Saturday, November 2, 2013

Cooperatives Counteract Contemporary Caste System.

The Western democratic-capitalist system that is now extending its reach to every corner of the globe is often presented, by its apologists, as a humanitarian advance over earlier social systems1. Unlike, for instance, the Hindu caste system or the European feudal system, democratic-capitalism allows for the social mobility of individuals. The (at least theoretic) ability of people to effect their own social status is claimed to be a major advance in equality over earlier systems of hereditary status determination.

However, our democratic-capitalist system has more in common with the systems that it has replaced than its proponents would like to admit. Let us take the Hindu caste system as an example and see if we can't tease out some of these deep similarities.

Traditionally, Hindu society was divided into four castes2, each with a particular role to fill in society. These castes are:
  • Brahmin—the priestly caste, responsible for performing religious rituals and perpetuating religious thought.
  • Kshatriya—the warrior and kingly caste, responsible for all military matters and for the administration/rule of society.
  • Vaishya—originally farmers and cattle-raisers, but now normally associated with trade and money-lending
  • Shudra—the working class; their traditional duty is described as serving the other three castes.

In our contemporary democratic-capitalist system, we also have brahmins and kshatriyas, vaishyas and shudras. The names have changed but much else has remained the same. Our contemporary brahmins are the academics and lawyers, those who are given the task of abstract thought and of aligning human action with abstract principle (concepts of “justice” and “equality” having taken the place of “divine will” and statutory law replacing ritual and doctrinal texts). Our kshatriyas are the political class: elected politicians and appointed administrators of the civil service. Vaishyas have been replaced by businessmen and women, bankers and financiers. And our equivalent of the shudra caste, of course, is the working class; which is to say, most of us.

Just as in the old Hindu caste system, our present social system prescribes and proscribes particular types of behavior for each class of people. While the rules regarding what types of activity are permitted to each social class are not made as explicit in our system as they were in the old caste system, they are, nonetheless, there3.

Specifically, only the top three groups are allowed to think. The bottom group, the workers, are not permitted to think but only to act. Of course, this proscription on thought is rarely spelled out so bluntly, but that is message that is given over and over again by the media and society in general: only the thinking of “experts” holds any weight.

Working class people are not expected to have their own thoughts about philosophic or academic topics; if anything, they are expected to parrot the pronouncements of respectable academics and professional intellectuals. In order for a person's intellectual pursuits and conclusions to be taken seriously, they must have a string of fancy letters behind their name. The plumber or baker who holds forth on intellectual topics is roundly ignored, if not laughed out of the room. Legitimacy is reserved for those of the intellectual, academic class.

Working class people are also not expected to have political ideas...unless, of course, they coincide with the reigning ideology of respectable politicians4. And working class people are definitely not encouraged to have ideas about how to run a business or a bank. Only the managers and owners of business enterprises are considered to be up to that task.

This is why the co-op movement, therefore, poses an existential threat to the current system on multiple levels. The co-op movement undermines academic economics by placing cooperation instead competition at the heart of it's economic model. It undermines the political class by expanding democracy and democratic practice to everyday life, instead of confining it to biannual elections, as the politicians would have us do (if people experience real democracy at work, they might start demanding it in other areas too!). And the co-op movement directly undermines businesspeople by implementing alternative management and ownership arrangements that eliminate the need for outside owners, investors and managers.

The co-operative movement is the working class daring to think for itself, and that thought has the potential to upset many powerful vested interests. We shouldn't be surprised, then, when the powers-that-be push back against this dangerous idea. Witness the hamstringing of health insurance co-operatives by Obamacare (as detailed in a recent Washington Post article here) as well as the current push in Congress to revoke credit unions' tax-exempt status. When those at the bottom of society's hierarchy begin to encroach on what have been the sole prerogatives of those further up the ladder, those at the top can be expected to do whatever they can to stop that encroachment.

Despite their best efforts, however, the encroachment shall continue.

There is one other caste that we must not forget to mention: the Dalits, or 'untouchables5.” In India, until recently, these people were utterly shunned, confined to live in slums and to perform only the most dirty and demeaning work.

Our Dalits, our 'untouchables', are the homeless. The homeless also are not allowed to think, to theorize, to organize. They are there to remind us shudras that there is always another rung further down the ladder that we could be pushed to. They are there to make us grateful for our place in the scheme of things, lowly though it may be. But just as the existence of an 'untouchable' caste is the shame of the Hindu caste system, and evidence of its corruption and moral vacuity, so the existence of homeless women and men, homeless children and homeless families is the proof that our system is similarly corrupted and morally vacuous.

The caste system in Hinduism has been officially abandoned, although it maintains its hold on many minds. Similarly, our current democratic capitalist system must also ultimately be abandoned. Abandoned for what? For a society that places democracy and cooperation at the center of its ideology and its daily life, instead of wealth accumulation and competition.

