Bistable morphology

The threat to a completely free anarchist society is contained within the very assumptions that make it possible. If an anarchist society is not to spin itself apart from the outward acceleration of every man acting in his own (unenlightened) self interest, it is because a large portion of them act from a communal spirit and the recognition that compromise may be necessary from time to time in order to preserve relations with your neighbors. But that very idea of communal spirit is what may lead them to realize that the establishment of one gang may help to prevent the rise of another unpopular gang or multitude of gangs (who apparently have their own sense of community). Thus, the seed of destruction is assumed to lie within the anarchists' psyche.

The threat to a completely controlled social democracy is contained within the very assumptions that make it possible. If a social democracy is not to collapse into totalitarian dictatorship, it must be because a certain portion of the community insists on maintaining tolerance of dissent and individualism and therefore on maintaining a certain amount of friction and divisiveness. But that very idea of nonconformism is what may lead to the establishment of rebellious factions and heretics and perhaps even the destruction of the group cohesiveness that was the essence of the social democracy. Thus, the seed of destruction is assumed to lie within the social democrats' psyche.

These are sketches of what may be, and not even original sketches (Madison covered the same ground in Federalist No. 10). Other possibilities are that the societies described allow themselves to go down another path of destruction: the anarchy becomes a bellum omnium contra omnes, the violent and chaotic conditions assumed of anarchy that apparently accompanied the destruction of Saga Period Iceland, while the social democracy becomes one of the many totalitarian states that have arisen in the last 100 years: fascist Italy, Nazi Germany, falangist Spain, Vichy France, and communist Russia, China, Cuba, Estonia, Georgia, Poland, Lithuania, Armenia, Ukraine, Belarusia, Azerbaijan, Albania, Viet Nam, Hungary, Yugoslavia, Czechloslavakia, Romania, and East Germany. So it is possible that the destruction of a society is not that it turns into its opposite (anarchy into social democracy, social democracy into anarchy), but that the society fails to correct its internal problems at all, following them instead to their ultimate "logical" extremes.

Morphology

A favorite theme of mine is the idea that every organizational regime contains elements of its own destruction, and that no regime is free of this. Put in a loosely mathematical description, let's say that a schema is represented by A. Imperfections in A are addressed by the addition of institutions or changes in the by-laws, and this new schema is A'. These changes don't quite create perfection, or they introduce new, unintended results, so new changes are made, resulting in A''. This goes on until we have A''', A'''', A^n' or A'''...''', which is functionally equivalent to a completely different schema, B. But B is known also to be not perfect, so adjustments are made resulting in B'. You see where this is going: eventually B morphs into C, or perhaps it morphs all the way back to A.

Given organizational schema A, which is made more efficient by adjusting it to A':

efficiency(A) < efficiency(A') < efficiency(A'')
A'''->B [note that this -> is an arrow, not a "greater than"]
B'''->C
...
Z'''->A?

I believe that this is the fundamental fallacy with the technocratic state and is the analytical blind spot for policy wonks. They seem to believe that any imperfection may be corrected with precise policy adjustments. But at every step, they "discover" new problems. In the environmental movement, technocratic arrogance of this sort is known as "parachuting cats" after a real world incident.

As part of anti-malarial campaign in the northern states of the island of Borneo in the late 1950's, the World Health Organization sprayed DDT and other insecticides to kill the mosquito vector for malaria. During this campaign, DDT was sprayed in large amounts on the inside walls and ceilings of the large "long houses" that housed an entire village in these areas. As a consequence of this effort, the incidence of malaria in the region fell dramatically. However, there were two unintended consequences of this action. There was an increase in the rate of decay of the thatched roofs covering the long houses because a moth caterpillar that ingests the thatch avoided the DDT but their parasite, the larvae of a small wasp, did not. Also, the domestic cats roaming through the houses were poisoned by the DDT as a consequence of rubbing against the walls and then licking the insecticide off their fur. In some villages, the loss of cats allowed rats to enter, which raised concerns of rodent-related diseases such as typhus and the plague. To rectify this problem in one remote village, several dozen cats were collected in coastal towns and parachuted by the Royal Air Force in a special container to replace those killed by the insecticides.

Another favorite example of mine concerns a confluence of well-meaning government schemes: First, it was observed that Florida was filled with disease-carrying swamps, so they (the Army Corps of Engineers) drained the swamps and damned the rivers to create productive farmland. Then people began raising sugar cane, and as they faced stiffer competition from throughout the Carribean, they instituted price controls. But then the cane industry came to be dominated by about 5 families who controlled legislators very tightly. Meanwhile, ADM and the corn farmers achieved control over their legislative concerns and, with the development of High Fructose Corn Syrup (HFCS), they found themselves in competition with the sugar farmers. Fortunately, they found that by also supporting the sugar price controls, HFCS was both more competitively priced and more profitable. So the price controls were universally favored, leading to the continued overuse of swampland to the detriment of the ecosystem (and to Carribean farmers). As this was gradually accepted to be counterproductive, the Clinton Administration proposed changes to restore ecological balance. The solution announced by Al Gore? Clearly, to tax sugar and use the revenues to restore the Everglades. Duh, that's what you thought, too, right? No?! You thought ... what? Maybe abandon the sugar price supports, let the farms go fallow, tear down the damns (saving the annual maintenance costs), and let it all go back to nature? Or perhaps it would have been better to let farmers drain their own land in the first place? Heh, you'll never make it as a bureaucrat.

Each displacement to an equilibrium will cause at least one change in the equilibrium. At least one adjustment needs to be made to restore the equilibrium to efficiency. This is Second Best theory at its simplest. However, few analysts go beyond that and recognize that each of the secondary disturbances, the "corrections", will also create disequilibria that must be adjusted with 3rd and 4th order corrections. In their analysis, somehow, the original disturbance -- the market failure -- must be corrected, but the secondary disturbance -- regulation -- is perfect? Maybe in a one or two dimensional model, but the real world is not one or two dimensional.

So I submit that not only do "ideal" regulations create the need for higher order corrections, but real world regulations create the need for an ever expanding regulatory bureaucracy. It is self-propagating myth and self-justification for bureaucrats. It was this that I reacted to when Megan non-McArdle made the claim that bureaucrats always act to balance competing interests: that may be true in a superficial sense, it may be their rationalization and their intent, but in reality, bureaucrats act to justify their own continuing existence and employment without consciously realizing or intending that. And when one band-aid requires two more, and those each require two more, well, pretty soon bureaucracy is not just surviving, it's thriving and we're parachuting cats. The problem changes from one of individual menaces acting in a freewheeling marketplace where the potential damage is limited to one in which large menaces act in a closely regulated, highly leveraged state-capitalist machine, where the potential damage is vastly larger.

I offer this as background for what will come.

Bowling Alone Means Anarchy?

When I try to imagine what an anarchist future would look like, it does not look like a bunch of cranky hermits sitting alone in their caves and refusing to talk to each other. Rather, it looks like a village of equals, engaging their neighbors in various projects. It looks a lot like the world that de Toqueville visited, but without the slavery and burgeoning symbiotic industrial and state hierarchy. But maybe that's just my naive take on it; frankly, I don't think it's very realistic. Judging by Robert Putnam's Bowling Alone: The Collapse and Revival of American Community, his version of anarchy lies somewhere between Hobbesian bellum omnium contra omnes and one in which everyone retreats behind computer and TV screens and refuses to interact in meatspace.

The book divides its subject, American withddrawal since roughly 1960, into four sections. The first is a cataloguing of all of the data which shows we are less involved with one another through everything from Free Masonry to cardplaying; the second is an analysis of why this has happened; the third is a discussion of the benefits of our lost communalism, and the fourth is a set of recommendations to restore the participation experienced in the 1950s. I found them decreasingly interesting as I went.

Putnam's region of interest lies roughly in the 1920-2000 period. Americans volunteered, participated, met, played, and dined with each other in increasing numbers, with a slight dip in the early 30s and a rapid expansion in the 1940s. Then, like a switch had been turned off, the trend reversed itself, giving up all of the postwar gains by the late 90s. This pattern is repeated in everything from joining fraternal organizations and attending church to joining bowling leagues to hosting neighbors at a dinner party. I find this fascinating because it gets at what I would consider to be a central problem for anarchists: how do people engage in community activities and collective action absent a central authority (be it church, state, or other). The data seems overwhelming that things do vary over time and specifically that there has been a significant decline since 1960.

There is a problem in that Putnam looks only at what was and finds less of it, rather than what is and looking for the growth in new things. Putnam notes these problems and seems hopeful (in 1999) that the social aspects of the internet will lend themselves to increasing contact, but there is still room for skepticism. In the historical record, there is another technology that held out similar hopes, but seems to have failed miserably in this regard: the telephone. When the phone first came along, there was some hope that it would allow people to keep in better touch and to meet new people, but studies show that people use the phone to strengthen existing relationships. To use Putnam's terminology, the telephone reinforces bonding social capital rather than bridging social capital.

The next section seems more problematic. While he spends many pages to exonerate the entry of women into the workplace, and more to partially convict television, he spends just over one page exonerating the state. He does this by noting that state spending barely changed in the period as a percentage of GDP. This seems disingenuous at best. I think the reason becomes more clear as he proceeds through the next two sections.

In the section describing the beneficial effects of social capital, he notes in the chapter on the wealth effects that social capital is as important in improving welfare as the free market. I would say, "duh." The idea of the lone entrepreneur struggling to establish himself is a Randian caricature. While it remains popular as a story-telling device, most credible biographies of "great men" note their partnerships and collaboration with other great men and women.

He wraps this section up with a discussion of the "dark side of social capital". In this section, he points out that we seem to have gotten more tolerant of racial and religious diversity even as we have gotten less involved in our communities. He includes a table like this:

	Low social capital	High social capital
High tolerance	Individualistic: You do your thing, and I'll do mine	Civic community (Salem without "witches")
Low tolerance	Anarchy: War of all against all	Sectarian community (in-group vs. out-group. Salem with "witches")

Note where anarchy falls. Clearly, he favors the civic community, but -- surprise! -- so do most anarchists with whom I am familiar.

Later, when describing what should be done to restore American community, Putnam tips his hand and reveals his real interest in social capital: he idolizes the Progressive period and the resulting increase in scope of state action. Curiously, it seems that his analytical skills abandon him at this point. He begins by noting the Gilded Age period preceding the Progressive Era and finds it wanting, and then locates all of the success in the Progressive period. He doesn't use "hyperindividualist" to describe the Gilded Age, but comes damn close. But if you look at the data he provides, you can see that community activity is clearly growing during the Gilded Age and peaks and perhaps even falters during the Progressive period. Why is the peak period considered to be the most successful? Why no interest in the growth that preceded it, or in the reasons that activity fell off immediately afterward? I would think the interesting research would be in looking at change and the reasons for it, not steady state operation.

Fortunately, Putnam provided the frightening part of the answer in an earlier chapter. It appears that people tend to volunteer more as a result of national crisis. Thus, WWII is cited as an influential national experience that led to the rapid rise in participation that followed. It seems likely that the expansion of the 20s followed from WWI. But why the peaks in the 1960s and the 1910s?

I propose that Putnam did not give the growth in the scope of state activity the attention it deserves. He begins

Circumstantial evidence, particularly the timing of the downturn in social connectedness, has suggested to some observers that an important cause -- perhaps even the cause -- of civic disengagement is big government and the growth of the welfare state. By "crowding out" private initiative it is argued that state intervention has subverted civil society. This is a much larger topic than I can address in detail here, but a word or two is appropriate.

On the one hand, some government policies have almost certainly had the effect of destroying social capital. For example, the so-called slum clearance policies of the 1950s and 1960s replaced physical capital but destroyed social capital, by disrupting existing community ties. It is also conceivable that certain social expenditures and tax policies may have created disincentives for civic-minded philanthropy. On the other hand, it is much harder to see which government policies might be responsible for the decline in bowling leagues, family dinners, and literary clubs.

From here, he looks at a chart of aggregate spending and, finding no significant change, declares state action to be unrelated to the problem. A word or two in rebuttal is appropriate.

First, while it may be hard to see which policies might affect bowling leagues and literary clubs, Putnam himself repeatedly asserts (presumably with the data to back it up) that there is a great deal of symbiosis between various types of social capital-building activities. Thus, if a state policy subverted, say, fraternal organizations, then activities that grow out of those bonds might tend to suffer. Bowling leagues associated with the Knights of Columbus, for example.

Second, while Putnam acknowledges David Beito's work in Mutual Aid, he doesn't seem to have absorbed the one relevant thing that he should have been most interested in from Beito's account. That is, that Mutual Aid organizations became so happy with the outcome of their efforts that they began to lobby their respective States for policies to mandate worker's insurance, and this was successful to their own detriment. After the States adopted laws to pay out unemployment insurance, there was no exclusionary reason to belong to a mutual aid society (see Manur Olson's Logic of Collective Action for explanation and expansion of this theme), so they closed their doors, and with them, presumably, a host of other activities suffered. Thereafter, the federal government began to get involved in this sort of activity (see here). At that point, the center of decision-making and power has moved far away from the community. Considering how this pattern has been repeated for education, care for the elderly, health care, and other aspects of life, is there any wonder that people are less involved with their neighbors?

Third, Putnam is disingenuous when he says he doesn't have room to address the question: he spends many more pages discussing urban sprawl. He is also disingenuous when he looks at aggregate spending rather than at the changing emphasis within the spending (from defense to social matters) and the expanding scope of what the state was getting into.






















Look at that ramp-up in spending from 1940 onward, and note the changing structure from the 1960s onward. Defense stops being the dominant component sometime during the Viet Nam war.

Furthermore, laws don't only cost the state time and money, they frequently cost the citizens in the way of unfunded mandates and unintended consequences. If I have to spend more time trying to understand and comply with laws, that is time I cannot spend with my neighbors. While time loss is a theme that Putnam explores deeply with regard to other explanations, he doesn't even mention it in passing with respect to the state.

In the end, while I am sympathetic to the general program of looking at community participation and social capital, I was not happy with what I perceived to be Putnam's goal. He does not seem to think that social capital is valuable in and of itself. Rather, he seems to believe that social capital is valuable as a means to petition government for more programs. Ironically, he seems to be surprised or curiously uncurious whenever the people succeed in getting those programs, as happened after the first Progressive hey-day (after 1920) and after the expansion in the welfare state in the 1960s.

