economies contained within the bounds of efficiency-impeding institutions will fail the test of the market. Therefore, institutional convergence is expected, specifically with regard to institutions that encourage or facilitate economic efficiency. Within these or even less than optimal institutional constraints individuals are assumed to behave in an economically efficient manner.²

Making the case in theory that what happens inside the firm is not a product of individual choice, but is rather a product of a moral and economic imperative, is not a moot esoteric point. It is fundamentally important for public policy. Whether we admit it or not, theory is the lens through which we perceive and make sense of the world around us. Theory helps both determine those facets of reality to which we pay attention and how we perceive this reality. If the theoretical lens is not the best of fits, it can provide us with only a distorted picture of how the world really works. This, in turn, affects public policy (chapter 3 below). Therefore, that economic theory predicts that economic efficiency is a necessary prior to the process of production, that it is a given, has profound implications for public policy. Under these assumptions, it is argued that living in a global and competitive world economy requires adherence to low-wage paths of economic development combined with minimalist government. The latter would be especially true when government participation in the economic realm refers to institutional or legal support for labor or the labor market writ large. This proposition at least implicitly presumes that a successful market economy, especially one that finds itself in the midst of an increasingly competitive global economy, comes at the expense of either the absolute or relative material well-being of the majority of any given society. The point is made, given the efficiency assumptions of mainstream theory, that efforts to improve the level of material well-being of the working population can only increase production costs, reducing the competitive position of the firm and the economy as a whole. This argument flies in the face of the worldview of Adam Smith that workers should be the immediate beneficiaries of market production and that their material success positively affects the productivity of the economy (chapter 4 below). However, this argument is ironically consistent with Marx’s long disputed contention that the evolution of capitalism goes hand in hand with the immiserization of the working class. Of course, those leaning toward the left then call for efforts to protect society from the unbridled effects of globalization. Alternatively, many on the left argue that the key to success in an increasingly competitive market economy is to invest appropriately in both human and public capital, so as to allow a nation to take advantage of its comparative advantage, whence will eventually flow material benefits to all by wit of competitive market forces, albeit with some delay (Cohen 1998; Reich 1992). In stark contrast, those leaning to the right make the case that eventually the benefits of the market economy will trickle down and accrue to all as a product of unfettered market forces.

Challenging the view that improving the material well-being of workers (be they skilled or unskilled, blue or white collared, low or high tech) need not damage the economy and may even further contribute to the material well-being of society at large is not simply a matter of presenting a set of facts, however rigorously derived and presented, that appears to demonstrate that the mainstream worldview is wrong. It is a fact that facts per se have convinced few economists or others dealing with economic policy to shift worldviews. Facts must make sense in terms of a particular worldview to win the day. As Thomas Kuhn points out, “Anomalous observations … cannot tempt [a scientist] to abandon his theory until another one is suggested to replace it.… In scientific practice the real confirmation questions always involve the comparison of two theories with each other and with the world, not the comparison of a single theory with the world” (cited in Coase 1994a, 27). Moreover, it is theory that is our fact-finding machine. It both provides us with the means to search for facts and determines the type of facts we search for. A theory that is wrong fails to ask the right questions. It acts as a blinder, preventing the scholar or the activist from seeing facts that speak to the issues at hand. In addition, facts that appear to contravene theory can be and are dismissed as exceptional or simply a product of poor empirical analysis. To quote Kuhn once again, “The road from scientific law to scientific measurement can rarely be traveled in the reverse direction. To discover quantitative regularity one must normally know what regularity one is seeking and one’s instruments must be designed accordingly; even then nature may not yield consistent or generalizable results without a struggle” (cited in Coase 1994a, 27). The mainstream point of view will also not be easily overturned by arguments for a more just society. If it cannot be shown that such a society is economically sustainable or what the opportunity costs, if any, for a differently structured market economy are, such calls will fall largely on deaf ears. The construction of an alternative economic theory is therefore critical in making the case that improved working conditions or an ecologically sustainable economy, for example, are possible within the bounds of a competitive market economy. Theory is required to demonstrate the conditions under which a more “just” society is economically viable or not and the potential costs of realizing such a society. This is the gist of this book. The mainstream worldview does not provide such an analytical framework. I hope to contribute to the construction of Kuhn’s other theory, which is both consistent with the facts and which can serve to confront the analyses and public policy recommendations that flow either explicitly or implicitly from the mainstream analytical framework.