1. It might well be argued that our current social system is neither democratic nor, strictly speaking, capitalist. However, lacking better terminology I will refer in this essay to our present social system by the misnomer favored by its proponents.
2. There is much debate about how the caste system actually functioned at various times and places on the Indian subcontinent. Here I present an admittedly simplified version. A summary of the debate can be found here.
3. That the pre- and proscriptions for each class are not made explicit in our society only makes them more pernicious, as they are harder to identify and therefore to resist.
4. Practically an oxymoron these days, it seems like.
5. Historically, the Dalits are a late addition to the caste system and are not mentioned in the classical texts.

Thursday, September 26, 2013

Problems with Business Ethics Discourse

I just had my attention drawn to this recent paper by Michael Luca and Georios Zervas, of Harvard B-school and Boston U, respectively, about review fraud on The conclusions of the authors are rather curious to me and appear to display a deep misunderstanding of ethics and what exactly they are.

 Fake It Till You Make It: Reputation, Competition and Yelp Review Fraud
As crowdsourced information becomes increasingly prevalent, so do incentives for businesses to game the system. In this paper, we have empirically analyzed review fraud on the popular review website Yelp - both documenting the problem and investigating the conditions under which it is most likely to occur. We show that the problem is widespread - nearly one out of fi ve reviews marked as fake, by Yelp's algorithm. These reviews tend to be more extreme than other reviews, and are written by reviewers with less established reputations.
Our findings suggest that unethical decision making is a function of incentives, rather than of unethical businesses. Organizations are more likely to game the system when they are facing increased competition and when they have poor or less established reputations. For managers, policymakers, and even end-users investigating review fraud, this sheds light on the situations where reviews are most likely to be fraudulent. More generally, this casts light on the economic incentives that lead organizations to violate ethical norms. [emphasis added]
I find the first sentence of their concluding paragraph extremely problematic. First off, what could possibly be meant by "unethical businesses"? A business is a legal structure, a set of relations, i.e. an abstract entity. A business does not make decisions, actual flesh-and-blood people do. An owner or manager makes a decision "on behalf" of the business, but it is still the owner or manager who has made the decision and who is ethically culpable for it. Confusing agency in this way is indicative of the sloppy use of language and poor philosophic reasoning in economics generally.

 Secondly, the existence of incentives to engage in unethical actions does nothing to remove ethical culpability from the agent who engages in those actions. Sure, a restaurateur facing stiff competition has an incentive to leave negative reviews for his competitors, but he also has an incentive to fire bomb their establishments. In neither case does the existence of incentives mitigate the unethical nature of the act. If ethics is to mean anything, it must mean acting on the basis of something other than individual incentives (whether financial, social, etc.).

All businesses have an incentive to game the system in whatever way they can (in this case, leaving fake reviews on Yelp), but only some of them actually do it. The people who choose not to game the system, despite the presence of incentives to do so, are the ones we call "ethical". A person who chooses to game the system and violate the trust of others because of those incentives is someone we call "unethical."

No wonder the state of "business ethics" is in such a shambles: the "experts" don't even know what ethics means.

Monday, July 22, 2013

NSA 2053

[I don't usually write fiction, but the recent revelations of Ed Snowden and others about the massive surveillance apparatus of the National Security Agency, sparked an idea for this dystopian short-story.  The scenario I present below is, perhaps, one response to those who do not think that a blanket spying program poses any problems.]

Send the young man in.”

The General's voice was gruff but warm, his tone cheerful. He always looked forward to these initial meetings, they were a bit like first dates. But whereas his actual first dates had almost universally ended in uncomfortable silence and thinly veiled rejection, these political 'first dates' never failed to reach a happy conclusion. He had yet to suffer rejection in his official capacity.

The man who was shown into the office was tall and text-book handsome. He had a strong jaw, a full head of chestnut brown hair and intensely blue eyes. He strode into the General's office confidently, as if he owned not only the office but the whole building. His face bore unmistakable signs of irritation. The General smiled and motioned for the man to sit down.

Please Mr. President, have a seat.”

The President did not have a seat. He glared at the General in silence for a few moments and then erupted.

You better have a damn good reason for this Mitchell! I've got a million things to do at the moment and I don't have time to be taking bullshit social calls! Unless you want to start a war this evening, I can't imagine what on earth couldn't wait until after the fucking inaugural.”

The newly-elected President of the United States had been shuffled out of a celebratory ball by two severe looking NSA agents half an hour before. They were grim and persistent and they arrived right in the middle of a solo by the President's favorite jazz clarinetist, which added considerably to his irritation.

General Mitchell needs to see you immediately, sir.”

What about? Can't it wait?”

I'm not at liberty to say what about, sir. The General needs to see you now. We've been sent to bring you to his office.”

The President thought he detected the hint of a threat in the agent's tone and he didn't like it one bit. He scowled at both of the agents but neither registered a reaction. They just gazed back at him with dead eyes and repeated their command.

We need to go now, Mr. President.”

He scowled at them for a few more seconds and thought about getting their names for future retribution, but decided it wasn't worth the trouble.

Alright. Fuck. Jerry, tell the boys we're moving out.”

The Secret Service agent standing nearest to the President nodded. “Yes, sir.”