What the mutualist world looks like

Without introduction:


From here. I'm particularly interested in her discussion of open-ended toys. Hard to believe kids played before branding.

While you're watching this, keep in mind that what she is doing is going to be a criminal activity next month. By criminal, I mean fines of $100,000 per violation up to a total of $15,000,000 and incarceration of up to 5 years.

Also, these are amusing:



and



I don't know of any evidence to support his claims that Big Box retailers were behind this, but se non vero e ben trovato (even if it is not true, it is well conceived). From what I can find, this legislation was passed on the recommendation of US PIRG, Public Citizen, Fear, and Shameless Pandering. If Walmart is the bootlegger to that Baptist cabal, well, all the more shame to be heaped on the Naderites' heads. It works out for those larger companies and retailers in much the same way that the large meatpackers were aided by the moral cover provided by Upton Sinclair's The Jungle and the resulting meatpacker's competition reduction act Meat Inspection Act. It makes it more expensive for small producers, and turns potential torts against retailers into a federal law enforcement problem. The costs are socialized, dispersed, and hard to see; they consist of unemployed small producers and their employees, fewer selections for consumers, and higher prices. The gains are privatized, concentrated, easily seen; they consist of higher profits for mass producers. The professed goal -- greater safety for children -- is probably nonexistent and possibly thwarted, since this works to increase the market share of the same mass producers who were responsible for the problems in the first place.

The products recalled in 2007 were already out of bounds of the Federal Hazardous Substances Act, so rather than enforce that law, we made a new one that grants lots more power to the state. To think that the people behind this drew votes away from Al Gore ....

Legislation also creates special interests

One interesting aspect of working to counter the CPSIA is how it is changing the perceptions of people directly affected. Many of the people I know in the apparel and related businesses are left wing; some of them are right. There have been a few instances of trying to tie this fiasco to lib-rals or Bush or even Obama, but there is no getting around the fact that the opposition to this law was miniscule. It passed with only 1 vote in the House and 3 in the Senate against. So it is a bipartisan disaster, and people have for the most part reoriented their attention on Congress (who remain ignorant to the problems and determined to stay that way) and the ignorant elite who pooh-pooh any mention of the downside.

The forces primarily responsible are "children's advocates". [1] What distinguishes Public Citizen or PIRG from other people who are also "children's advocates", usually known as "parents", is that they don't live in the real world. These are people whose jobs are securely upper middle class, many of them are young, unmarried, and childless. They don't have to live on a budget. Also, they have lots of access to Congress.[2]

Now we have this law that is going to put the parents of children out of business. When some of those businesses go under, they will lay off other parents of children. Many parents who like to buy safe toys will find their choices curtailed, leaving them with the option of making toys or buying the mass-produced plastic junk that started this train wreck. The children of those parents don't count; their poverty, or stress, or hunger, or lack of choice is their problem. For their next trick, perhaps David Arkush or other elites at PIRG and PC will note that we would all be so much richer if we would break windows and put glaziers to work.

Incidentally, one child has died of lead poisoning from a toy in the last two years. That's one child too many, but it is impossible to say what the consequences of this law will be. Parents who were running a business from home now have to find work in a bad economy. Some of them will succeed, and put their kids in daycare. What are the long-term negative consequences of that? Others will not succeed and will have other problems. I doubt that unemployment and children's health are compatible. School science programs will be unable to obtain microscopes and telescopes (and goodness knows what else, those are just things of which I am currently aware). What are the long-term costs of that? The delay of the discovery of a cure for some disease? How many illnesses and injuries should we tolerate to avoid one death? Is this a horrible question to ask? I assert that it is not: resources are finite, and mandates of this type lead to tradeoffs. This question should have been asked before the law was passed; the fact that it was not shows a lack of humanity or realism on the part of the special interest groups and Congressmen who took us down this path without asking the right questions of the right people.

The upshot of all of this is that small businesses who were previously unaware of their need to keep one eye on Washington have suddenly become partisans. Instant special interest group. Not because they are in favor of lead and phthalates, but because they need to keep from getting screwed by activist groups who don't care about that which cannot be seen. Mark Riffey nails it in his "Vigilance, Wooden Toys and Evil Realtors"

It's difficult to say when the handmade child products industry realized they were in trouble. The Handmade Toy Alliance appears to have been formed in October or November 2008 -- after the bill became law (their website was registered Nov 23, 2008), but that's just one of the affected industries. Digging around on Google, there's barely any activity on this issue before November.

Overall, it appears that most handmade children's product businesses were not watching Washington.

Normally this sort of thing is done by an industry's national, regional or state trade association, assuming they are being vigilant (noting that vigilant is not the same as blindly partisan). However, many cottage industries haven't organized themselves (or have but not well enough), leaving this work to individual business owners.

No matter what your politics, you cannot afford to assume that Washington and Helena are on your industry's side. You cannot assume that they are aware, much less able to fully consider and understand how the things they write into bills can impact (or destroy) your business.

I suspect you have enough trouble keeping up with all the news and developments in your industry. Try doing it in hundreds of industries. That's the difficult task they're up against.
...
Laws like Do-not-mail make big business the clear winner. They already have market share, a customer list and cash flow to eliminate industry newcomers who have no relationship, no mailing list (and laws preventing use of a purchased list), no way to call or fax, etc.

Watching over policy making bodies for potential impacts they're making on your business is smart business, whether you do it yourself or join a trade organization that does it for you.

Standard political science has this notion that special interest groups arise to engage in political entrepreneurship, or rent-seeking. But the reaction to CPSIA demonstrates that sometimes the reverse is true: special interest groups arise as a result of arbitrary and detrimental government action. In this case, that action arose because of another set of special interest groups who are narrowly focused on things that they don't understand. Actions create reactions.

---------------------------
[1] Children's advocates: This is patent nonsense, "nonsense on stilts". I am amazed at the information-free content of campaign literature that touts a candidate as "pro-family" or "anti-crime". Newsflash: everyone is for children, everyone is against crime. Those are not distinguishing features. The implication is that one's opponents are anti-children and/or pro-crime. Those are not honest debate tactics.

[2] Many of those advocates are trial lawyers who have a vested interest in creating more complex laws. The bill's original sponsor, Bobby Rush, has a running battle between electric companies and trial lawyers for his vote. Does anyone understand why electric utilities - publicly regulated natural monopolies - need to spend money on Congressmen? And then there's this cheerleader.

Contradictions in the Progressive Movement

I have always been amused/confused by neo-progs who rabidly deny any association between proto-progressivism and, say, national socialism. Can't be - one is left-wing, the other is right-wing, you simpleton.

But I've been poking around in the dustier shelves lately, and noted three contradictions inside the Progressive movement just here in the US.

1) Richard T. Ely was unquestionably one of the founding members of the Progressive Movement. He, John R. Commons, and Robert M. La Follette Sr. were responsible for The Wisconsin Idea. La Follette was the quintessential Progressive politician - he was the Progressive Party's presidential candidate in 1924, fer cryin' out loud. During World War I, La Follette and Ely had a falling out: it seems that La Follette thought that entry into the war would have been a stupid thing. Ely declared him to be un-American and channeled all of his energies into denouncing La Follette.

2) The Progressive Movement was all about answering the Social Question. The plight of the working man in the industrial environment was the focus of many of their legislative projects. Frederick Winslow Taylor was a Progressive: he advocated Scientific Management as a way to introduce egalitarianism and meritocracy in place of favoritism and arbitrary management that had previously dominated the workplace. He promoted his work among unions as a "mutual gains strategy." He believed that Scientific Management would lead to greater efficiency, greater productivity, and higher wages. The Efficiency Movement was thereby spawned. But today, we think of Taylorism as little better that forced labor. Indeed, the Taylorist admonition to clearly separate thinking from doing became embedded in the Wagner Act, which in turn keeps labor outside of the most important decision-making processes (like, whether to make hybrid cars or SUVs).

3) The early Progressives were very much anti-trust. The latter Progressives did not seem to have this leaning. The early Progressives were interested in aligning business interests with national interests. After the experience of the War Industries Board in WWI, they seem to have lost their trust-busting verve. By the early days of the New Deal, they had developed an admiration for Mussolini's corporatism, and the adoption of GE president Gerald Swope's plan into the National Industrial Recovery Act confirmed a preference for cartels and the like.

I don't really even understand how to explain these; I could make some stabs at it, but the answer seems simplistic. So I think I understand how someone who had not studied the period in much detail could react to some of the seemingly impossible contradictions, like a warmongering Ely, a Taylorist Lenin, and a fascist-leaning FDR. In fact, it makes me wonder if a coherent definition of Progressivism can be articulated.

Anti-science vs. questionable science

Before my break, over at Crooked Timber, John Quiggin was having a go at John Tierney specifically and Republicans generally on their anti-science stance.

In some of the more hilarious comments, they seem to insinuate that agriculture policies are Republican driven; this may perhaps be the result of a number of non-Americans feeling informed enough to comment on American politics. The most egregious of these policies got their start during the Depression (though some pre-date it), and they grew much larger over the years. That roughly corresponds with the approximately 40-year unbroken period in which Democrats controlled Congress. And as Stephen Downes recently reminded us, the more enlightened Left actually prefers these policies because it maintains order among the Morlocks:

Speaking as someone from the left, I understand the need to provide these subsidies to rural and suburban regions. They are necessary because the free market, left to its own devices, would leave these regions completely unserved.

This would greatly exaggerate the 'time warp' effect, whereby rural regions would be decades behind urban regions, not only in technology, but also education and health care, and ultimately, attitudes and behaviours.

...

It turns out - and we have the empirical evidence for this now - that it is much cheaper to provide subsidies to these regions [rural areas in the US and Canada? Or Africa, Asia, and South America? He seems to have wandered around a bit by this point, so the antecedent is no longer clear - EH] rather than to take a 'law and order' approach. Responding to religious fanaticism, tribalism and the like by war and invasion costs hundreds of billions of dollars - a non-productive subsidy that amounts to thousands of dollars per resident. [I don't think he is still talking about Iowa ... but he does now seem to be implying that invasions are the necessary alternative to foreign aid subsidies! That is a false dilemma.]

Essentially, Downes is admitting that he and his enlightened fellows understand the need to do these things, but Republicans should nevertheless be blamed for actually doing them, and please ignore the history of New Deal farm policy. [1] I wouldn't let either party off the hook on this, though. Republicans took over Congress with the intent of rolling back some of these subsidies, and actually did so for a while (under a Democrat president), but then reintroduced them all under the Freedom to Farm Bill (under a Republican president). The Democratic Congress recently passed another horrific farm policy law with broad-based Republican support, and the silence over at DailyKos is deafening, except to continue to propagate the meme that the beneficiaries of the bill are Republican farmers.[2] As I said at CT, ag policy is non-partisan. Perhaps I should have said bipartisan?

There is a large group of people who tend to be unified by a mindset that is anti-Western, anti-industrial, anti-free-market. Not all share all aspects of this, and not all share the same level of venom, but they exist. At one end of the spectrum, you have the ignorant, violent kids who tore up Seattle and join ELF, who think that Hayduke was a pansy. At the other, you have the reserved lobbyists of the Sierra Club.

People in this group have a model of the world which is reinforced by pessimistic scientific claims. Anything which looks like an indictment of Western, industrial, modern society is immediately accepted on its face because it reinforces their moral views. This confirmation bias, however, goes unrecognized and unacknowledged because of the myriad of other biases that occur when looking back at it introspectively.

One of the biases which makes it difficult to identify past errors is hindsight bias, the tendency to believe that one's predictive abilities are better than they are. We tend to forget bad predictions and to remember good ones. Confirmation bias is the tendency to search for information that matches our preconceptions. Another is the winners' bias, in which we tend to examine hypotheses that actually turned out to be true in order to determine whether hypotheses are more frequently true, a bias which is in part selection bias and in part the Texas Sharpshooter's Fallacy. Selection bias is a distortion created by the manner in which data are collected, in this case resulting from limiting our selection of hypotheses to examine to after the fact rather than before the fact. The Texas Sharpshooter's fallacy is the determination of the hypothesis after the data have been collected. It would be far more constructive if we were to look at all of the hypotheses before the era which was being forecast and to look at which of those were true rather than looking at only the most memorable ones (recall bias?), which are inevitably the ones that eventually come true.

So, for example, we have the historical examples of epicycles, luminiferous aether, and phlogiston. Epicycles were introduced to try to explain the occasional regress of a planet in order to salvage the Ptolemeic or Earth-centric view of the universe. Luminous ether was the medium in which light travelled. Phlogiston was the element which sustained fire. These were important in their day, but are largely unknown today because they were, of course, wrong. These are just a few of the many now-discredited theories of how our world works.

More recently, we had the saccharin scare. Scarcely remembered today, the saccharin controversy was headline news in its day. Having determined that it caused cancer in rats, the FDA wanted to ban it as a carcinogen. They ran into tremendous popular and corporate opposition, since saccharin was the main sugar substitute in diet drinks at the time. They "compromised" by requiring the incorporation of warning labels. Years later, it was determined that saccharin has an effect particular not just to rats, but more specifically to male rats, in a way that does not effect humans. The entire controversy was completely misguided.[3]

Another example is the global cooling scare of the 1970s. It is still well-known that the Earth cooled during the 1940-1970 period, leading to concerns that the trend would continue until we entered a new Ice Age. Pollution was blamed, though it was noted that we are overdue for another Ice Age (in the literature, this is described as the end of the "interglacial period"). Bring this up on a climate change activist website and they will point out that the scare was largely created by articles in Newsweek and National Geographic magazines but was not predicted by scientists. While true that it was brought to the fore of public attention by the popular press, and that few scientists were predicting as opposed to positing the possibility of a new Ice age, the actual history at the time proves my point that these memes achieve some resonance in popular opinion despite the fact that they aren't true.[4] Afterwards, those who believed and advocated strong action claim to have never believed strongly.

It's almost a Lake Wobegon effect: all of today's environmentalists are above average in their ability to have picked only the true environmental scares of the 1970s. How did the belief in global cooling ever get so popular? Was there a die-off among environmentalists in the 1980s? That damn Reagan is probably behind it.