Although this is a book that is largely theoretical in nature and is therefore concerned with the logical consistency of the arguments presented, the theoretical arguments presented in this book are not presented largely in mathematical prose. Nevertheless, there is math, as well as analytical diagrams, found throughout this book. Math and analytical diagrams often go a long way toward clarifying the logic of particular arguments. But the objective of the presentation is to expound the theory in a manner that is understandable to a wide audience without losing the necessary rigor required of theory. Moreover, a necessary condition for the formulation of good economic theory is not the extent of the math contained in the articulation of the theory, the capacity of an argument being convertible into mathematical form, or the extent to which logical-mathematical proofs are provided for the “existence” of certain axioms or basic propositions contained in the theory. Some of the most influential works in economics include the contributions of Adam Smith, John Maynard Keynes, Joseph Schumpeter, Milton Friedman, Ronald Coase, and Douglass North, whose works, although logically argued, lack mathematical form and rigor. In addition, I am not concerned with presenting theory without regard to the economic reality to which it must relate if the theory is to be economic theory as opposed to an exercise in mathematical logic or model building for the sake of model building. It is the latter that so much of economics has become (Blaug 1998; McCloskey 1996; Nelson 1995; Szostak 1999). This is a book in economic theory grounded and infused by real economic issues and problems and with a steadfast concern for the realism of the assumptions underlying the economic theory.

At this point, it is essential to summarize and further clarify the distinguishing features of the model articulated in this book as compared to the mainstream theory and to the key alternative economic theories that directly relate to the analytical framework presented below, such as x-efficiency theory and efficiency wage theory. The theoretical framework provided in this book differs from the mainstream neoclassical framework in terms of three key assumptions. For the rest, I remain consistent with the mainstream model. This forces us to focus our attention on those assumptions that are critical both to the mainstream model in terms of the economic problems discussed in this book and to the alternative theory presented here. For example, I assume that given the constraints that they face, individuals are rational in the sense that they make best use of the information at hand and that they are forward looking in their decision making with the end in mind of maximizing their utility or general well-being.³ I also assume perfect product market competition. Deviations from these assumptions can only strengthen the arguments made in this book. In contrast with mainstream theory, however, I assume that individuals are typically not maximizing the quantity and quality of effort inputted into the process of production. Moreover, I assume that labor markets are imperfect in the sense that supply and demand factors will not typically result in identical wage rates for identical types of labor. Finally, I make the assumption that individuals within the firm hold different preferences with regard to conditions of work and that it is best to model the firm as composed of at least two groups of individuals or economic agents, such as workers and managers or owners, where these different groups have different preferences.

An important footnote to this discussion is to underscore that the analysis presented here is consistent with the major role of institutional factors as determinants of economic output. It is also important to note that the mainstream view that institutions should converge toward their efficiency-facilitating ideal is rejected here. However, this book is not about institutions per se or about institutional change. The focus here is on what happens inside the firm. I argue that the level of efficiency and the rate of technical change are affected by the work environment and by the overall choices made by economic agents within t...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Acknowledgments
• Original Half Title
• 1. Introduction: Revising the Microfoundations of Economics
• 2. Human Agency as a Determinant of Material Welfare
• 3. The Methodology of Economics and the Survival Principle Revised
• 4. A Behavioral Theory of Economic Welfare and Economic Justice
• 5. The Economics of Exogenous Increases in Wage Rates in a Behavioral/X-Efficiency Model of the Firm
• 6. A Behavioral Model of Endogenous Economic Growth
• 7. Interfirm, Interregional, and International Differences in Labor Productivity: Why Convergence Need Not Take Place
• 8. The Economics of Profitable Inefficiency and Market Failure: A Behavioral Model of Path Dependency
• 9. Economic Theory, Public Policy, and the Challenge of Innovative Work Practices
• 10. The Efficiency- and Welfare-Promoting Role of Labor Rights and Labor Power in a Market Economy
• 11. A Revisionist View of the Economic Implications of Child Labor Regulations
• 12. How Discriminatory Pay Inequality Can Persist: Even in Competitive Markets
• 13. When Green Isn’t Mean: The Economics of Environmental Regulations
• 14. Big Is Not Always Better: A Critical Appraisal of the Transaction Cost–Economizing Paradigm
• 15. Culture as a Determinant of Material Welfare
• References
• Index
• About the Author