The General's office was spacious but spartan. No art hung on the walls. No plants or furniture interrupted the vast expanse of black marble tile that covered the floor, save for the General's desk and two leather chairs that sat facing it. The General was now gesturing to one of those chairs with an outstretched hand, a used car salesman's smile frozen on his face.

Please, Mr. President, have a seat. I assure you this will only take a moment.”

The General had been expecting a fiery response from the President: it was the response he always got at the start of these meetings. Anger and indignation was what he expected when he had given the order for the President to be brought to his office; indeed, it was what he had hoped to elicit with his exquisitely bad timing. He was not disappointed.

Please, sir, sit down and let me explain.”

The President glared at the General a few moments longer and then finally took a seat.

Make it snappy.”

The General took a moment to consider the man sitting across from him, the man who many were already referring to as “the most powerful man on Earth” and “the leader of the free world.” He chuckled silently to himself, savoring the irony of those phrases.

Some things have come to our attention at the NSA, Mr. President, some rather disturbing things.”

What kind of things? What are you talking about? I don't have time for this bullshit.”

Well, Mr. President, it has come to our attention that in 2022, a Ms. Jenny Butler received a pregnancy termination at the Port View Medical Center of Grand Rapids, Michigan. Does that ring any bells for you Mr. President?”

The President said nothing. A man who had been radiating confidence and power just a few minutes before now sat stunned, his mouth slightly agape as the implications of the General's words slowly sunk into his brain.

You were married at that time, were you not, Mr. President? Quite unfortunate. There is also the matter of your brother, Michael.”

The President just stared at the General, still in shock. Vaguely connected thoughts ran wildly about the inside his skull like squirrels on methamphetamine. Jenny...the long ago...if Cindy knew...if the press knew...Michael?...

He would appear to have a predilection for three-way intercourse. Watching videos of others, I mean, not participating himself. Still, it would be an uncomfortable thing to have to explain to his congregation, don't you agree? I'm not a church-going man myself, but I've heard that they tend to frown on that sort of thing, especially among the leadership.”

The President started to regain his composure. He hadn't risen to the height he had by allowing himself to be intimidated. Ok, he thought, they've got some dirt. It isn't the end of the world

So what do you want from me?”

Oh,” the General grinned cheerily, “we'll let you know.”

And am I to understand that you've been spying on me for my entire political career, that you know all my deep dark secrets? Is that what this is about?”

No, no, of course not! Don't be ridiculous. No one has been spying on you for all those years. You're beginning to sound paranoid, Mr. President.”

The General's good-natured smile had remained unchanged throughout their conversation, but now it broadened slightly and took on an additional air of sadistic pleasure.

No, this is just what the boys have dug up in the last few hours. I'm sure you have plenty of deep dark secrets that we haven't found out about yet.”

The leader of the free world and commander-in-chief of the US military seemed to physically shrink in his chair. In the space of a few minutes he had gone from a self-righteous, self-assured world leader, to a beaten, battered dog. He felt like his guts had been ripped out. He felt like there was a noose around his neck.

He stood up slowly and turned to leave without a word. Just as he reached the door of the cavernous office, the General called out.

Oh, Mr. President...”

The President turned, too traumatized already to fear anything else the General might have to say.


The Air Force drone bases in Afghanistan, the ones you promised to shut down during your campaign...that's not going to work.”

The President stared at the General in silence, then opened the door to leave. The General's cheery, gruff voice followed him out of the office.

National Security, sir, I'm sure you understand.”

Monday, April 22, 2013

The Labor Market As Ultimatum Game

Introduction: Labor Market as Ultimatum Game

In the standard neo-classical economics that I was taught in college, labor contracts are assumed to be negotiated between parties who have an equal ability to refuse the terms of any proposed contract and walk away from the agreement. Each party to the contract is also assumed to have the same amount of information available to them; for instance, the working conditions and the amount of surplus created by the production process. It follows from these assumptions that each party to the labor contract (i.e. the worker and the employer) will only agree to contracts which provide each with the value of their contribution to the production process. So long as there is competition among both employers and employees, capitalists will not be able to exploit workers (by paying them less than they are worth) and workers will not be able to exploit capitalists (by demanding more than they contribute).

Of course, this description of the labor market sounds patently absurd to anyone who has spent time toiling in the low-wage sectors of our economy. The statement that both parties to a labor contract have an equal ability to walk away from the agreement recently elicited a well deserved guffaw from one of my friends.

An alternative model of the labor market is offered by scholars such as Prof. Ellen Dannin1, who describe at-will employment as a “dictator game2” in which the employer tells the worker the terms of the agreement and the worker has no choice but to accept3. While Dannin's description is closer to lived reality for most of us, it too, like the neo-classical description above, fails to capture the nuanced real-life interaction of employers and their employees (at least, to this humble observer).