Finally, we have people who accept the claims of Paul Ehrlich:

"The battle to feed humanity is over. In the 1970s the world will undergo famines . . . hundreds of millions of people (including Americans) are going to starve to death." [1968]

"I would take even money that England will not exist in the year 2000." [1969]

Far from being ostracised for making a string (or two) of laughably wrong predictions, Ehrlich has received several awards for his "research". People want so badly to believe him that they continue to discount his way-off-the-mark predictions and accept his newer work at face value.
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Most scientists must necessarily be wrong most of the time, at least in published journal articles. This is the nature of science as a search for truth (truth which is as yet unknown): one must submit hypotheses to tests. Either most of those hypotheses must be wrong, or scientists are surprisingly good at guessing right answers, or publication bias is a factor. In fact, those are the findings of scientists researching the results of research: see this article by John Ioannidis and this article by Douglas Allchin for examples.

What is required is a substantial amount of skepticism, even for "accepted" conclusions. At one time in the not-so-distant past, ulcers were thought to be related to nerves, stomach chemistry, and diet. Not until 1979-1981, when two Australian researchers (Warren and Marshall) showed that most peptic ulcers were caused by a bacterium, Helicobacter pylori, did we have the truth. It is fortunate that Warren and Marshall rejected the consensus on this. Howard Aiken's assertion that you shouldn't "worry about people stealing your ideas. If your ideas are any good, you'll have to ram them down people's throats," summarizes the reception Warren and Marshall's ideas received from the medical community. Humans are not good at identifying truth that is at odds with their world view, or at identifying when falsehoods are confirming their world view.

We must be as skeptical of those who claimed that they always knew that Global Warming was true as of Anthropogenic Global Warming (AGW) itself, even if (or perhaps especially if) we believe it to be true. Skeptical, not hateful, dismissive, and/or obtuse. Not skepticism because we "feel" it isn't true, but skepticism for its own sake. The doctors who doubted Warren and Marshall made them prove their claims; that's as good for all of us as is the skepticism of Warren and Marshall that led to the discovery in the first place. Those who claimed they always knew the truth of AGW (especially the non-scientists), even when the evidence was more scant than at present, likely believed (and continue to believe) every pessimistic prediction, but conveniently forgot those that later turned out to be false. They weren't prescient; they were and remain ignorant. They are also ignorant of their ignorance.

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[1] A while back, I said that the Left may not be in favor of the Police State, but they are in favor of a Police State. They build it and then feign surprise when the other side uses it. They refuse to believe reports that their own guys use it for anything less than righteousness.

[2] This continues to be a vexing problem about which I intend to post sometime in the near future. That is, a completely misguided application of demographics along with confusing correlation with causation. In this case, we have policies which benefit farmers. Farmers are known to live in rural states. Rural states tend to vote Republican. However, less than 2% of the population farms. Furthermore, it is well known that a small portion of farmers receives most of the subsidies. They alone cannot account for the number of votes received by Republicans. Believing that it is Republicans representing Republican farmers that managed to pass a bill 318-106 in the House, and 81-15 in the Senate, defies explanation on any grounds other than partisan blindness. When you further find out that of those 15 voting against it, only two were Democrats while 13 were Republicans, you really must examine your premises. In other words, it is time for Democrats to drop the sanctimony on farm policy.

In other news (and a demonstration of this same misguided approach to demographics), Democrats are the party of the wealthy and they emit most of the greenhouse emissions. More to come on this, eventually.

[3] Curiously, Quiggin's response regarding the saccharin scare was that it was driven by the USDA, which he sees as a Republican creature:

As regards saccharin, a quick look at Wikipedia reveals that the anti-saccharin push came from USDA. I don’t think it would be too hard to look behind the curtain to red-state sugar and corn producers.

In the first place, the Wiki article specifically points out that the USDA opposition was mostly one man acting in accordance with the law, a law written by the meat-packing industry, so I can't completely discount Quiggin's claim. But Quiggin's assertion that red-state farmers were behind it is typical of the partisan blind under which the subjects of this article labor. Yes, some of those farmers were Republican. Some are Democrat, but he is blind to them. The laws were all written, supported, and not repealed by the Democrats even though they have controlled Congress for most of the period since 1907, and the White House for about half of it.

In the second, this doesn't explain how the FDA came to attempt to ban it.

In the third, doesn't this illustrate exactly what many of us have been saying with respect to regulatory capture? Specifically, that the government mostly exists to defend corporations in the guise of defending the average citizen?

[4] In fact, this has become a new interest of mine: How do such ideas get created and transmitted to seats of power? It isn't always via the press, and the locus of power is not always popular opinion. Take, for example, the ideas of the German Historical school, which got mainstreamed under the name of Progressivism by a route that seems to have included Robert Ely, John Commons, Herbert Croly, Robert M. LaFollette Sr., Teddy Roosevelt, Louis Brandeis, and finally FDR's cabinet. Why that school of thought? Why that route? Pure chance?

My point here repeatedly escapes the comprehension of the pessimists. I am not saying, "Scientific consensus in the 1970s was in favor of global cooling and impending an Ice Age." I am saying, "Public opinion in the 1970s was tipping toward a belief in an impending Ice Age and a desire to do something about it." It therefore doesn't matter what scientists were publishing in journals, or that there was no scientific consensus predicting the end of the interglacial period. What matters is that a significant number of voters believed it. How did they receive the information? How credible did they perceive it to be? How strong were their beliefs, and how far were they willing to go to act on them?

Promise of American Life (again)

In The Promise of American Life (part I here), Croly seems to accept the moral basis for socialism, but soundly rejects the Marxist formulas. Maybe this is what is meant by American exceptionalism?

In Socialism: Utopian and Scientific, Engels makes demands for gradual state takeover of private property. "In any case, with trusts or without, the official representative of capitalist society -- the state -- will ultimately have to undertake the direction of production. This necessity for conversion into State property is felt first in the great institutions for intercourse and communication -- the post office, the telegraphs, the railways." This nationalization was expected to lead to the whithering of the state:

Whilst the capitalist mode of production more and more completely transforms the great majority of the population into proletarians, it creates the power which, under penalty of its own destruction, is forced to accomplish this revolution. Whilst it forces on more and more of the transformation of the vast means of production, already socialized, into State property, it shows itself the way to accomplishing this revolution. The proletariat seizes political power and turns the means of production into State property.

But, in doing this, it abolishes itself as proletariat, abolishes all class distinction and class antagonisms, abolishes also the State as State. [1]

Croly would have nothing to do with that; in his estimation, the men (Hill, Harriman, Morgan) who built the great industrial concerns contributed to the national efficiency. Rather than banishing them, Croly wanted to harness them (and maybe control the amount of money they made [2]). His methods of regulating therefore consist of removing impediments to them, including the Sherman Act, and replacing it with a system of commissions who would review their decisions and make them more transparent. To what end? National efficiency, of course (the man had an efficiency fetish). But Croly was unsatisfied with the idea of a commission, since efficiency would normally require responsibility to be placed with one man; but by favoring national commissions, at least it gives him a way to preserve private property even as he expands the scope of the national government. Sounds like ... ?

The constructive idea behind a policy of the recognition of semi-monopolistic corporations is of course the idea that they can be converted into economic agents which will make unequivocally for the national economic interest; and it is natural that in the beginning legislators should propose to accomplish this result by rigid and comprehensive official supervision. But such supervision, while it would eradicate many actual and possible abuses, would be just as likely to damage the efficiency which has been no less characteristic of these corporate operations. The only reason for recognizing the large corporations as desirable economic institutions is just their supposed economic efficiency; and if the means taken to regulate them impair that efficiency, the government is merely adopting in a roundabout way a policy of destruction. Now, hitherto, their efficiency has been partly the product of the unusual freedom they have enjoyed. Unquestionably they cannot continue to enjoy any similar freedom hereafter; but in restricting it, care should be taken not to destroy with the freedom the essential condition of the efficiency. The essential condition of efficiency is always concentration of responsibility; and the decisive objection to government by commission as an efficient solution of the corporation problem is the implied substitution of a system of divided for a system of concentrated responsibility.

This objection will seem fanciful and far fetched to the enthusiastic advocates of reform by commission. They like to believe that under a system of administrative regulation abuses can be extirpated without any diminution of the advantages hitherto enjoyed under private management; but if such proves to be the case, American regulative commissions will establish a wholly new record of official good management. Such commissions, responsible as they are to an insistent and uninformed public opinion and possessed as they inevitably become of the peculiar official point of view, inevitably drift or are driven to incessant vexatious and finally harmful interference. The efficient conduct of any complicated business, be it manufacturing, transportation, or political, always involves the constant sacrifice of an occasional or a local interest for the benefit of the economic operation of the whole organization. But it is just such sacrifices of local and occasional to a comprehensive interest which official commissions are not allowed by public opinion to approve. Under their control, rates will be made chiefly for the benefit of clamorous local interests, and little by little the economic organization of the country, so far as affected by the action of commission government, would become the increasing rigid victim of routine management. The flexibility and enterprise characteristic of our existing national economic organization would slowly disappear, and American industrial leaders would lose the initiative and energy which has contributed so much to the efficiency of the national economic system. Such a result would of course only take place gradually, but it would none the less be the eventual result of any complete adoption of such a method of supervision. The friends of commission government who expect to discipline the big corporations severely without injuring their efficiency are merely the victims of an error as old as the human will. They "want it both ways." They want to eat their cake and to have it. They want to obtain from a system of minute official regulation and divided responsibility the same economic results as have been obtained from a system of almost complete freedom and absolutely concentrated responsibility.

This section of the book reminded me of those sections of Gabriel Kolko's Triumph of Conservatism, in which he traces Teddy Roosevelt's preference for regulating behavior by the Good Ol' Boy method. TR, the renowned trust-buster, didn't really like to bust trusts, but preferred to try to persuade the less civilized among them (read: non-Harvard men) to change their ways. Those who didn't go along, such as J. P. Morgan and (IIRC) John D. Rockfeller, felt his wrath and it was upon their necks that Roosevelt's mythological Trust-Buster reputation was built. Perhaps it was no coincidence that Croly expressed admiration for Roosevelt (one chapter features a comparison between Roosevelt, William Jennings Bryan, and William Hearst as reformers, with TR as the hero), and later, after the publication of TPoAL, Roosevelt based his New Nationalism upon some of Croly's ideas.

And it was much the same when discussing unions. First, the Sherman Act should be repealed, and second, unions should be recognized with a deal that brings their activities in line with the national efficiency. The highest accomplishment to which a man can aspire in the Crolyist world was to place his talents at the service of the nation. You know, for the sake of efficiency.

The alternative [preferred] policy would consist in a combination of conciliation and aggressive warfare. The spokesman of a constructive national policy in respect to the organization of labor would address the unions in some such words as these: "Yes. You are perfectly right in demanding recognition, and in demanding that none but union labor be employed in industrial work. That demand will be granted but only on definite terms. You should not expect an employer to recognize a union which establishes conditions and rules of labor inimical to a desirable measure of individual economic distinction and independence Your recognition that is must depend upon conformity to another set of conditions imposed in the interest of efficiency and individual economic independence. In this respect you will be treated precisely as large corporations are treated. The state will recognize the kind of union which in contributing to the interest of its members contributes also to the general economic interest. On the other hand it will not only refuse to recognize a union whose rules and methods are inimical to the public economic interest, but it will aggressively and relentlessly fight such unions. Employment will be denied to laborers who belong to unions of that character. In trades where such unions are dominant, counter-unions will be organized and the members of these counter unions alone will have any chance of obtaining work In this way the organization of labor like the organization of capital may gradually be fitted into a nationalized economic system.

...

[T]he union should have the right to demand a minimum wage and a minimum working day. This minimum would vary of course in different trades in different branches of the same trade and in different parts of the country and it might vary also at different industrial seasons. It would be reached by collective bargaining between the organizations of the employer and those of the employee. The unions would be expected to make the best terms that they could and under the circumstances they ought to be able to make terms as good as trade conditions would allow. These agreements would be absolute within the limits contained in the bond. The employer should not have to keep on his pay roll any man who in his opinion was not worth the money, but if any man was employed he could not be obliged to work for less than for a certain sum. On the other hand, in return for such a privileged position, the unions would have to abandon a number of rules upon which they now insist. Collective bargaining should establish the minimum amount of work and pay, but the maximum of work and pay should be left to individual arrangement. An employer should be able give a peculiarly able or energetic laborer as much more than the minimum wage as in his opinion the man was worth and men might be permitted to work over time provided they were paid for the over time one and one half or two times as much as they were paid for an ordinary working hour. The agreement between the employers and the union should also provide for the terms upon which men would be admitted into the union. The employer, if he employed only union men should have a right to demand that the supply of labor should not be artificially restricted, and that he could depend upon procuring as much labor as the growth of his business might require. Finally, in all skilled trades there should obviously be some connection between the unions and the trade schools, and it might be in this respect that the union would enter into closest relations with the state. The state would have a manifest interest in making the instruction in these schools of the very best and in furnishing it free to as many apprentices as the trade agreement permitted.

Translation: The state must control industry, preferably monopolies, and then control the labor that works in those monopolies. If the unions won't go along, we'll start state unions (where have we seen this?). And the state won't countenance any shenanigans from you workers: you can bargain for a minimum wage and then shut up. This isn't for you, it's for the nation.

I am reminded of Chris Nyland's article, "Taylorism and the Mutual Gains Strategy" (Industrial Relations, Vol. 37, No. 4, Oct 1998), in which he describes Taylor's attempts to reconcile with various labor unions and convince them that efficiency was something they ought to embrace. The alliance between the Taylorists and unionists is attributed to (among others) Louis Brandeis: close associate of Croly, the coiner of the term "scientific management", and the leading spark for the Efficiency Movement. One of those unionists, Sidney Hillman of the Amalgamated Clothing Workers Union, entered into collaboration with members of the Wisconsin school of industrial relations [3], but disagreed with them over the scope of union-management negotiations. The Wisconsinists believed that the scope should be limited to wages and hours, but the unionists believed the scope should include more, including investment, plant layout, and promotions.

