Unveiling Incentive-Opportunity Fallacies

[This post is a continuation of the article-blog Productive Inequality]

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As I watched one night the 6-part series “The Men Who Built America” on the History Channel, I kept saying to myself What has changed  in our socio-economic America today?  The answer is a lot…and not much.  Watch the two following video clips in order:

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Resting on Star-Spangled Laurels

Ask most Americans on the streets today who Cornelius Vanderbilt, John Rockefeller, Andrew Carnegie, J.P. Morgan, and Henry Ford were and what they meant to America and you will get a variety of answers – although many could describe briefly some connection to Ford Motor Company, Chase Morgan, and Carnegie Hall in New York City.  Beyond those mutterings, the depth and accuracy might be in question.  However, ask the same question to Donald Trump, Jerry Jones, the Waltons of Walmart, Bill Gates, or Sumner Redstone and they will give you a hyper-patriotic narrative of how these progenitors founded and built the greatest economic nation in the world.  In the annals of Western capitalism, Carnegie, Ford, Morgan, Rockefeller, and Vanderbilt are the founding demigods.

John D. Rockefeller, 1888

John D. Rockefeller, 1888

By the age of retirement all five of these 19th century business-moguls’ fortunes made up anywhere between 1-3% of America’s GDP by a single person.  Those five net worth’s have been adjusted for today’s 2000 dollars, but the amounts are incomprehensibly staggering.  Vanderbilt’s estimate:  $140 – $180 billion dollars.  Rockefeller’s estimate:  $392 – $663 billion dollars.  Carnegie’s estimate:  almost $300 billion.  Ford’s estimate:  $188 billion.  Morgan’s final net worth was divided between several holdings but his estate was estimated to be worth about $68 million at death.  If 1-3% of the economy of America – one of the world’s richest nations – consisted of five men, then that is perhaps the truest definition of oligarchy not democracy.  J.P. Morgan’s wealth was so vast that during the economic panic of 1893, President Grover Cleveland borrowed from him in order to restore the nation’s treasury.

How was it possible for a handful of entrepreneurs to accumulate such epic wealth during sixteen national recessions (1865 to 1933) as well as the Great Depression of 1929?  I will attempt to answer this question simply.

Do not mistake this web blog as promoting Karl Marx or Vladimir Lenin economics.  There is nothing inherently wrong with making and earning money for quality work.  What is under question, however, is how efficiently and fairly that economy — which provides the wealth — is working as a whole and perpetuating itself.  Despite the great success of these five American entrepreneurs, the “machine” from which they profited broke-down sixteen times.  Those failures in a long line of many failures as recently as 2008, are what is in question.  Why does our “strongest nation in the world” economy and government keep failing?

I am a lifetime sports fan.  One way to answer the question is to use a sports analogy.  Pick your favorite sports team, the team you grew up watching with family or friends.  The team’s performance should elicit some level of passion inside.  You’ve always wanted them to perform well, maybe even win several championships.  When your team is playing say in the playoffs, do you feel that referees or umpires are necessary?  Why are they necessary?  No fans, or for that matter no team players or coaches on the competing rosters cheer for the referees or umpires.  Why is that?  We like them when they punish or discipline our opponent, but we dislike them when they punish or discipline our favorite team.  Why are the referees and umpires needed for the games?

From a biased point-of-view the answer is obvious:  we want them there so that our opponents won’t cheat or win the game unfairly.  But from an objective standpoint, we need them there to ensure a “fair or level playing field” for both teams, correct?  Imagine what the games would be like if there were no referees or umpires.  Cheating, even intentional maiming would no doubt take place.  Whether we like referees and umpires or not, we need them so the games can be won or lost fairly.  Well, in economics and social policy the government is no different:  we need a strong government to ensure that the game of economics and social policy are fairly played.

During the era of Vanderbilt, Rockefeller, Carnegie, Morgan, and Ford there were weak referees or umpires, and in several cases no referees or umpires at all.  Even though the United States grew into the most powerfully economic and productive nation on the globe after 1870, doing it inside an unrestrained ungoverned free-market economy it eventually led to the worst economic and social collapse in modern history:  the Great Depression and two world wars.  Is that performance really deserving of grande boasting and fan-fare?  Resting on the laurels of post-1870 Wild West growth is at the same time condoning unfettered greedy oligarchists and market manipulation.  Domestic and global economics today are much more complex and dynamic than antiquated 19th and 20th century philosophies can manage and diluting the power of the referees and umpires (i.e. our government) is a sure way of returning to another Great Depression.

Let’s look more closely at what outdated economic systems, still pushed today by some American parties, nurture over several generations.