A better description can be had, I think, by conceptualizing the labor market as a variety of ultimatum game4. In a standard ultimatum game, two players are given the task of dividing a sum of money between them. The first player (the 'proposer') makes an offer to the second player (50/50, 60/40, 99/1, etc) and the second player decides whether to accept or reject that offer. If the second player accepts the offer both keep the amounts agreed upon, but if the second player rejects the offer neither receives anything. Usually, the game is only played once by any test subject or pair of subjects and both players know what the stakes are (that is, they know what the total amount being divided is). The ultimatum game bears many resemblances to my experience working in low-wage sectors (janitorial, retail sales, food service); however, there are a number of tweaks that could be made to the standard ultimatum game that would make it much more closely resemble what people like myself face when we go out to look for a job.

First, and most obviously, the ultimatum game is only played one time by any given individual in an experiment, while employment negotiations are (for most of us) a 'repeated game.' Not only do workers seek employment at multiple establishments and employers interview multiple job candidates, but the 'ultimatum game' continues even after employment as workers and employers negotiate for adjustments of wages, benefits and working conditions/requirements. Besides being a repeated game, labor contract negotiations also have distinct 'informational asymmetries.' Workers and employers do not have the same amount of information regarding what the actual value of the product or service that the worker will be making or providing is; nor do they have equal information regarding the relative share of revenue that labor is responsible for creating. Workers and employers bargain for shares of revenue created by the productive process, but only the employer knows what that revenue actually is. Contrariwise, employers have no way of knowing for sure ex ante what the individual characteristics of an employee are, and therefore what their productivity will actually turn out to be.

Another difference between the actual labor market and the standard ultimatum game experiment is that players in the ultimatum game do not suffer any personal economic consequences if the game ends in refusal, both players simply walk away in the same economic position that they were before. No one had gained, but neither has anyone lost. In the real world, on the other hand, people seeking employment are often in no position to refuse any offer, however small. This is why my friend laughed at the notion that workers and employers are on equal footing in negotiating labor agreements and why Prof. Dannin has characterized the at-will labor market as a dictator game. Different individual workers will have differing degrees of ability to refuse low proposals, based on things like their accumulated savings, strength of social and familial 'safety nets,' relative slack or tightness in the labor market, and their individual psychologies. Because these factors (and many others) are unique to each individual 'player' in the labor market ultimatum game, generalizations about workers abilities to refuse proposals must be made with a great deal of caution. My preference is to assume some sort of distribution of player's ability to reject low offers, random or otherwise. I have tried to encapsulate these realities into two concepts which I will explain in more detail later: ability to refuse (ATR) and economic effects of refusal (EER).

So, we might conceptualize the labor market (or at least large portions of it) as a modified ultimatum game; one in which players repeat the game indefinitely with multiple other players in an environment of informational asymmetry, and in which players experience differing consequences as a result of games that end in refusal. It is on this basic conceptual framework that I will build in what is to follow.

Differential Ability to Refuse

We start with the last difference between the standard ultimatum game and real life that I mentioned above, i.e. that in the ultimatum game neither party suffers economic consequences for a refusal to accept the offer. The worst-case scenario for either player is that they leave the experiment in exactly the same economic condition as when they entered it. In real life, on the other hand, the refusal to accept an offer of employment can have very real economic consequences for the players involved. Failing to reach an acceptable arrangement with another party in the labor market can lead players to lose not only money, but homes, families and self-respect as well.

I say “can” because the degree to which failing to accept an offer (or failing to make an acceptable offer) will effect a particular player is dependent on all sorts of things, many of which are not susceptible to economic analysis, even of the rather “soft” variety I am attempting here. We can, however, sketch the broad outlines of what conditions, at least here in the United States, we might expect to diminish or enhance a person's ability to refuse any given offer (hereinafter, ATR). Strictly speaking, only workers should have an ATR, since they are the ones who accept or refuse the labor contract offered by the employer. However, we might also speak of the employer's ATR as their ability to refuse to increase their offers as a result of not finding any takers at their current offer level. ATR then, for both employers and workers represents their ability to wait for a better deal to come along.

Many different variables, so to speak, go into an individual's ATR. The one that we will be most concerned with here is the economic effects on an individual of refusal to accept an offer or to make an acceptable offer (hereinafter EER, economic effects of refusal). By economic effects, I mean real effects on an individual's standard of living and their ability to maintain that standard into the foreseeable future. While we would expect an individual's EER to have a relatively strong negative correlation to an individual's ATR, even extremely high EERs can be overridden by other constituents of a person's ATR. As a dramatic example, I offer the experience of my homeless friend Dave (known to the transient community in Missoula, MT as “Crazy Dave”). Dave used to work as a cook at a local restaurant. The sheer quantity of food wasted by the establishment became increasingly troubling to him until one day he decided that he would rather live off the incredible waste of our society than continue to contribute to it. He walked off the job and never looked back (although he has done a fair bit of work since then, just not paid work). For Dave, the economic effects of his refusal to accept any wage offered, dramatic as they were, were far outweighed by the negative psychological effects that he experienced as a result of acceptance. Most of us, however, do not posses David's ethical rectitude, and so our ATR will likely largely reflect our EER.