These dalliances between labor and the Taylorists continued right through the 1920s and the Depression, during which the Wagner Act was passed. In 1940, the creation of a bargaining agreement between GM and the UAW was influenced by the back and forth between unionists, Taylorists, and the Wisconsin school. According to Nyland,

In 1940, George Taylor [not Frederick Winslow] was appointed umpire of the newly signed UAW-GM contract. At the time, this development must have appeared a great opportunity to extend the mutual-gains model. Optimism that the model would be extended was common not ony within SAM, the AFL, and the CIO but also in wider industrial relations circles. For example, Sumner Slichter in 1941 devoted some two hundred pages of Union Policies and Industrial management to an examination of the history of union-management cooperative schemes for increasing production, quality improvement, and cost reduction. Slichter was aware that such schemes tended to have a high mortality rate and had been embraced by only a small number of employers. [...]

The hope that unionization of the automobile industry would assist the growth of the mutual gains model was, of course, not realized. As in the 1920s, it tended to be small, unionized enterprises experiencing difficult times that took up the mutual-gains option. As Leichtenstein [...] notes, while GM took much from the bargaining model that George Taylor had helped develop in the garment industry, the company was very selective as to the parts of the garment program it adopted. As a consequence, the company institutionalized a form of union-management closer to the model advocated by the Wisconsin school than that favored by [the Society for the Advancement of Management, or SAM, the name the Taylorist Society had chosen when it absorbed the Society of Industrial Engineers], and it was this model that was subsequently widely emulated through industry. Leichtenstein [...] has explained why this was so:

General Motors had a very different conception of how the grievance system and umpire machinery might function. the company, which had closely observed the way in which [George] Taylor handled disputes in the hosiery industry, wanted to avoid the freewheeling, all-inclusive style pioneered there. The largest corporation in the world had no need for the kind of economic tutelage so often meted out by those industrial relations "fixers" who had pioneered in the economically chaotic clothing trade.

In short, GM rejected "joint management" and instead institutionalized that amalgam of work practices, formalized grievance procedures, limited seniority, and constrained bargaining that subsequently became known as "New Deal Industrial Relations."

So Croly and his friend Brandeis got their way after all, at least with regard to unions. The Wagner Act, far from being the labor success it is frequently claimed, was a means of restricting labor's control over their work environment. Those aspects of work that today we call Taylorist should have been called the GM-Wisconsin model. As I argued in this article, it was GM's size and an accident of history rather than any special power of efficient management that led the world to adopt their accounting system, and so it is with their labor control system. In both cases, the adoption has been assisted by the federal government: in the first case by its adoption as the GAAP and the SEC, in the second by Wagner and the NLRB.

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[1] I guess I was wrong about the terminology of socialization and nationalization in this post, but the outcome is the same: fascists must have the state, Marxists seek to abolish it.

[2] At that time, they still naively believed that the Constitution had to be amended before you went off and assumed a power like taxing income. We have learned so much since then.

[3] Somewhere, I read that the ILGWU instituted the first Industrial Engineering program, but I don't recall where. I think Kevin Carson would suggest that the "mutual-gains strategy" will be effective right after the workers take ownership of the factory. But then it's a "worker-grains strategy," isn't it?

Knowledge regimes

The way most sciences are taught is to start with very simple models in which many unrealistic assumptions are made so that students can learn the big picture and major forces, and then the assumptions are gradually relaxed so that you end up with very sophisticated models. It is true of physics and economics. That was what the First vs. Second best debate between Dani Rodrik and several other bloggers was about a few months ago, to which I had three responses (here, here, and here).

I find the claim among the so-called Second Best camp to be over-simplified for several reasons. The first is the problem of vulgar second best-ism in which they spot an institutional failure, propose a correcting policy, and assume success without investigating whether there are multiple institutional failures which counteract each other, whether there is a private institutional response to the failure, whether the policy actually corrects the problem, or whether the policy has unintended consequences which give rise to a new institutional failure. I have a whole category for this.

The second is their assumption of a knowable, static set of affairs. This is an assumption that the Econ 101 theory is correct, but that the real-world solution of some master equation for universal efficiency and total spiritual creaminess requires state intervention because of those chewy chunks of degradation known as "institutional (market) failure" [1]. This presumes an optimal state of affairs that we should strive for -- the "correct" allocations of inputs, outputs, numbers and types of goods to be made, and prices. This seems to me to be impossible not only because of the unknowability of the current set of all knowledge, but because of the unknowability of all possible knowledge. Hayek was only half right: Not only is the sum of current human knowledge unknowable to a single person, but the sum of all possible knowledge is unknowable to all persons or groups except for the group which consists of all humans over all time.

Although the book isn't explicitly about this, Dengjian Jin's The Dynamics of Knowledge Regimes illustrates a relatively simple case in cultural comparisons, a single slice through the cone. The book is Jin's explanation of the competitive differences between the US and Japan. He notes that previous explanations of Japan's rise fail to explain the current stasis of that economy. Those explanations approach the problem from neoclassical, revisionist, institutional, cultural, technological, and complexity schools of thought, among which the revisionist and complexity schools might be counted as Second Best approaches, the former noting the importance of industrial policy, and the latter noting issues like path dependency. Jin, on the other hand, focuses less on trade and transaction and more on the way in which each culture creates, stores, transmits, and uses knowledge. Each culture has its distinctive isomorphic regime (to use his phraseology), and the two regimes are nearly mutually exclusive.

In Jin's description, the cultures can be identified along the relationship and identity axes, with Japanese falling more into connectual and contextual while Americans fall more into contractual and individual. In those terms, Williamson's contractual schema have little to do with the Japanese experience and therefore are relegated to the status of a subset of the possible relationship schema. The American knowledge regime both results in and encourages the creation of isolated, modularized, disconnected, universal knowledge, while the Japanese regime results in and encourages the creation of highly contextualized, tacit, specific knowledge. Jin also notes that the relationship between the state and industry tends to fall into the same isomorphic pattern, with Japanese government working very closely with the affected industries and American government working (or appearing to work) in a universalist relationship, i.e. DARPA awards contracts for knowledge creation in a competitive bid process while MITI would work closely with an alliance on a development project. Jin's book explores these ideas in detail and also shows how this produces competitive advantage for each culture in distinct sectors. For example, the American approach results in leadership in sectors such as software and biotechnology where talent and knowledge can be modularized and reconfigured endlessly, while the Japanese approach results in leadership in complex fabrication and assembly such as automobile and opto-electronics.

So whereas Americans work with a system which emphasizes contracting, Japanese work within a system which emphasizes long-term relationship building. Asymmetric knowledge and opportunistic breach of contract are therefore rarely a problem in Japan. On the other hand, network effects certainly are a strong problem for the Japanese while the creative destruction machine that is modern America blows through network effects rapidly (and the process appears to be accelerating). Thus, a problem that worries the second-besters in one culture doesn't even make it on to the radar in the other regime.

Now pull back a little and realize that Jin was only comparing dominant Japanese and US knowledge regimes. What would be the result of a similar study of all cultures? Or of subordinate cultures within the US, Japan, and other dominant culture types? Also, the Japanese emphasize tacit knowledge, some of which is destroyed by the simple act of trying to objectify and communicate it, so it is not even clear that we could understand all of the institutional failures in our own culture that a Japanese would note, and vice versa. What would happen if we were to be able to look at our own institutions not only in terms of Japanese understanding, but of all existing, or of all possible cultures?

Now, having made those observations, I immediately begin wondering about things like,

• What institutional failures are we failing to note?
• How many failures could there be that have yet to be discovered?
• Are there some failures that cannot be detected or described in terms understandable within our culture?
  
• Since failures may work in both directions, is the net effect of those underprovision or overprovision of the good or service in question? How can we know?
  
• Because we aren't aware of these failures -- indeed, because the state's relationship falls into the same patterns -- isn't it likely that attempts to counteract them will only exacerbate a set of underlying, undetected problems?
• Even if it were possible to detect all of the possible failures, is it possible to counteract those features which are (A) a distinguishing feature of our society, and (B) only detectable to someone outside our society, and (C) solvable only through techniques which are not available to our society or our state-society relationship? In other words, some problems are apt to be an undeniable feature of our society, but their solution is unavailable to us unless we fundamentally change our society ... in which case many of the other institutional failures and the corresponding responses will be rendered meaningless while we simultaneously choose a whole new set of institutional failures for which we have neither experience nor remedy. At best, we could go back, but then all we have is a mono- or bi-stable system in which we never completely eliminate institutional failure, but rather trade one type for another.
  

Don't think of the Stay-Puft Marshmallow Man, Ray!


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[1] pro forma, we ignore failures of the Really Big Institution, The State

Walmart CSR again

So, here's my kindergarten summary of how the mass market apparel industry works:

You have a company (a manufacturer) that makes clothing. If you don't actually sew it (you contract that out), you are still called a manufacturer. You are selling your clothing through boutiques, the internet, and so on. You want to make the leap into large retail outlets like J. C. Penney, Wal-Mart, Sears, Dillards, Macy's, whatever, so you start trying to get into those stores.

Those stores have very funny (funny-strange, not funny-haha) policies on charge-backs, returns, and how they pay their bills. Basically, they make you take all the risk. You send them clothing, they send back what they don't sell, they charge you back for every non-compliant item they can find (e.g. the tags are crooked). And to top it off, they don't get around to paying the bills for 3, 6, 9 months on end. But still, you are moving a lot more product through them.

Eventually, you realize that the interest rates on the money you are borrowing is killing you, so you get involved with a factor. The factor acts as a bridge: they take over your accounts receivable, but they pay you faster. The factor holds lots of sway over the retailers because they represent lots of their suppliers exclusively. If the retailers wants product, they have to pay the factor. The factors, though, charge for this service, and charge a lot: 15-20%. And that comes from you, the manufacturer. But at least you're getting paid, right?

So by choosing to sell through a major retailer, your choices are either to borrow money and pay interest on that or get a factor and pay them (though effectively you become their employee, since they have now taken over your accounts receivable). If you want to keep making money at these volumes, you need to cut costs. The easiest way is to go offshore and get cheaper sewing contractors.

Wal-Mart, on the other hand, has the reputation of paying their bills in a timely manner. They berate you on pricing [1], but at least they pay on time and offer volume opportunities.

If the major retailers would pay their bills quickly, there would be no need for factors and thus less temptation to go offshore [2]. Perhaps people concerned about Corporate Social Responsibility (CSR) are going after the wrong target? Perhaps they ought to be scrutinizing manufacturers' complaints about retailers' pricing and other policies, their business-to-business relations, rather than their employee or customer relations.

I'm just sayin'.

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This is Wal-Mart CSR again because I already wrote about it.

[1] Apparently, Wal-Mart also brow-beats its suppliers over their use of packaging and renewable fuel content, among other things. Wal-Mart is the world's largest buyer of organic cotton (WSJ-$), and becoming the largest purchaser of sustainably harvested shrimp and fish (WSJ-$). Is it green-washing? Could be. These efforts overlook more sustainable practices -- they are optimizing locally while sub-optimizing globally. But they aren't the ogres normally claimed.

[2] Why wouldn't they go offshore, for profit maximization, even in a factor-free world in which everyone paid on time?

1. Quality control, the ability to see and control problems

2. Flow, in Chandler's sense, the flow driven by the visible hand. This was the preferred method of operating a mass production business before WWII and the ascendancy of the GM/DuPont theory of management. You can't achieve flow with a 3 week or longer delay in the supply stream.

3. Leisure time; if you run a local business, you have the opportunity to blur work, relaxation, and other personal time, whereas when you run an international operation, you have to be "on" 24/7. This is the same problem faced by racing enthusiasts who are offered a sponsorship: do you really want it to be a job instead of a hobby?

4. Some other stuff that will have to wait for another post. Why do factors exist? Why doesn't someone vertically integrate textile, apparel, and retail? Or perhaps we can just shame my wife into writing that book.

Local, Action: Issues of Scale

In a recent debate hosted by Cato, Peter Leeson argues

In a recent study I compared Somali welfare under anarchy to welfare under government using all key development indicators for which data allowed comparison. According to the data, of the eighteen development indicators, fourteen show unambiguous improvement under anarchy. Life expectancy is higher today than was in the last years of government's existence; infant mortality has improved twenty-four percent; maternal mortality has fallen over thirty percent; infants with low birth weight has fallen more than fifteen percentage points; access to health facilities has increased more than twenty-five percentage points; access to sanitation has risen eight percentage points; extreme poverty has plummeted nearly twenty percentage points; one year olds fully immunized for TB has grown nearly twenty percentage points, and for measles has increased ten; fatalities due to measles have dropped thirty percent; and the prevalence of TVs, radios, and telephones has jumped between three and twenty-five times.
...
Should we conclude from Somalia's stateless improvement that it is a nice place to live? Of course not. But Somalia's pre- and post-government performance highlights an important point about the desirability of anarchy. Contrary to conventional wisdom, it is simply not true that any government is always superior to no government. If state predation goes unchecked, government may not only fail to add to social welfare, but can actually reduce welfare below its level under statelessness. Such was the case with Somalia's government, which did more harm to its citizens than good.

Dani Rodrik responded

I do not have any trouble with the idea that self-enforcing agreements (what Leeson calls "anarchy") can sometimes substitute for third-party (i.e., government) enforcement. Such self-enforcing agreements are maintained through the force of repeated interaction ("if you cheat me now, I will cheat you in the future,") through reputational mechanisms ("see, I am not the cheating kind of guy"), and collective punishment schemes ("if you cheat me, I will bring the wrath of my colleagues on you"). The literature is replete with examination of such informal institutions. See for example Avner Greif's work on medieval merchant guilds, John McMillan and Chris Woodruff's work on commercial dispute settlement in Vietnam, Marcel Fafchamps' work on firms' relations with their suppliers in Africa, and Elinor Ostrom's work on the management of common property resources around the world [1]. Leeson's own account of how pirates have developed self-enforcing arrangements to elicit cooperation fits squarely in this larger literature.

The problem with self-enforcing agreements is that they do not scale up. One of the findings from Elinor Ostrom's extensive case studies is that self-enforcing arrangements to manage the "commons" work well only when the geographic scope of the activity is clearly delimited and membership is fixed. It is easy to understand why. Cooperation under "anarchy" is based on reciprocity, which in turn requires observability. I need to be able to observe whether you are behaving according to the rules, and if not, I have to be able to sanction you. When the size of the in-group becomes large and mobility allows opportunistic behavior to go unpunished, it becomes difficult to maintain cooperation. Imagine that the pirates numbered in the millions and they could easily jump ship to join competing groups mid-voyage; would the arrangements Leeson describes have been sustainable?