Fallacies of Incentive-Opportunity Economics

REAGANMONEYSPEECH2Some political parties and economists today swear by and blow their Reaganomics bugle, or trickle-down economics as the best economic system.  Another more modern name for this system is incentive economics.  Within this philosophy its adherents proclaim that inequality is a natural product of its efficiency:  some will produce more than others.  Proponents of incentive economics (primarily those from the political right) argue that if programs and policies redistribute wealth, then it will deconstruct incentives and motivation toward efficiency.  They also argue that if we focus too much on disparity of outcomes, i.e. a growing gap between socio-economic classes, especially over one year or a four-year presidential administration, then the public is missing the bigger better picture.  What is more important, they proclaim, is only lifetime inequality and how much more opportunity is created.  In other words, there is a natural trade-off of the-haves and the-have-nots based on efficiency as if it is “natural selection” of the strongest over the weakest or genius over ignorance.  They add that private wealth created by opportunity and perfect competitive economies will soon feed or trickle-down into social returns for the less fortunate.  But for the last four to five decades this simply hasn’t been the case.

Remember the definition of rent-seeking from the earlier post Productive Inequality?  It said when a company, organization, or individual uses their resources to obtain economic gain from others without reciprocating any benefits back to society through wealth creation…this is called rent-seeking.  For the last several decades declining public investment, declining support for public education, distortions of the true health of our economy, declining worker morale and labor fairness, have all contributed to a widened gap between the top 1% and 10% from the middle and bottom economic percentile.  Redistributing wealth and opportunities would reduce inequality and increase efficiency, the exact opposite of what the Right contends.

Both the lack of wealth and minimization of risk available to the lower 99% – 90% are two major market failures of our capital economy.  Consequently, this lays the burden of upward economic mobility on parental wealth; in other words, what their parents can or cannot provide through digressing public education and their work income.  And too often in the lower economic third both parents are working for wages that hardly keep up with inflation.  The Right consistently underestimates these failures.

Stronger or weaker team?

Stronger or weaker team?

The Right also consistently overestimates the benefits of incentive pay.  Before revealing the true risks of incentive pay, what does the term mean?  Barron’s Business Dictionary states it is a wage system that rewards a worker for productivity above an established standard and within a defined time period.  It is often called pay for performance.  Many incentive pay schemes are used by corporations each with varying success rates, or resulting in higher worker productivity.  However, history has repeatedly shown that the schemes can also come with many counterproductive results.  Take for instance the program at Hewlett-Packard in the 1990s (click here for the CBS News article).  After setting up pay-for-performance schemes across thirteen or more American production sites, most of the HP worker-teams outperformed management’s projections costing the corporation excessive payouts.  As a result, HP management made the goals higher and harder to achieve.  This move had the exact opposite effect.  Teamwork within the nationwide teams declined, primarily because self-interest dominated over corporate gains.  Why do you think this happened?

Another example of failed incentive pay schemes but using instead a disciplinary fine, or negative reinforcement, to stimulate better results as told by Joseph Stiglitz:

“…a cooperative day center had a problem with certain parents’ picking up their children in a timely way.  It decided to impose a charge, to provide an incentive for them to do so.  But many parents, including those who had occasionally been late, had struggled to pick up their children on time; they did as well as they did because of the social pressure, the desire to do “the right thing,” even if they were less than fully successful.  But charging a fee converted a social obligation [teamwork] into a monetary transaction.  Parents no longer felt a social responsibility, but assessed whether the benefits of being late were greater or less than the fine.  Lateness increased.”

This begs the question, why is an extrinsic monetary reward scheme imperfect?  Because it is human nature to be socially connected; it is a primal instinct…for most, and in the end it often outweighs individual, secluding self-interest.  What is the point of an opulent palace with opulent toys on a grossly opulent island, if there is no one at all to enjoy it with?  Stiglitz goes on to write:

“The reason that [incentive pay] economic theory failed to gauge accurately the effectiveness of team incentives is that it underestimated the importance of personal connectiveness.  Individuals work hard to please others in their team – and because they believe it is the right thing to do.  Economists overestimate, too, the selfishness of individuals (though there is considerable evidence that economists are more selfish than others, and that economics training does make individuals more selfish over time) [particularly when resources, opportunities, and rewards are scarce/hoarded; ala the 2012 film The Hunger Games].  It is thus perhaps not surprising that firms owned by their workers – and who therefore share in the profits – have performed better in the crisis and laid off fewer employees.”

All four must be equally balanced

All four must be equally balanced

Many incentive pay schemes will never be able to fully ignite the best of human-worker performance because often monetary rewards, extrinsic gains, fall short of a greater good.  Why?  Because all four types of human motivation (table on right) must be as closely balanced as possible for a person to be peacefully satisfied.  This is just as true in economic and political laws and policies.