As a general proposition, we might expect workers to have higher EERs than employers, and low-wage workers have higher EERs than high-wage workers. Labor market conditions will also differentially effect players' EERs. A tight labor market (low unemployment) will tend decrease EERs for workers, since the odds of finding another at-least-as-good offer in a relatively short period of time will be high. Coversely, tight labor markets will tend to increase EERs for employers, since it will be relatively harder for them to find additional players to make their offer to. However, this will only be true for some employers, i.e. those that require a continual stream of revenue to maintain their standard of living. Employers with large personal fortunes may have an EER of zero, regardless of labor market conditions; the same is true for wealthy workers. Accumulated savings and assets are what largely determine a players' EER, since they are what must substitute for an income or profit stream in the absence of achieving a 'successful' ultimatum game outcome (which is why we would expect EERs to be highest for poor workers and lowest for rich employers).

One last thing that seems pertinent to this analysis is that workers and employers face different 'transaction costs' in finding opponents (or, perhaps, partners) with whom to repeat the labor market ultimatum game. While workers generally must seek out potential employers, employers can generally wait for potential employees to come to them. For many low-wage employers, even the simple expedient of a classified ad is unnecessary as unemployed workers will regularly present themselves for consideration whether the business is advertising a vacancy or not. The result is that these kinds of transaction costs will tend to lower the ATRs of workers more than of employers.

Having a high EER means having a low ATR, and having a low ATR means that you will accept pretty much any offer that is made to you. If your bank account is flirting with zero and rent is due in a week, you are much more likely to accept wages and conditions that, in other circumstances, you would not even consider. In the labor market ultimatum game then, having a low ATR means being ripe for exploitation. For all of the reasons stated above, it seems reasonable to assume that, on the whole, a worker will have a lower ATR than an employer in any given iteration of the labor market ultimatum game.

Informational Asymmetries

In the standard version of the ultimatum game, both players are aware of the full amount being divided. This informational symmetry has obvious implications for the outcome of the game. If I am in the position of player two, i.e. I have to decide whether to accept or reject the offer, and I know that the ten dollars being offered to me is only 10% of the total amount at stake, I may reject the offer to punish my opponent/partner for their unfairness. However, if I am offered the ten dollars without knowing the full amount in play, i.e. without knowing whether my opponent/partner was given $20 or $1000 to divide, I will be more likely to accept it, since I cannot judge the “fairness” of the deal.

In the labor market ultimatum game, the total amount to be divided between the employer and the employee is any revenue left over after all of the non-labor operating expenses (inventory, rent, power, licensing, etc.) have been covered. In general, employees and potential employees can have only a weak grasp of what the total amount in play actually is. Because the firm's accounting is not usually made available to employees either before or after being hired, employees are placed at a necessary disadvantage in wage negotiation ultimatum games. Employers will always be able to claim that “we can't afford” increases in wages or benefits and employees will not be in a position to verify, much less gainsay, these claims. The workplace taboo against employees discussing their relative wage levels creates further informational asymmetries, as only employers know what the total wage bill for the firm is, while employees are left to speculate. In the absence of this taboo, workers might be able to piece together some idea of the company's overall accounting, but in it's presence this is almost impossible5.

The asymmetries also flow in the other direction, so to speak, although to an apparently lesser degree. Employers, as noted above, have no way of knowing ex ante whether a worker will be more or less efficient than average. Having been on a couple of hiring committees in my day, I know from experience: the description of goods given in a job interview does not necessarily have anything to do with the actual goods that will eventually be delivered.

However, employers can mitigate this problem, especially in low-wage jobs, through routinization and automation; something the fast-food industry seems to have refined to an exact science. Employers can also monitor the productivity of the worker after hiring, which will be discussed below.

Looking for a Job/Employee as Repeated Ultimatum Game

As I said before, unlike the usual ultimatum game experiment, players in the labor market ultimatum game play repeatedly, both with different partners, while in the search mode, and with the same partner, after hiring has occurred. The manner in which this repetition is performed differs for employers and employees. While employees tend to entertain employment offers sequentially (one at a time), employers generally make their offers in batches, interviewing many candidates for a position and selecting from a group of interested individuals. This makes “comparison shopping” easier for employers than for employees and thus serves as another advantage for employers (although this might not be the case in a tight labor market).

Another disadvantage faced by employees is that difficulty in comparing different wage and benefit packages (if one is lucky enough to have multiple options). Suppose a worker is offered three jobs: one with a relatively high wage but no health benefits and inconvenient hours, a second with some health benefits but a lower wage, and a third with an even lower wage but full health coverage and convenient hours. How is the worker to estimate the relative values of the different health plans, or determine how to weigh wages and benefits against being available for family members, friends and children? It becomes a matter of trying to compare apples with oranges, bananas and pomegranates.

Employers, however, do not face this conundrum, since they are the ones structuring the offers. If an employer cannot find any takers for a given wage and benefit package, they can simply increase the wage by a given amount and try another iteration. Once again, we find that informational asymmetries inherent in the structure of the game tend to favor employers over employees.