Later in the essay, Rodrik concludes, "There is no example of a society that has become prosperous without a state machinery." He doesn't appear to be thinking about the fact that many societies that have not become prosperous in his sense (high GDP) have been sustainable over hundreds of years -- sustainable by definition.

In contrast to Leeson's note that it is not true that any government is better than no government, Rodrik arguees that more government is equivalent to good government. In fact, he is all but saying that state capitalism is the best option we have.

Unlike in pirate societies or pre-colonial Angola, modern economies require an elaborate and ever-evolving division of labor -- among owners of firms, managers, and their employees, among producers up and down the value chain, and between producers and providers of supporting services such as finance, accounting, and legal services. The complexity, fluidity, and geographic non-specificity of these activities leave too much room for opportunistic behavior for self-enforcing arrangements to work well. They require an external backstop in the form of government-enforced rules.
...
Which is why the scatter plot below, showing the relationship between per-capita GDP and the size of the public sector, should not be a surprise. There is a strong, statistically highly significant, and positive association between countries' income levels and the share of their economy that the government consumes. This highlights the complementarity between markets and the state. Those societies in which markets work best are the ones where the reach of the state is longer -- not shorter.

Alas, Rodrik seems committed to conflating the quality of governance to the size and scope of it, as he switches back from size to operation: "Prosperity is achieved when states are effective in setting and enforcing the rules of the game, not when they wither away."

I welcome Rodrik's entry to the blogosphere. So far, he is proving very valuable as a source of material showing that defense of state capitalism is something to which both the Chamber of Commerce Right and Crolyist Left agree. [2] It's a fight between two sides of the same coin, the one side saying that we need government to rationalize the entire economy (by which I mean, "to coordinate everything in accordance with a central plan") while ignoring the side effects (increasing concentration of wealth and power), while simultaneously claiming that it is the other side that is doing this. The other side claims to defend free markets while actually defending the businesses and people benefiting from state policies.

And, in the present essay, Rodrik provides a generous amount of material to help me with the third installment of the Local, Action series. In the first two essays, I explored local commerce and associational activity. In this one, I am more interested in discussing localism as a preferred method for governance. I will gladly concede that dividing the world into loose confederations of local or regional sovereignties will result in a lower rate of growth, but I will simultaneously assert that the median person will not necessarily be worse off, that the least well off will be much better off, and that the society will likely be much more sustainable than the existing system which Rodrik prefers.

It is well-known that interpersonal communications scale poorly with the number of people involved. The most effective means of communication is direct conversation; we evolved to convey and to receive a great deal of information via non-verbal means (gestures, facial expression, voice timbre). People cannot handle the cognitive load of more than a few other people. Anthropologist RIM Dunbar posits

there is a cognitive limit to the number of individuals with whom any one person can maintain stable relationships, that this limit is a direct function of relative neocortex size, and that this in turn limits group size. The predicted group size for humans is relatively large (compared to those for nonhuman primates), and is close to observed sizes of certain rather distinctive types of groups found in contemporary and historical human societies. These groups are invariably ones that depend on extensive personal knowledge based on face-to-face interaction for their stability and coherence through time. I argued that the need to increase group size at some point during the course of human evolution precipitated the evolution of language because a more efficient process was required for servicing these relationships than was possible with the conventional nonhuman primate bonding mechanism (namely, social grooming). These arguments appear to mesh well with the social intelligence hypothesis for the evolution of brain size and cognitive skills in primates.

(hattip: Life With Alacrity blog, at which this is an interesting and related post)

Dunbar calculated that humans could effectively socialize in groups of about 150 people. He also notes that modern military organizations are limited to no more than 200, a limit arrived at by trial and error over several centuries.

Once language and then writing was developed, we had the means to communicate to but not with a wider group. Writing can allow one person to reach more people, it is more precise and can possibly unload some of the emotional content, allowing a more rational conversation, but it isn't interactive. Personal relationships maintained by physical interaction are closer than impersonal relationships maintained by broadcast, a difference of kind, not degree. In Human Scale, Kirkpatrick Sale cites research from sociology and anthropology to argue for two types of naturally sized community: the neighborhood, roughly limited to 500 people, and the community of 5,000 to 10,000, roughly corresponding to the two types of communication. A Pattern Language makes similar arguments for the optimal size of regions, towns, neighborhoods in political, economic, and architectural terms.[3]

Not being able to communicate with many people effectively means that our ability to find out about their activities and intents is limited. We might forgive someone for making a mistake if we understood their motivations. We might also allow a mistake to pass if we knew that person was usually very conscientious. So contract breaches can be handled in a very cost-effective way when we have personal knowledge of the deliverer, but contracts become much more costly to enforce as our physical, mental, and emotional distance from the other party increases.

Thus, reputation and other features of self-enforcing contracts are difficult to scale up because it becomes difficult for people to directly observe compliance and to sanction the non-compliant. Rodrik does not seem to be aware, however, that the same problems stalk state enforcement of its own regulations. [4] Not only can the state not monitor everyone, but citizens can not effectively guard the guardians the further removed they are from them. It is difficult (costly) to hold politicians to their promises, to know the content of laws, and to know the quality and activities of the bureaucrats charged with enforcing the regulations. Laws may therefore work to the advantage of the wealthy and powerful, they may not be enforced effectively, or they may be enforced selectively, giving rise to corruption.

Locally, citizens can engage more freely and more securely in give-and-take. One day, the majority may agree to something that puts some at a disadvantage. We all know it and can confirm it personally. Later, we can agree to do something that compensates the victim(s). We have a better handle on who is getting the shaft and who is getting more than their fair share, and when the numbers are small, we are capable of keeping a running balance sheet on the externalities of our collective actions. [5]

In From Mutual Aid to the Welfare State, David Beito describes at length the activities of review committees sent to the homes of the covered. Their direct observation was not only an effective way of weeding out the fakers, but also provided stronger credibility for legitimate cases, so strong that when requesting special grants for hard cases, lodge members gladly forked over. After all, they weren't giving to charity, they were contributing to a mutual fund, one which they themselves might need to draw against one day.

Mancur Olson addresses the scaling issue in The Logic of Collective Action. He argues that small groups are able to use moral and social pressure to maintain group cohesion. The larger the group gets, the more costly it becomes to maintain cohesion. In large numbers, the group must offer some kind of tangible, excludable good in order to maintain he necessary cohesion. Because of the difficulty of herding large numbers to a common goal, small but focused groups may come to dominate the larger groups.

Scaling is the same argument that Tyler Cowen offers against the local food movement (sorry, no link). Sure, it may be possible for a few (usually wealthy or eccentric) individuals to obtain their food locally, and it should be of higher quality, but it becomes more difficult to attempt to feed entire cities from local farms. The Northeast corridor is unlikely to return to self-sufficiency in its current state, though this is interesting.

I would extend the arguments of the local food movement to the state: if you think that government is a good thing, local is better. Just as you can produce inexpensive food products by mass production techniques by giving up nutritional value, loading the environment with pollutants, and allowing national brands to push out local flavor, you can also mass produce your law by giving up legislative quality, loading the legal environment with barriers to entry and regulatory sclerosis, and allowing one-size-fits-all regulations to push out local custom. When your food is produced far away, you have little idea what ingredients or processes are being used. Just so, you have little idea how earmarks are getting into legislation or who stands to benefit from each 30,000 page bill. Transparency does not scale well, publicly or privately.



-----------------------------
[1] Let's also add Lisa Bernstein's study of the diamond industry and Jacob Loshin's delightful piece on how innovation and secrets are kept in the magic industry without Intellectual Property law.

[2] Need evidence of that fact? Check out this blurb for a book advertised on Max Sawicky's site:

In his new book, economist Dean Baker debunks the myth that conservatives favor the market over government intervention. In fact, conservatives rely on a range of "nanny state" policies that ensure the rich get richer while leaving most Americans worse off.

I found it on a post arguing in favor of one of Rodrik's Crolyist, pro-industrial policy posts. Irony was not intended. When I pointed it out, Sawicky nominated me for a Blogalympics Long Jump medal, apparently oblivious to the obvious.

[3] Were the 300 M inhabitants of the US divided into towns of that size (say, 6667), there would be 45,000 such towns. Using Sale's calculation of one square mile per town (admittedly, he only had 5,000 inhabitants) and a 15 square mile green belt around each town, this would require about 720,000 square miles, which he calculated to be less than one-fifth of the nation's total land and less than one-half of the area given over to cropland at that time.

[4] Actually, that's not entirely true. Rodrik himself characterizes federal policies as "targeted on a loosely-defined set of market imperfections that are rarely observed directly, implemented by bureaucrats who have little capacity to identify where the imperfections are or how large they may be, and overseen by politicians who are prone to corruption and rent-seeking by powerful groups and lobbies." So, he seems to recognize it, or perhaps he is just using arguments he has encountered but not really understood or accepted for rhetorical effect?

[5] One way of looking at this is to consider the costs to obtaining consensus and the cost of externalities arising from the decisions. A dictator has nearly zero (0) cost of reaching a decision, but the externality cost is likely to be very high. On the other hand, it would be extremely costly to obtain a 100% consensus of a large group, but there would be no externalities. Given methods of reaching a decision, like log-rolling, the externalities of the final decision may be expensive. The larger the group, the higher the cost of reaching a decision, and given Olson's observations about the ability of small, focused groups to dictate to large, dispersed groups, the cost of obtaining and the external costs grow as the group grows. This is an insanely abbreviated version of one line of analysis in The Calculus of Consent.

Me vs the libertarian vice

As the argument goes,

Private actors and markets tend to be dynamic because the actors respond to incentives. Proactive people will be promoted in dynamic companies and those will win market share from companies that stifle creativity and drive creative individuals away.

Government bureaucracies are static; there are no incentives. If they do a job poorly, they still keep their market share and jobs.

It occurs to me to take to heart Tyler's suggestion that the libertarian vice is to think that gov't quality is fixed. I confront the second statement from above, asking whether it is true if we consider what I have said about bureaucrats. Chiefly, are they self-selecting? If so, then they have reason to see a good job done regardless of the benefit to themselves, i.e. in spite of the fact that they have few or no market incentives to do a good job.

It seems that there would be a tradeoff between "work for myself" and "work for my ideals", i.e. some might not be self-selected and some might be sell-outs. What percentage of people are self-selected, and how strong are their ideals? Also, they may over time begin to blur the two, perceiving "that which makes my job easier" as "that which is right".

Local, action: Buying Whole Foods' local claims

In Kevin Carson's book chapter, "Decentralized Production Technology", he has this to say about my comment about Viking appliances and planned obsolescence:

Here I take issue, at least in part, with Husman's analysis. First of all, it's hard for me to understand why the average lifetime of an appliance, as determined by the durability of its components, should as a matter of strict definition be excluded as a matter of design choice. After all, Husman himself mentions Viking refrigerators as an example of a product specifically designed for longevity. Second, he seems to be defining "planned obsolescence" far too narrowly. Planned obsolescence refers not just to how soon or how frequently an appliance breaks down as a result of problems with individual parts, but also to how amenable it is to repair. Planned obsolescence, in this latter sense, includes 1) a deliberate choice among design alternatives in favor of a design that makes repair more costly, difficult, or complicated, and 2) the use of such expedients as patents to control the availability and pricing of replacement parts.

First, as I pointed out, the Viking appliances are expensive, on the order of $6,000 for a refrigerator. And the same is going to be true of many such things: a Mercedes or Lexus is going to last longer, all things being equal, than any economy car. So I'm not opposed to including longevity as a design criteria, but rather pointing out that the longest lasting items are going to utilize the latest and most expensive elements and techniques. On the other hand, a Toyota lasts longer than its similarly priced competitors and people desire that feature. Second, I'm going to definitely concede that Kevin has a good point about repair difficulty/ease being part of the equation. The original Model T was made to be easy for farmers to repair, and they loved it. The current generation of cars is ridiculously difficult for the shade-tree mechanic to do anything but change a tire.

But that's beside the point I'm after in this post. What I'm mostly after is the fact that moving to an economy that we might prefer is going to look expensive. I introduced this with the appliance debate, but I'm going to flog the "controversy" between Michael Pollan and John Mackey for the rest of the material.

I first happened to hear about Michael Pollan during this interview on Fresh Air; I have his book Omnivore's Dilemma on my get-around-to-reading list, but this interview will have to suffice for now. It supported most of the things I have come to believe about our diet, corn, and related issues. Note especially his comments after 29:00, in which he says,

To eat in a way that is healthy for you and healthy for the environment and doesn't use a lot of energy is more expensive. That's an issue we have to grapple with. A lot of this food is elitist food, and can be called elitist food, and often is -- usually by proponents of the industrial food system. Any situation where McDonalds is claiming the high moral ground, I'm a little dubious of and this is one of them. But I think we have to confront this.

There's several different ways to look at it. One is cheap food is not as cheap as it looks. The real cost of that $0.99 burger in terms of ... is charged to public health, is charged to the environment, is charged to your health. Even though it's cheap at the register, that is not the real cost of that food. That is an irresponsible price. I don't know that people want to buy irresponsibly.

Now some people don't have a choice. There are a percentage of people in this country who probably can't afford to eat organic or even to eat more sustainably 'cause organic is not the only answer. Let's not oppose organic to everything else; there are many more alternatives out there. Grass fed beef is not organic but it's better, I think, than organic.

If you go to the supermarket, it is true that -- and you're a rational actor, and you don't have a lot of money -- if you're basically buying energy for you're family -- that's to say calories -- the rational thing for you to do under the system we have is to patronize the center of the store, all the processed food. Because a dollar will get you 2500 calories of cookies, of snacks, of potato chips and if you go to the produce aisle, it will only get you 250 calories of carrots

So, y'know, we're programmed by evolution to seek the most energy with the least effort possible and the supermarket has created an environment where that forces people essentially to buy the least healthy calories. But that's not a function of the free market, that's not a function of nature, either. That is a function of policy. There's a reason that the least healthy calories in the supermarket are the cheapest, and that is essentially "policy": we subsidize the cheap calories. We subsidize ... those calories are calories that come from corn and all those calories -- all that high fructose corn syrup -- is subsidized by our taxpayer dollars, the carrots are not.