As a result of the Right’s shortsightedness, i.e. underestimating the real costs of socio-economic inequality and overestimating the costs of fixing it through progressive taxation and public spending, America needlessly spins its congressional and executive wheels in gridlocked hyper-partisanship  eventually invoicing her 90 percentile taxpayers.  President Reagan pushed for a less progressive tax system, lowering taxes on the top 1 and 10 percent, claiming that would raise more funds due to increased saving and worker productivity.  He was incorrect:  tax revenues plummeted.  H.W. Bush’s cuts had the same effect:  an increased deficit.  During President Clinton’s administration, taxes were raised on the top percentile and the United States enjoyed a brief time of rapid growth and a minor decrease in economic inequality.  Then George W. Bush entered office and…well, we had the 2008 financial crisis in which the majority of Americans, indeed the lower poorer classes, are still suffering.  Naturally, the Right contends that if the marginal Americans paid 100% of their taxes, then “incentives” for the public would be harmfully weakened.  But this claim is really nothing more than crying wolf.  Stiglitz points out:

“…University of California professor Emmanuel Saez, Thomas Piketty of the Paris School of Economics, and Stefanie Stantcheva of the MIT Department of Economics, carefully taking into account the incentive effects of higher taxation and the societal benefits of reducing inequality, have estimated that the tax rate at the top should be around 70 percent – what it was before President Reagan started his campaign for the rich.”

What many on the Right fail to recognize in their economic, social, and political theories and/or systems is that no one succeeds on their own.  They fail to recognize that a more level playing field, a more fair game if you will, almost always produces more efficiency, more brilliance, and a higher quality of life for a greater number, which in turn nurtures itself.  A healthier “team” is a more productive successful team; and when these healthy teams are playing other healthy teams on a fair game-field with strong powerful referees or umpires, the “game”…the economy is brilliant!  Therefore in return, the players, the coaches, the fans, everyone benefits and is more motivated to excellence.

On the other hand, an economic theory/system of scarcity and hoarding, i.e. weak public spending and regressive taxation for the strong/resourceful, is actually the antithesis of motivation-for-excellence; it too often maligns individual behavior to succeed-at-all-costs.  Survival-of-the-Fittest economics does not encourage unity, particularly in times of severe crisis, and does not encourage real democracy.  Thank the good stars that most human beings need MORE than just extrinsic rewards and require equally intrinsic rewards, if not more.  But oh dear, that would mean less egocentrism, less arrogance, less consumption, and more community, more intimate connectivity, more humbleness, and a more permeable comfort zone to name a few life-changes.  I feel there are many who are simply terrified of this idea, unfortunately, but I can hope.

Retrieving the American Dream

Joseph Stiglitz and those economists inside his camp have several profound ideas, policies, and reformations that will return America to its former collective glory.  To share these here would extend this blog series by two or three more; a length I have no time to carry out and likely readers and visitors here will have no patience with.  Hence, I will only recommend strongly that everyone purchase The Price of Inequality and read it, study it, and digest it.  If you wish to better understand what has happened and will continue to happen to our American economy and social classes, and avoid being a naïve puppet in a oligarchial corporate capitalist show in a failing free-market economy, then it is a must read!

class_saying_pledgeHere is the pressing question:  Is the American dream still alive?  Is the American dream still available?  More importantly, is the American dream available to all as our “pledge of allegiance” implies?  The present fifth version, which Congress passed in 1954, states in the last half “…one nation, under God, indivisible, with liberty and justice for all.”  How accurately does this pledge reflect America today?  How does one measure its accuracy?

Surprisingly perhaps to most, measuring America’s success of “…with liberty and justice for all” is quite easy.  In modern statistical tables, polls, experiments, or graphs all mathematicians will say that the greater the data collected, the more accurate the results.  Take for example a simple school student-poll on say thermostat comfort of the buildings.  Of a student body of 700 students, would the pollers achieve an accurate reflection of their student body if they obtained 150 student opinions?  Of course not; a poll of exactly 700 students would be the most accurate.  This statistical truth is always the case whether one is measuring ten people or elements, or whether measuring 314 million.

This statistical truth therefore applies to larger numbers or polls, like the world (see earlier post The Land of Opportunity? for a comprehensive indicator of America’s global standing).  In order to get a truly accurate and objective reflection, we must include the rest of similar industrialized nations, and to be most accurate all other non-industrialized nations.  But this raises more complex dynamics that in some cases go beyond economic, social, and political elements I have covered in this series of three web-blogs.  Fortunately, this formula…this gauge of happiness, justice, and liberty for all is not exclusively owned by one person, one group, or even one nation.  It is collective and shared.  The discouraging reality is that on the American horizon – and maybe the world horizon too – this Collective Goodness Gauge, if you will, is constantly threatened.  My next and last web-blog in this series, A Collective Imperative, will examine these threats and how to fight its extinction.

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Live Laugh Love

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Creative Commons License This work by Professor Taboo is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License. Permissions beyond the scope of this license may be available at https://professortaboo.wordpress.com.

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