Repeating the Game After Acceptance

In a sense, the labor market ultimatum game is continually repeated even after employer and employee have reached a mutually acceptable division of revenue. This is true because the effective offer from the employer goes down if pay-raises do not keep pace with inflation, work requirements are increased ex post, or rises in productivity are not reflected in wage and benefit gains. Here again we have informational asymmetries that favor the employer, since workers do not have direct knowledge of the revenue created or their overall contribution to it.

Conversely, an employer's effective offer goes up if pay increases outstrip inflation, if workers successfully “slack off,” or if workers can bargain for a greater percentage of revenue (through unions, exploiting the value of their personal experience to the firm, etc.). In general though, it would seem that employers will be able to get a better idea of a worker's productivity than the worker him/herself, and thus ensure that the employee's remuneration never exceeds their contribution to the value of the finished product or service. Workers, however, have no direct way of observing their own contribution to said value and thus no easy way of knowing what percentage of the value they create that they are receiving.


The labor market can be conceived of as a modified, repeated ultimatum game between employers and employees. Most the of the divergences between the real-life labor market and the idealized experiment, serve to advantage employers and disadvantage employees. As a result, in the labor market ultimatum game it's easier to get away with under-paying than it is to get away with under-working.

1Professor of Law, Wayne State University Law School
5Some of these asymmetries, of course, can be addressed through union tactics in workplaces where workers are organized. Trade union representation, however, seems to be decidedly on the decline and, at any rate, cannot ameliorate all of the asymmetries and disadvantages that workers face under the current, capitalist arrangement.

Tuesday, February 19, 2013

The Problem of Perspective

If you ever happen to find yourself on the campus of Montana Tech, in Butte, and your eyes happen to wander to the east, your gaze will be greeted by a stunning scenic display. Historic gallows frames from the old mining days dot the foreground, while the hillside behind them appears as artistic horizontal bands of orange, red, yellow, and brown. I know of at least one artist who made that hillside the subject of a rather pretty series of oil paintings.

That hillside, of course, is the Berkley Pit: America's biggest superfund site and once known as “the richest hill on earth.” Those beautiful bands of color are the end result of environmental pillaging on an almost unimaginable scale; the lovely hues that paint the terraced hillside come from over a century of mining waste and pollution. The richest hill on earth has become its foulest pit, but from a distance it looks sorta pretty. If you get a little closer, down inside of it, say, the view isn't nearly so pleasant.

This is by way of making a point about perspective, description and knowledge. The perspective from which one views the world has necessary consequences on one's description of the world. One's description of the world dictates which facts about the world one can become aware of, and which facts one cannot (because they fall outside of one's description). Any economist necessarily views the economy from a particular perch within the economic system which s/he is describing. The location of this perch is an over-determining factor in the economist's economic thinking and outlook. It largely determines which phenomena they see as problematic and which as salutary, which problems they consider relatively minor, to be safely ignored, and which need immediate addressing.

Most of those whose occupations consist of describing the economy and its functioning occupy perches that are, at the very least, situated well within the top half of the income distribution. Even relatively low-paid adjunct professors, if not especially affluent, are at least part of the white-collar, professional world. This uniformity of perspective has important effects on economic theory and knowledge. It is as if economists were trying to describe the Berkley Pit, but never venturing any closer to it than the Montana Tech campus. This is not to imply that there is nothing important that one might discover from that perspective, but rather to point out that many important aspects of reality are simply not accessible from that vantage point.

In the same way, economists whose entire experience of the labor market consists of holding one or another academic post, can hardly be expected to have much to contribute to discussions about the low-wage service sector. From behind a desk in the ivory tower the psychological suffering faced by “the working poor” on a daily basis probably doesn't seem like such a big deal. For a tenured academic, it might be difficult to understand the psychic toll that a lifetime of having little-to-no control over one's work takes on a person. There is knowledge about the workings of our economy, vital, relevant knowledge, that is simply “invisible” to most economists because they've only seen the view from the hilltop, not from the valley.

In order to overcome this blindness, economists need to learn to listen to people who occupy other perches in our economy, especially perches below their own. We would have very different economic policy prescriptions if economists spent less time in the tower and more time in the street, examining those things which aren't visible from the faculty lounge.

Friday, January 25, 2013

A Mobius Model of Reality

The sciences, both physical and social, attempt to understand reality by first breaking it into parts, and then studying each part, each aspect, individually.  This is the method of analysis.  There is much to be gained from this method of enquiry and understanding, as the current state of our technology readily attests to.  This method, however, also has its limitations and its built-in blind-spots.  It can lead us to conclusions about the nature of reality which are incorrect, despite their being based on apparently logical foundations.

Imagine that two people, Mike and Maya, are confronted by a very large mobius strip.   It's so large, in fact, that they can't even see the whole thing from where they're standing. 

Mike says to Maya, "Weird.  I wonder what that thing is?"

Maya responds, "You know, it kind of looks like a big mobius strip to me."

Mike: Mobius strip, what's that?

Maya: It's something I heard about once.  It's a form that only has one side and one edge.

Mike: What?!? That's ridiculous!  How is that even possible?