So it seems to me that for the people who are shopping this way, the challenge is to change the set of incentives and figure out a way to make the healthy food cheaper and to make the unhealthy food a little bit more expensive.

[transcript acquired the with old-fashioned method: listen and type. I hope it's accurate.]

From the interview, Pollan's point seems to be that we should be more careful about what we eat. For example, avoiding anything with HFCS is a good shorthand for not confusing "food products" with "food". He also differentiates between good and bad organic, where bad organic is the type where free range hens never actually get outside (apparently, they haven't checked their contracts). I believe that the use of petroleum as the major input to our food is a problem since one of petroleum's alternative uses is transportation and that means that the cost of food to our poor people is rapidly becoming impacted by the transportation choices of increasingly wealthier people in China and India.

And we thought we freed ourselves of such considerations when we shucked the gold standard.

So Pollan finally ends up endorsing something like the 100 mile diet described by Alisa Smith and J.B. MacKinnon in their book of the same name. He believes that eating local means that farmers will use better inputs (no pesticides or petroleum) and that local farming will inhibit sprawl. And since localism is the point of this post, I swear I will return to it after dealing with two asides.

First, I believe he could have selected better examples. For example, by having all of our farming concentrated in Iowa, they may have eliminated birds there, but we increase the potential for green space around our cities everywhere else. He is basically proposing that we replace the native species of plants around our cities with food stuffs, which only shifts the problems around a little, but does not eliminate them. Indeed, this is the argument of Nobel Peace Prize winner Norman Borlaug, the so-called father of the green revolution. In an article in The Economist, he argues

Thanks to synthetic fertilisers, Mr Borlaug points out, global cereal production tripled between 1950 and 2000, but the amount of land used increased by only 10%. Using traditional techniques such as crop rotation, compost and manure to supply the soil with nitrogen and other minerals would have required a tripling of the area under cultivation. The more intensively you farm, Mr Borlaug contends, the more room you have left for rainforest.

Granted, Borlaug and I are offering a false dilemma here*, but the point is that Pollan doesn't seem to have thought this far through the problem (perhaps he has and it didn't come out in the interview; I haven't read the book).

Second, Tyler Cowen's critique at Slate left me flat. Tyler points out that Pollan's approach neglects to value our time and other market signals. Tyler makes a good point when he says that we may respond to higher fuel prices by driving less or buying smaller cars, but that we probably won't start growing grapes in the back yard. However, I'm surprised that Tyler doesn't more strongly endorse Pollan's descriptions of the problems of subsidization. Neither does Tyler recognize a benefit in which I expect him to be most interested, which is the improvement in food quality that might arise from a more local, fresher supply of ingredients.

While Tyler mentions the problem with the corruption of the term "organic", and agrees with Pollan that shopping at Whole Foods is an insufficient response to the three problems in the industrial food system (our health, our environment, the treatment of animals), Whole Foods founder John Mackey responded much more vigorously in a series of blog posts and public forums. As a result, each has moved a little in the direction of the other, Pollan agreeing that the Whole Foods approach is not as bad as he thought and getting better, while Mackey conceded that some of their practices needed review and changing.**

Mackey's summary of his arguments can be found in this presentation. In slides 39-41, he mentions something that has bothered me for some time now. While writing about the theme of self-sufficiency in Kirkpatrick Sale's Human Scale, I told a story about driving out to a local chile farm to acquire the green ambrosia. Even in my high efficiency automobile (46-50 mpg), it probably required a quart or two of fuel to make the round trip. Most other vehicles would require more, and most of the city lives further away from Lujan Farms than I do. The fuel required per pound of a truckload of chile would probably be much lower when delivering to a market in the center of town, but people still have to get to the market. This is an optimization problem, so the least-energy solution will not necessarily be "don't shop at Wal-Mart". Given existing social circumstances, the optimal solution will probably depend on where you live and what you drive; "shop at Wal-Mart" may actually be the solution for many people.

That is only part of the issue. When you account for all of the inputs (soil, sun, water, etc.), the fact that some geographic regions are blessed with some of these in abundance while others are not, and that economies of scale can be realized when using railroads and ships, local may not be the answer for everything. Mackey's summary of this part was, "If you live in Berkeley, you will use less fossil fuel and produce less carbon dioxide by buying rice from Bangladesh than from California." I'm inclined to think that even if that particular claim is not correct, it will be true that some foods will be less energy intensive when grown and shipped from afar rather than locally.

But is Mackey sincere when he claims that Whole Foods' supply chain is not as bad as Pollan claims and getting better? I was originally going to post about an article in Forbes that I bookmarked some time ago (To Fight Rivals, Whole Foods Buys Local). Unfortunately, Forbes can no longer find the article on their own site. Fortunately, Google can find it elsewhere, so I excerpt it here without linking:

Dairy general manager Matt Lucas began bringing the glass bottles himself from the Morning Fresh farm in Bellevue, Colo., 60 miles north of Denver. Until then, Morning Fresh had long made its name on home deliveries.
Since his Whole Foods deliveries began in 2004, Lucas estimated, his dairy's sales have increased 20 percent. Morning Fresh now sells at least 1,000 gallons a week to supply a Whole Foods distribution center serving 10 stores.
"It's a breath of fresh air to get involved with a group like that. They were so excited to get our product in their stores," Lucas said.
By strengthening -- or, as some farmers say, returning to -- their commitment to local products, Austin, Texas-based Whole Foods and Boulder-based Wild Oats Markets Inc. are fending off big chains like Wal-Mart Stores Inc., Kroger Co. and Safeway Inc., which have expanded their own organic offerings and put pressure on the smaller "natural" grocers. "With Wal-Mart barging into the lower-end organic sales, this is a way these other retailers can differentiate from what Wal-Mart is doing," said Dan Hobbs, a cooperative development specialist with the Rocky Mountain Farmers Union.
...

Small local growers often cannot offer lower prices than large-scale operations that benefit from economies of scale and cheaper labor. But fuel costs for shipping food are less for shorter trips, which in turn often require less packaging to preserve food. Buying local also shortens the time it takes produce to get to market, preserving nutrients and freshness, ....
...
Whole Foods defines a local product as having traveled less than seven hours to get to the store.
It sells more than 200 produce and floral items from more than 60 local growers in the region covering Colorado, New Mexico, Kansas and Missouri. Overall, it does business with more than 2,400 independent farms.

Apparently, Whole Foods is looking at local foods (in the article, consumer interest in local food is credited in part to Pollan's book) as a competitive advantage over purveyors of "bad organic" such as Wal-Mart. If true, it means that Whole Foods' conscience and self-interest are aligned with those of their customers, suppliers, and (if you believe John Mackey's New Agey Manifesto) employees and stock holders. If true, that's pretty cool.

A few things can be pulled out of this.

• I think the struggle between Whole Foods and Wal-Mart leaves us all better off than Pollan does. I can't tell which paradigm will win, but I am certain that having them square off with two different formulas -- and having the local farmers market and small grocery stores as well -- means that my food supply is simultaneously more secure, less expensive, and of higher quality than if someone was to start mandating that their favorite approach should be the victor. Also, Wal-Mart is a big boy, so perhaps the merger of Whole Foods and Wild Oats creates a stronger competition between the two.
• Still, as Pollan points out, it is policy that the corn industry should be as large as it is. Frito-Lay and Coke need to occupy all that premium shelf space because they have products that need to be sold to keep the machine running. In that sense, Wal-Mart is a creation of both Sams: Uncle and Walton.
• Mass producers have genuine advantages over craft production. For one, their cash prices are lower. Amana is cheaper than Viking, Kraft is cheaper than the dairy farm down the road, Wal-Mart is cheaper than Whole Foods. If I'm on a limited budget, that's going to be important.
  
• However, there are hidden costs. Note that above I said, "moving to an economy that we might prefer is going to look expensive", not "be expensive". All things considered, and on average, cheaper appliances and vehicles are typically not as long lasting or efficient, cheaper food products are not as tasty or nutritious as organic and artisan foods, and mass production relies on a massively subsidized infrastructure. We taxpayers pay for agriculture subsidies and transportation subsidies, while we as people pay for the externalities (farm runoff, smog and soot).***
  
• The cost of transportation is a factor in whether local or mass produced is less expensive. The railroad ushered in the first age of mass production and broke down state and regional barriers and built a nation while the container and container ship ushered in the age of globalization. If we are entering an era of permanently higher fuel costs, those trends may reverse. That's not all bad.
  

I am interested in understanding how to reverse some of the policy decisions of the past 150 or so years without reverting socioeconomically to what existed then (grinding poverty, extreme inequality -- contra to what populist demagogues would have you believe about today being the worst of times in those regards). Employing lean production can build a local manufacturing base that produces high quality goods at low costs with little waste, benefiting both workers and consumers. Removing taxpayer supports shifts the advantage from ADM and Cargill toward local farmers. And local governance moves power out of distant capitals and bureaucracies into our hands.

In an upcoming post, I want to say something about local energy production.

-----------------------------------------------------

* You could combine localism and organic methods.

** Other takes on the Pollan/Mackey "smackdown turned lovefest":

• An Open Cupboard suggests that Whole Foods should be more diligent about teaching people to shop on a low income. Easy: vegetarian.
• Whole Foods blog: Points out that Whole Foods stock took a $2 billion dive after Pollan's book came out, but also notes that may be attributable to other problems.

*** Yes, it is literally true that the corresponding costs of obesity cost us money through Medicare/Medicaid. However, that also is a matter of policy and I am not going to start using that as a pretext for dictating other people's behavior and food choices.

Halt in the Decline of Work Hours

I'm sure someone must have done more serious research on this, but I'm curious as to why the work week has been frozen at 40 hours. Going back 200 years, farmers worked sunup to sundown (and perhaps then some), 7 days a week. Through the 19th century, various laws in England, the US, and elsewhere were passed, sometimes following private practice, reducing the hours to 12, then 10, then 8, while the workweek was reduced from 7 to 6 and then to 5. So far as I know, with the sole exception of France, that trend stopped at the 5 x 8 = 40 hour week in the 1920 or 1930s. Yet productivity continues to climb, so why haven't work hours continued to follow suit?

1) Due to the passage of the 16th Amendment and then SSI legislation, taxes have eaten up all of the surplus since then.

2) Health care insurance has absorbed all of the gains.

3) The period in which it has become feasible to drop to 20-30 hours per week has coincided with the rise in globalization. The competition won't let us slow down.

4) It is a coordination problem: high income workers prefer to work longer weeks, and want/need someone to be on the other end of the phone whenever they call.

5) It is a different coordination problem: because of the explosion in labor legislation at the state and federal level in the Progressive and New Deal eras, it is simply too complex to change all of the relevant law.

6) There has been a realization that such legislation shackles those at the bottom who would like to get ahead by working longer hours.

7) The productivity gains have been apparent, not real.

8) Some of us *are* working less, it just isn't showing up. One way is by retiring early. The other is by switching to alternative work schedules (4 x 10) or work arrangements (telecommuting, comp time, better vacation and sick leave packages). Yes, 4 x 10 is still 40, but the off-book time to commute is less, and the one day per week to run errands without taking time off is significant.

I think 1 is overplayed. 2 is a strong contender, but doesn't explain all of it, especially outside the U.S. 3 might make a slight contribution. I doubt 4, 5, and 6; not the truthiness of them, but rather the strength of these arguments to dissuade a majority from obtaining the desired change; after all, the same arguments in 6 apply to minimum wage laws. I doubt the truth of 7. There might be something to 8, but probably not as much as we would like; the benefits described have fallen to high income workers, whereas previous work hour reductions helped those on the low end.

Work organization all in one post

Thanks for coming back, thanks to Kevin Carson for noticing (damn, two weeks too early), and welcome to all of the Mutualist Blog readers. I'm looking forward to Kevin's comments regarding Lean (or kaizen or whatever you want to call the amorphous set of principles that originated in the US, attained dominance in Japan, and are slowly being repatriated). I have seen far too little informed and intelligent criticism of Lean management.

This series (links below under Production Modes) has been an extended review of Oliver E. Williamson's (OEW) The Economic Institutions of Capitalism, starting with a roundup of New Workplace books listed in a pair of posts called The New Workplace and Flow . In one chapter of that book, OEW compares the efficiency and hierarchy of different modes of organization. The purpose is to examine whether hierarchy has merely enforced itself (the power explanation), as argued by Stephen Marglin and Katherine Stone, or whether the dominant modes of organization have an efficiency explanation. In Williamson's words,

The central issue, and my main interest here, is an assessment of alternative work modes in transaction cost terms. If, as alleged, hierarchy does not serve efficiency purposes, the power relationship hypothesis is more compelling. If, however, hierarchy serves to economize on transaction costs, then an alternative explanation for the historical events to which Marglin and Stone refer warrants serious consideration.

OEW examines 6 modes of organization under 3 broad categories, two modes of contracting used by each, two types of hierarchy, and 11 measures of efficiency.

Production modes:

• Entrepreneurial
  • Putting-out
  • Federated
• Collective
  
  • Communal-emh (every man for himself)
  • Peer groups
• Capitalist
• • Inside Contracting
  • Authority relation
    

Contracting:

• Continuous
• Periodic
  

Hierarchy:

• Contractual
• Decision-making
  

Efficiencies:

a. Product flow

1. Transportation expense

2. Buffer inventories
3. Interface leakage

b. Assignment attributes

4. Station assignments
5. Leadership
6. Contracting

c. Incentive attributes

7. Work intensity
8. Equipment utilization
9. Local shock responsiveness
10. Local innovation
11. System responsiveness

Mode	# Efficiencies	Contracting	Contract Hierarchy	Decision-making Hierarchy
Putting out	5	Continuous	Medium	Medium
Federated	5	Continuous	Low	Low
Communal-emh	4	Limited periodic	Low	Low
Peer groups	8	Limited periodic	Low	High
Inside contracting	6	Continuous	High	Medium
Authority relation	9	Complete periodic	High	Very high

First, a note about the aggregation of efficiencies: As OEW notes himself, this is not a very rigorous means of comparing. He says, "Aggregation to obtain an overall efficiency rating for each mode requires that the relative importance of the eleven efficiency indicators be addressed. This will obviously vary across industries." Later, he calls this system "rough".