Maya: I don't really understand the details, but I'm pretty sure it is possible and that this is one of them, just a really big one.

Mike: Well, how about we test out this little hypothesis of yours?  Obviously this thing is too big to consider all at once, but we can cut sections out of it and examine them.  If we look at a bunch of sections, we should be able to get an idea about the whole thing, right?

Maya: I don't know if that will work or not.

Mike: Why not?

Maya: I can't really say for sure, it just doesn't feel right to me.

Mike: Whatevs.  If you don't have any other suggestions, I'm going to start studying this thing one section at a time.  We'll see how many sides this "mobius strip" really has.

[Mike pulls a pair of scissors out of his pocket and begins cut sections out of the strip]

Maya: Why do you have a pair of scissors in your pocket?

Mike: Because this is a hypothetical situation.  Are you gonna help me or not?

Maya:  I think I'll let you handle this one.

Mike: Fine. [begins to examine the pieces of strip he's cut out]

Mike: Maya, come here and look at this.  I've got all these pieces here and every single one of them has two sides and four edges.  How is it possible to take a bunch of two-sided things, put them together, and come out with a one-sided thing?

Maya: I don't know how, but I still think it only has one side.

Mike: Think whatever you want. I've studied the matter and I can tell you, every piece of this thing has two sides, therefore the whole thing must also have two sides.  I don't know what a "one-sided form" even means.  Sounds like superstition to me.
The problem here is obvious.  The only way to directly verify that a mobius strip has only one side and one edge is to trace along its entire length, but in our hypothetical situation that is not possible.  So Mike tries to test Maya's claim through analysis, i.e. by breaking the whole down into its constituent parts.   But while this might be a good way to understand a car engine, say, it is not a valid way to understand a mobius strip (or at least not a valid way to answer the question of how many sides it has).  The act of analysis itself ensures that the incorrect conclusion will be reached.

The whole must be understood in terms of the whole, not in terms of the individual parts.  Inasmuch as the sciences claim to provide a comprehensive worldview, a perspective on the whole of reality (or at least to be working in that direction), their methodologies will ultimately, necessarily, lead them astray.

Someone may say to them, "Life and death are one," and they will respond, "Nonsense! Life is one thing and death merely the absence of life.  Your statement is meaningless and you are obviously a superstitious bumpkin!"  Another person may say, "There is no difference between rich and poor," and they will say, "Ridiculous! The rich live in palaces and buy yachts for their yachts, while the poor must scramble and scrape just to pay the rent.  You have no idea what you're talking about."

But they are trying to understand the whole through analysis of the parts.  The knowledge that they have gained by analysis is valid and true, but there also exist truths that cannot be had through analysis.  Denial of those truths is known as "scientism": the superstitious belief that the whole of reality can be understood through scientific analysis.  

Wednesday, January 23, 2013

Like Paint...

Commenter hermanas left this little gem in the comments section of this morning's post on Yves Smith's Naked Capitalism blog:

Like paint, ideology conceals a multitude of sins. Including criminal intent.

So of course, being a painter and an inveterate purveyor of metaphor, I couldn't help but flesh this thought out.  Here's my response:

Society, then, is like a wall, “sins” are like imperfections on the wall, and ideology is the paint that supposedly covers up those “sins.”

But as any (good) painter can tell you, a coat of paint doesn’t actually hide imperfections. In fact, it can make them more apparent. If you really want a beautiful wall, you have to spend a bunch of time scraping off all the imperfections first. Good painters spend more time scraping and sanding than actually painting. Only lazy painters neglect the tedious task of preparing the surface and just slap a coat of paint on it.

So, for purposes of the metaphor, if we want to end up with a “beautiful” society, we need to first spend a lot of time scraping away imperfections, i.e. removing all the crime and corruption, the systemic fraud, the captured regulators, etc. Only after we’ve done all that can we justifiably cover the whole thing with our preferred color, i.e. ideology.

But if we get lazy and just throw the ideology on without first concerning ourselves with the pre-existing flaws in society, we just end up highlighting the flaws and actually making them worse. So if we try to throw our “efficient markets” ideology on top of a system rife with informational asymmetry and manipulation, we only end up worsening those problems.

Like paint before it’s been applied, ideologies are pure. The world, OTOH, like all surfaces, is full imperfections, contradictions and paradox. Different ideologies are like different colors of paint, each pure, each unique, and each just as valid as any other. The problem arises when, mesmerized by the beauty of our preferred ideology, entranced by its pure, perfect hue, we become over-anxious and try to apply it to society before society has been adequately “cleaned up.” The results are predictable. If you stand back a bit and squint your eyes it looks OK. But if you put your glasses on and stand a little closer it just looks like absolute crap.

All of our arguing over ideologies amounts to this: screaming at one another over which color of paint is better (which is ridiculous, since this is essentially a matter of taste), without first having addressed ourselves to scraping, sanding and stripping all the dirt and grime and detritus off the wall we intend to paint. Regardless of who wins the “color war,” the end result is going to be a shoddy looking piece of work.

Saturday, January 19, 2013

Here's what I'm reading today:

IV. The Vision of Local Stock Exchanges

Throughout most of this country’s history, securities were issued by local companies based in specific states, were traded on stock exchanges within each state, and were regulated by each state. Some state exchanges were efficient, honest, and successful, while others were sloppy, corrupt, and uneconomic. After the Great Depression hit, Congress stepped in to place the entire industry under national supervision. Mindful of the principles of federalism, it established a two-tiered regulatory regime—a national system, overseen by the Securities and Exchange Commission (SEC), for the creation and trading of stocks across the country, and state systems, overseen primarily by state regulators, for the creation and trading of local stock within a given state.

For a number of understandable reasons the state systems largely fell into desuetude. The priority of most companies selling stock was to get as much capital as possible from as many investors as possible, irrespective of where they lived. Creating stocks tradable on national secondary markets offered greater demand for the stock, greater liquidity (that is, the ability to have ready cash to buy and sell the stock), and greater opportunities for profit from the secondary trading of the securities. But the possibilityof local stocks and local exchanges has been, and remains, firmly embedded in U.S. law. It’s a sleeping giant.

Every now and then a story comes along that reminds us of the existence of the state systems. For example, when Ben & Jerry’s first issued public stock, it was basically a statewide offering. You had to be a Vermont resident to buy or sell the securities. Subsequent stock issues by Ben & Jerry’s, however, were conventional national offerings. Gradually the company lost its tether to Vermont and ultimately was purchased by Unilever in a hostile takeover.

The prevailing view is that it’s difficult and expensive to do any of the five essential pieces of successful state stock exchanges—to create local stock, to sell it initially, to evaluate it, to trade it, and to assemble it into diversified portfolios. It’s worth mentioning that historically these same tasks confronted investors interested in larger companies. But throughout the nineteenth and twentieth centuries new financial intermediaries emerged, making it possible to restructure companies so that they had tradable stock shares, to evaluate the worth of shares, and to exchange shares on various public stock markets. My point here is that we already know how to do these tasks pretty well. Now we need to apply our know-how to the local companies.
~Michael H. Shuman, from Local Stock Exchanges: The Next Wave of Community Economy Building
I like this idea, although I would prefer local bond exchanges, rather than stock exchanges, since I think stocks are ultimately a rent extracting device. A system like this could be used to create a funding mechanism for worker-owned co-ops, which is one of my pet causes, and it could also conceivably be combined with an alternative, local currency to create a truly local economic system! Exciting...

Tuesday, January 8, 2013

Alternative Theology, Lesson One

Diptherian Ontology: The Orthodoxymoronic Position

First Assumption: nothing comes from nothing.

This is a denial of the concept of creation ex nihlo. The natural extension of this concept is that anything currently existing has necessarily existed in a previous time period. Things change form, change state, rearrange themselves in multiple ways, but in some sense the same “things” exist now as existed at the beginning of the universe. Anything that exists or comes into existence has necessarily been created from some thing or things that already exist, and so even the Big Bang, the supposed beginning of our universe, must have originated in some thing which had existence prior to it. That infinitesimal point-particle that exploded into what we now know as our universe did not come from nothing; it was not created ex nihlo. Nothing comes from nothing*.

Physicists cannot look back further in time than the Big Bang, they cannot see what may have come before it, since the very fabric of time itself is wrapped up in that tiny particle. But just because the mathematics that physicists use to look back in time breaks down at the moment of explosion, it does not follow that there is nothing beyond that moment to see, nor that other methods of looking might not yield more satisfying results.

First Conclusion: we have always existed and will always exist.

Nothing comes from nothing, and we did not come from nothing either.

It happens every so often that water falls, of its own accord, from the sky. Of course, the water doesn't just come from nowhere, it comes from clouds which are composed of water vapor. And that water vapor just didn't happen either, it came from evaporation off of lakes and oceans. And those lakes and oceans didn't come from nothing, they are created and maintained by rivers and streams which, of course, get their water from the rain, which every so often falls from the sky.

In all of this, the water molecules themselves remain ever the same and always exactly what they are. In certain states they are perceptible to our senses and useful for our purposes, while in other states they are imperceptible and therefore useless to us. Nonetheless, they remain forever themselves, unchanging.

In the same way we ourselves change state and move from imperceptibility to perceptibility and back again, perhaps more than once, but we ourselves never change. Being and non-being are themselves two different states through which we, and everything else, moves. Any thing, any entity, may exist in the state of potential (non-being) or the state of actuality (being). The entity itself remains unchanged regardless of it present state. The unenlightened on these matters view birth as a beginning and death as an end, but this view, as we have seen, violates the First Assumption. Nothing comes from nothing.

*It may be objected that the discovery of “quantum foam,” i.e. of particles popping into and out of existence on the quantum level, proves the reality of creation ex nihlo. The Orthodoxymoronic view, however, holds that these particles are, in fact, not popping into and out of existence but rather moving back and forth between our dimension and one abutting or overlapping it. Regardless, even if the particles are popping into and out of existence, existence itself is merely one form of being, as is explained below.