Obviously, there is no way to directly compare the net total economy of two modes if, for example, they have the same total score but one scores higher in transportation and another in incentive. The efficiencies are rated as either existing or not (a "bivariate" measure), and no attempt is made to calculate or assert the magnitude.

Second, there is little discussion of why this particular set of measures and no other is used. During the course of this review, I have introduced two that I thought could be relevant, especially as we note the growing dominance of the Toyota model and demise of the GM model of management. The two I have introduced were Quality Control and Worker Satisfaction. The GM model neglects both, while Toyota obtains much better economies in both areas. By this, I am not arguing that GM's quality is lower, but rather that the method by which they achieve quality is more expensive (less economical) than the method by which Toyota obtains it and that GM worker satisfaction is obtained by less economical methods than those used by Toyota. There may well be more measures of efficiency than those used by OEW than the two I have added, and some may well be more important.

Finally, I note that OEW does little analysis of the conditions in which these alternative modes are employed. The conditions of 18th century England, in which the Putting Out system was created, are different from those of 21st century United States. Yet Putting out saw its zenith in manufacturing then and there, while Putting out as a method of developing software may be still on the rise. As Kevin Carson is sure to point out, the rise of state capitalism has almost certainly corresponded with a rise in companies preferring Authority relation to more agorist modes, possibly to the detriment of all.

OEW's purpose was to demonstrate the technique, not to prove that one or another mode was superior and that his efficiency claims were definitive. The nature of the market system is that companies are always trying ideas in new combinations, so while the analysis of Authority relation may hold, in general, it is possible that someone will find a way to combine the effective parts of that mode with the effectiveness of others while suppressing the negative parts of both. For example, the Toyota style of subcontracting has much in common with both Putting out and Inside Contracting.

technorati tags: organization theory "Oliver E. Williamson" "Transaction Cost Economics" book review economics

Authority Relation

The last production mode listed by Williamson (OEW) in The Economic Institutions of Capitalism is "Authority Relation". It is what most of us have come to know as the "normal" work environment, with a boss directing workers (and perhaps that boss has a boss, and that boss has a boss, and so on up to the capo di tutti capo).

• It is classified by OEW as a "capitalist mode" (as opposed to entrepreneurial or collective)
• Not compatible with agoric modes almost by definition
  
• This form seems to have existed from the Renaissance forward, but apparently does not seem to have taken hold in large scale (manufacturing) organizations until the 18th or 19th century, after "putting out" and "inside contracting". Certainly, the M-corporation (multi divisional) did not come along until the 20th century, with GM as the archetype.
  
• OEW considers it to be a "periodic contracting" mode. However, he qualifies this: "Contracting under Authority Relation is apt to be somewhat more complete, in that explicit and implicit understandings regarding the zone of acceptance of the employment relation [...] need to be reached. Once agreement has been reached, however, this is an essentially noncontractual mode. Adaptations of an operating kind are made within the framework of that rather general contract, whereby boss and worker essentially agree to "tell and be told."
  
• In terms of contractual hierarchy, OEW classifies it at the top (very hierarchical), tied with Inside Contracting.
  
• In terms of decision-making hierarchy, this is the most hierarchical.
  

OEW finds this to be the most efficient method of organization with the analysis below.

Efficiencies:
a. Product flow
1. Transportation expense - Economic, everyone under the same roof.
2. Buffer inventories - Can be controlled economically. Fiat takes the place of pecuniary penalties to eliminate these.
3. Interface leakage - Workers making a salary have no incentive to "shade quality" as they would under Inside Contracting

b. Assignment attributes
4. Station assignments - Effective. In comparison to Inside Contracting especially, workers in this mode "are less given to aggressive subgoal pursuit and do not resist adaptations because they do not possess the requisite property rights."
5. Leadership - Effective.
6. Contracting - Effective.

c. Incentive attributes
7. Work intensity - Not efficient. The worker's compensation is not tied directly to his productivity. I'm not sure I agree: recent studies have shown that the people working the longest hours are professionals and white collar workers whose compensation is highest, and I don't know if he is considering workers making piece rate. I intend to say more about this some time in the future, but for now, please consider the work of Edward Lazear (via MarginalRevolution and Kathleen's informed comments at Fashion-Incubator).
8. Equipment utilization - Effective.
9. Local shock responsiveness - Effective.
10. Local innovation - OEW finds this mode to lack economy with respect to this attribute, but doesn't explain himself (or maybe I just can't find it). It seems to resonate with the finding for work intensity, but again I think that the rediscovery of Deming may work counter to this. The entire goal of (insert favorite descriptor here - kaizen, TQM, Quality Circles, TWI, Lean) is to encourage local innovation. To the extent that these management techniques are actually (not rhetorically) adopted, workers are also happier with their work.
11. System responsiveness - Effective. Workers may slack off under supervision, but the flip side is the ability to direct change effectively.

Although not covered in these areas of efficiency, Quality Control is again not explicitly addressed. Workers encouraged to work faster may cut corners, requiring oversite and inspection. That is a diseconomy. A culture where active participation exists will be more economical WRT quality control.

Also not covered explicitly is Worker Satisfaction, which I find surprising given the attention given to the subject of labor organization and unions later in the book. While this measure may be implicit in Work intensity and other incentive attributes, it isn't addressed directly. Admittedly, OEW and others might protest that Worker Satisfaction is no measure of efficiency, but I would beg the case that it is. Workers who find little job satisfaction may have to be placated with other concessions, including pay, perquisites, vacation, health care, and so on. Workers finding none of the above may leave, which could be detrimental if they take any significant investment in training with them, or seek alternative means of protest including strikes, slacking off, spreading hatred and discontent, and a host of aggressive and passive-aggressive behaviors that serve as disincentives to others.

Bottom line: Williamson finds Authority Relation to be not only very hierarchical, but also very efficient. It succeeds in 9 of the 11 areas of efficiency. This exceeds the Peer Group mode's 8 of 11 efficiency score by 1, so it is neither much more efficient nor much more hierarchical that that collective mode.

Next: a wrap-up.

Inside Contracting

I'm glad I'm finally getting to this mode of organization. This is the first production mode that Williamson (OEW) lists under "Capitalist modes" in The Economic Institutions of Capitalism. It also happens to have a rich history that may still be active. Inside contracting was the standard organization used by the New England armories throughout in the 18th and most of the 19th century. It carried on into sewing machine manufacture, reaper manufacture (McCormick), and possibly even bicycle manufacture, all of whom evolved from the armory manufacture. It was an integral part of The American System, as explained by Hounshell (
From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States).

• It is classified by OEW as an "capitalist mode" (as opposed to entrepreneurial or capitalist)
• It was extensively used in the early gunmaking industry, which in turn lies at the heart of mass production and modern manufacturing and quality control methods. David Hounshell writes, "the inside contract system had been used for many years throughout American manufacturing, particularly in New England. In some respects, inside contracting resembled the putting out system, but its particular characteristics were derived from the factory system. Although the Springfield Armory never adopted inside contracting [...], almost all the New England armsmakers employed it. When coupled with armory gauging systems and machine tool design, inside contracting became a distinguishing characteristic of the Yankee armory practice extensively employed in all types of metal fabrication in the second half of the nineteenth century." Pratt & Whitney were inside contractors at the Colt armory, and went on to become first machine tool makers and then engine makers.
  
• Because of the influence of the armory practice on the manufacture of sewing machines and reapers (among other things), inside contracting was used in other industries. Hounshell writes, "[Lebbeus B.] Miller [a man Singer hired to "'design and supervise the construction of special tools for the production of interchangeable parts' for Singer machines" but who eventually rose to become superintendent] helped introduce inside contracting, a system that characterized the New England armory approach to manufacture and would be used at Singer until the early 1880s."
  
• Volkswagen under Piech attempted to set up Inside Contracting with its Brazilian plant in Resende. At the time it was purported as revolutionary, but that would be true only in the sense of revolving, not revolting. When searching for more information on this, I frequently found it in conjunction with "Supplier Parks" and "modularization". I am not sure it is still in use, and have not completely vetted the literature enough that I am confident in placing a link here.
  
• There is a fine line between Vendor-managed supply used in JIT and Inside Contracting, as the use at Resende indicates. More on this below.
  
• OEW considered it to be a "continuous contracting" mode, and an intensive user of contracts at that.
  
• In terms of contractual hierarchy, OEW classifies it as very hierarchical
  
• In terms of decision-making hierarchy, as moderately hierarchical. There is a central contractor, but his authority is dissipated by the contracts.
  

Efficiencies:
a. Product flow
1. Transportation expense - Because everyone is under one roof, transportation is economized in this mode.
2. Buffer inventories - Because no contractor has any hold on any other, buffer inventories may arise.
3. Interface leakage - Because different contractors run different areas, leakage may occur and become a subject of dispute. Frequent disputes and their settlement is not economical.

b. Assignment attributes
4. Station assignments - This mode economizes on station assignments.
5. Leadership - This mode also economizes on leadership. Bad contractors are let go, and the Yankee mechanic did not gain a reputation for efficiency for nothing.
6. Contracting - Because the central contractor can serve as a consolidating agent for things such as maintenance contracts, this mode can achieve efficiencies in contracting.

c. Incentive attributes
7. Work intensity - Inside contracting was frequently preferred precisely because of the work intensity attributes.
8. Equipment utilization - The contractors used the central agent's equipment and was frequently abusive of it. OEW says that contractors were prone to stop spending time and money maintaining equipment toward the end of their contracting interval, postponing them until the new interval.
9. Local shock responsiveness - Inside contractors did not adapt to local shocks well. Although OEW does not explain this thoroughly, we might assume that they would take the opportunity of a shock to negotiate opportunistically.
10. Local innovation - Inside contractors were very adept at local innovations because they - having negotiated fixed price contracts - would reap all of the benefits.
11. System responsiveness - The inside contracting system would not adapt to system changes well.

Bottom line: Williamson finds Inside Contracting to be moderate-to-highly hierarchical, and moderately efficient. It succeeds in 6 of the 11 areas of efficiency, less than the Peer Group []'s 8.

Inside contracting seems very similar to the Just-In-Time model of vendor-managed inventory. That is apparently the idea behind the Resende plant. Interestingly, such ideas had been tried in the past by American automotive companies, ultimately leading to vertical integration.

Say you have a manufacturer of brakes. You do business with them but don't buy them partly because they achieve some economy of scale by selling to your competitors that you yourself could not achieve (because your competitors won't buy from you). Now you ask them to locate their plant under your roof or at least very near your plant. If your competitor is located much further away, the economy of scale may longer apply. If you are further having them tailor every aspect of their operation - design, timing, part numbering - with your own, you have further thwarted the economy of scale that led you to do business with them in the first place. Okay, but in the process you are achieving an economy derived from their special investments into your production schedule and component design. Any company could see that this would be the case before it happened, so surely they would seek a commitment from you. Now we're back into the start of OEW's analysis of those factors that lead to vertical integration. Why VW and its partners are going through with this is not quite clear to me.

[FOLLOW-UP] Aw, geez, I totally forgot to discuss a section of Economic Institutions in which OEW relates an article about Inside Contracting in the steel industry. The article, (Stone, K., "The origins of job structures in the steel industry," Review of Radical Political Economics, 6 (Summer): 61-97) explains how the steel industry used inside contracting through the late 19th century. The system was dominated by the Amalgamated Association of Iron, Steel, and Tin workers, who enforced a system that "suppressed innovation" by (among others)

• restricting output per worker
• fixing the proportion of scrap used in a furnace
• forbidding use of brick and fire clay by puddlers
• prohibiting skilled workers from teaching other workers
• requiring approval by the union's executive committee to fill vacancies and to make changes in the physical plant

After Frick and Carnegie challenged the union in the Homestead mill in 1892 (a violent incident, to be sure), the union declined and the steel industry took off. The lesson is that this particular union arrangement was not efficient (as opposed to others, see my review of OEW's chapter on unions). In part, this inefficiency looks like a tragedy of the anti-commons.

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"Oliver E. Williamson"
"Transaction Cost Economics"
book review

Peer Groups

The fourth of the organizational modes in Oliver Williamson's Economic The Economic Institutions of Capitalism are Peer Groups. A Peer Group factory is communally owned, but rather than being paid for their own products which they make from start to finish under Communal-emh, each worker is compensated equally based on the factory output. Workers may rotate stations as desired. Rather than devolving into negotiation over every detail, the workers elect leaders to make tactical, operational decisions, while strategic decisions are still made collectively (consensus or majority rule). The leader elections should rotate to avoid any hierarchy.

They have the following features:

• The second of the two Collective Ownership modes (as opposed to Entrepreneurial and Capitalist modes)
• I'm not familiar with lots of examples of actual attempts to organize along these lines, though there may be some. Owens Societies followed something like this, but were relatively unsuccessful. Workers attempting to establish communes in early revolutionary Russia quickly found their movement co-opted by the authoritarian Leninists who imposed authority from above while retaining the appearance and rhetoric of collective ownership. Lenin himself was a Taylor enthusiast, an ironic twist of history.
  
• OEW considered it to be a "Periodic contracting" mode, but one in which contracting was relatively unimportant because democratic decision-making would direct adjustments between work stations and workers.
  
• In terms of contractual hierarchy, OEW classifies it at the lower end of the spectrum. Other than a need to decide how new members could join the group and how unwanted members would be ejected, there is little need for contractual relations.
  
• In terms of decision-making hierarchy, the Peer Group rates near the top. An elected leader makes the decisions which everyone must abide by for the system to work. It is not the most hierarchical, however, because the workers do have the option of electing someone new. They can't continually do that, however, or it will devolve into a system where only popular decisions are made.
  

In Williamson's efficiency analysis, this mode does rather well.

Efficiencies:
a. Product flow
1. Transportation expense - Everything is under one roof, relatively economical
2. Buffer inventories - The system is flexible enough that it is unnecessary to keep buffer inventories in theory
3. Interface leakage - Since workers are sharing the outcome, there is incentive to monitor, report, and control leakage in theory

b. Assignment attributes
4. Station assignments- Since decisions and leadership selections are made democratically, it is possible for manipulators, demagogues, and self-promoters to get what they want even if this is not the most efficient outcome. There is opportunity for log-rolling: you vote me to be the QA inspector and I will vote you to be the buyer. Neither of us is very good at our job, but we can get at least 2 votes that way.
5. Leadership - The comments above about voting, log-rolling, rotation, and popularity all hold for leadership selection efficiency.
6. Contracting - As mentioned above, there is little need for contracting, so this is an efficient organization for that characteristic

c. Incentive attributes
7. Work intensity- Since pay is by average productivity and not marginal productivity, there is little incentive to work harder. Another Tragedy of the Commons: my hard work will benefit my neighbor as much as me, but I will enjoy all of my own laxity. Slacking will be overproduced.
8. Equipment utilization- Workers will note the abuse of equipment and seek to minimize it because everyone suffers equally. Does this seem to contradict the previous point? I think not, since it is easier to prove that your neighbor is letting his equipment deteriorate than to prove he is not working as hard as he possibly can.
9. Local shock responsiveness- All workers share in the outcome equally, so when one station or worker is broken down, it is in their interest to solve the problem.
10. Local innovation- Again, everyone stands to benefit from innovations made, so workers will enthusiastically accept new ideas. Or will they? Some people will resist change for the sake of resisting it, and if they are good at arguing their point, they will prevail in a democratic organization. However, this works in the opposite direction, also.
11. System responsiveness- The group makes tactical decisions through an elected agent, so it should respond well to immediate problems, and it makes strategic decisions through consensus, so it should respond well to longer term problems, but it will not respond quickly. Japanese corporations are largely run this way, and they seem to adapt quite well.

Again, Quality Control is not explicitly addressed. It seems that this mode would be economical with respect to such practices as continuous improvement and team production which rely on consensus.

Bottom line: Williamson finds the Peer Group to be of mixed hierarchy (low in contractual, high in decision-making), and very efficient (scoring positive on 8 of 9 tests). In some ways, Deming management principles emphasize consensus-based decision-making, so many of the operations would be similar to what is already seen in Japanese and Lean manufacturing environments. However, there is still a concern that "the management" would become highly politicized and unwilling to face or confront hard problems.

organization theory "Oliver E. Williamson" "Transaction Cost Economics" book review "lean manufacturing" "lean production"

Communal-emh

Communal-emh -- where "emh" stands for "every man for himself" -- is the first of Oliver Williamson's modes of organization that comes under the category of "collective ownership". In this system, all of the stations in a factory are owned collectively, but laborers move their raw and intermediate materials from station to station themselves, then sell the finished products on the open market. This another cooperative system (the Federated being the other covered so far). OEW seems to include this as an intermediate step between the craft production (black-smithing, where one man built everything by himself in a simple process) and the next step in communal organization, Peer Groups.

• It is classified by OEW as an "collective ownership mode" (as opposed to entrepreneurial or capitalist)
• Compatible with agoric modes, in my opinion
  
• Although there isn't much contracting involved, OEW puts it under "periodic contracting" to handle situations that might arise from temporary disability of workers (where intermediate products might otherwise stand idle)
  
• In terms of contractual hierarchy, OEW classifies it as being low. There is no central agent, and workers own their intermediate products.
  
• In terms of decision-making hierarchy, again with no boss, it is also at the lowest end of the scale
  

So, life the Federated system, Communal-emh is not very hierarchical. Of the six organizational modes, Communal-emh is the least efficient.

Efficiencies:
a. Product flow
1. Transportation expense - Having everyone under the same roof means that transportation costs are economized.
2. Buffer inventories - Since you may go much faster than other workers, and therefore have to spend downtime waiting, it will be worthwhile to process in batches. This would be a waste compared to a system that moves material through in a constant flow.
3. Interface leakage - The fact that you are carrying your own raw and intermediate products means you have an incentive to economize on leakage.

b. Assignment attributes
4. Station assignments - All people are not going to be equally good at all jobs, so this method does poorly at economizing on station assignments.
5. Leadership - With regard to leadership, Williamson rates Communal-emh as economizing, but no explanation is offered.
6. Contracting - Communal-emh is rated poorly for contracting for reasons given previously.

c. Incentive attributes
7. Work intensity - This mode will economize on work intensity because it is, after all, emh -- every man for himself.
8. Equipment utilization - This mode will economize poorly on equipment utilization. The equipment is owned in common and used by everyone, so care of the equipment becomes a classic Tragedy of the Commons problem.
9. Local shock responsiveness - Should a worker fall ill or fail to come to work, that doesn't stop everyone else, but it does substantively halt that worker's output.
10. Local innovation - OEW rates this mode low for local innovation with no explanation. If you want to change a process (improve a machine, build new dies, invest in new equipment), you have to obtain consensus of everyone. As most people will realize, people have different responses to change, so this would be cumbersome.
11. System responsiveness - This is effectively a macro view of local innovation. If the market changes, and requires a systemic change to adapt to new conditions, the requirement of consensus is multiplied many times. Thus, the Communal-emh system is far more difficult to change on a large scale than other modes.

Bottom line: minimally hierarchical, but the lowest efficiency score.

BTW, yes, some of these seem like rent posts, but my choice was either to detail and summarize all at once, or to detail one at a time and then summarize. I'm getting there, but slowly.

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Federated

The second of Oliver Williamson's (OEW) organization methods from The Economic Institutions of Capitalism (described in this post) is another "entrepreneurial" mode he calls "Federated". He describes it thus:

Stations are located side by side in a common facility. Intermediate product is transferred across stages according to contract. So as to avoid the need for supervision orcontinuous coordination, buffer inventories are introduced at each station. Subject to the condition that buffer inventories do not fall below prescribed levels, in which event penalties are assessed, each worker proceeds at his own pace.

He goes on to say that it is "uncertain and perhaps doubtful" that this mode was ever widely used. He cites Pat Hudson ("Proto-industrialization: The case of the West Riding World Textile Industry in the 18th and early 19th centuries," History Workshop, 12 (Autumn, 1981)) as saying that "the majority of early woolen mills were occupied and run [...] by small manufacturers ... rather than by wealthy mercantile concerns," but that it is not clear whether they traded between stations. But if the mode didn't exist, why bring it up at all? OEW explains that it is useful as a hypothetical, and especially as one in which worker autonomy is preserved.

So what are the salient features of the federated system?

• It is classified by OEW as an "entrepreneurial mode" (again, as opposed to collective or capitalist)
• Compatible with agoric modes, again in my opinion
  
• OEW considered it to be a "continuous contracting" mode
  
• In terms of contractual hierarchy, OEW classifies it as being low. Workers own their own equipment, and there is no central agent
• In terms of decision-making hierarchy, with no boss, it is also at the lowest end of the scale
  

So it's not very hierarchical, but how does it stack up efficiency-wise? Poorly, as it turns out.

Efficiencies:
a. Product flow
1. Transportation expense - Having everyone under the same roof means that transportation costs are economized, an improvement on Putting out.
2. Buffer inventories - The fact that everyone is dependent on upstream contractors puts you at their mercy. If you happen to be downstream of a poor operator, so much the worse for you, and even contractual countermeasures aren't going to help very much. Buffer inventories are anathema to flow production.
3. Interface leakage - This also receives low marks (recall that this means loss of material from one station to the next).

b. Assignment attributes
4. Station assignments - Same as Putting out (good).
5. Leadership - In this category, the federated system loses marks. There is no central figure to point out when prices are too high, manufacturing processes are taking too long, or whether the group is in fact making the right product.
6. Contracting - Same as Putting out in OEW's opinion, but I suspect the same moderating tendencies as before. That is, the use of modern predictive maintenance practices make this less important, but the comparative cost of contracting between this and systems which economize on contracting will tip in their favor.

c. Incentive attributes
7. Work intensity - Same as Putting out.
8. Equipment utilization - Same as Putting out.
9. Local shock responsiveness - Same as Putting out, or perhaps worse. At least with the central agent doing the subcontracting in putting out, someone might recognize the problems and redirect work to another subcontractor.
10. Local innovation - Same as Putting Out.
11. System responsiveness - Same as Putting out.

Bottom line: minimally hierarchical, but the same 5 out of 11 on efficiency. This is one of the three modes of organization that could be roughly described as "cooperative".

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Putting out

Continuing from Flow:

The first production mode listed by Williamson (OEW) in The Economic Institutions of Capitalism is "putting out".

• It is classified by OEW as an "entrepreneurial mode" (as opposed to collective or capitalist)
• Compatible with agoric modes in my opinion
• Usage in early gunmaking industry - David Hounshell writes, "[In 1854, t]he British obtained their military small arms through a system of contracting with private manufacturers located principally in the Birmingham and London areas.... Although significant variation occurred, almost all of the contractors manufactured parts or fitted them through a highly decentralized, putting-out process using small workshops and highly skilled labor. In small arms making as in lock production, the 'workshop system' rather than the 'factory system' was the rule." (Hounshell 1984, p.17)
  
• OEW considered it to be a "continuous contracting" mode
• In terms of contractual hierarchy, OEW classifies it in the middle of the pack. Workers own their own equipment, but there is a central agentIn terms of decision-making hierarchy, with no boss except the central agent, it is also in the middle of the pack
  

This mode is what is usually referenced in works like Malone's The Future of Work, though not by this name, as the work organization of the future. Crowdsourcing is the completion of projects such as wikipedia and linux that are "put out" to many different contributors. Linux particularly is relevant to this since Linus Torvalds was the central agent in the early days. I also think that putting out is essentially the same as outsourcing, so this has more relevance to modern manufacturing methods than I think Williamson's 1985 treatment would have indicated.

With respect to Williamson's efficiency analysis, however, it doesn't do well.

Efficiencies:
a. Product flow
1. Transportation expense - not good. Intermediate pieces have to be transported between either the put-outees and the central agent, or sequentially between each other. As Malone points out, the decreasing costs of communication brought by e-mail and the internet have rendered transportation costs trivial for purely intellectual pursuits such as writing. Indeed, I am writing this with Writely, which is expressly designed for collaborative writing. The Economist recently highlighted a directly relevant and concrete proof of this point, which Greg Mankiw commented on: Adobe's PDF has made bicycle messengering an endangered species. The expense of outsourcing to Asia suffers primarily from this inefficiency, but not so much as to overcome other efficiencies. One such possibility is economy of scale, since Asian (especially Chinese) factories can produce for domestic consumption as well as North American and European consumption.

2. Buffer inventories - the frequent travel and dependencies of one process on another requires buffering and batching, and so makes the traditional putting out system very ineffective in terms of economizing on buffer inventories. That is a major difference between traditional putting out and supplier-managed inventory subcontracting as used by Toyota and others.

3. Interface leakage - The opportunity to blame material usage inefficiency on the preceding or following processor and to embezzle or lose material at the interfaces between processes. Consider what this means for outsourcing: if products are merely coming to the factory, the outside source will manage the materials much better than if sub assemblies were going from the factory out, or between outside sources. I understand this is the case for some subassemblies in automobiles, where for example parts will go from one subcontractor to another for integration into a harness, and then to another for integration into the vehicle. How are such discrepancies handled? Such leakage was reportedly bad in the textile industries in the 18th and 19th centuries; I'm not sure how bad it is in textile manufacturing outsourced to Asia and Latin America.

b. Assignment attributes
4. Station assignments - Putting out economizes well with station assignments. If someone is unable to do the work, he is not picked up in the next contract or cannot make a profit and takes himself out. That was especially true in the system as practiced in the 18th and 19th centuries, where work was put out to family-based contractors. That's not so clear when outsourcing to modern contractors.

5. Leadership - Putting out economizes well on leadership for the same reasons.

6. Contracting - Putting out does not lend itself to other contracting arrangements in Williamson's analysis. I think it may be a mixed bag when comparing to modern subcontracting. Williamson uses the example of contracting with maintenance specialists. TPM suggests that the operators learn to do the maintenance, but does allow for specialists to help with the harder maintenance. One could also expect that contract costs would reflect whomever was better at maintaining the machines. However, while the requirement for maintenance might be a very minor cost, contracting may make a difference when you are looking at marginal advantages between one mode and another.

c. Incentive attributes
7. Work intensity - Putting out is highly correlated to work intensity. For a one-person operation, the outside source is essentially making piece rate. For a multiple person operation as was typical in the 18th century when people took home work in which the whole family participated, it was easy to see who was shirking and to shame them into keeping up.

8. Equipment utilization - Since the outside contractors own their own equipment, they are likely to economize on equipment utilization and not abuse it.

9. Local shock responsiveness - The outside source was not economical with respect to such local shocks as illness, injury, or machine breakdown. Such shocks comparatively favored those operations where everything was together under one roof and workers had incentives to back each other up (or at least did not have disincentives to doing so). Look at what happened to Ericsson ($) when a semiconductor fire destroyed the production capacity at a subcontractor in New Mexico: they ended up leaving the handset business.

10. Local innovation - As with equipment utilization, putting out benefited from those contractors who were able to both innovate and to keep their innovations to themselves because they were not working under a roof with everyone else. Local innovation is a requirement in order to be a subcontractor to Toyota.

11. System responsiveness - This efficiency is not well defined, but basically describes how well the system economized in response to outside shocks or changes in the marketplace. Although Williamson scores this one low, it is not clear why. Putting out was common when laborers were skilled craftsman and every product was unique. Thus, mass customization was the norm, not a new marketing strategy. It could be argued that putting out was obviously unresponsive to system shocks because it eventually gave way to new methods of organization, but given that outsourcing is commonplace and my assertion that outsourcing is the new putting out, that isn't true either. It could be that Williamson scores it as not being responsive because in comparison to other modes the "system" of putting out couldn't turn on a dime. Toyota's experience with the 1997 Aisin fire indicates the opposite, however. As described in Jeffrey Liker's The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer, Toyota has such a strong relationship with its suppliers that they recovered within 24 hours of the fire. Compare that with Ericsson's failure!

Although not covered in these areas of efficiency, Quality Control is not explicitly addressed. In might be implicit in local innovation, but they might be more inclined to innovate with respect to labor cost reduction than in making sure that components and subassemblies built by other putting out contractors fit together. In fact, that may be part of the problem with system responsiveness: given that one subassembly manufacturer might understand how to innovate and economize on the whole by changing his subassembly, but that would require an interface change and a diseconomy by another subcontractor, how do the three parties (central agent and the two subcontractors) divide the savings? There is a cost savings or quality improvement that can be passed on to the customer at either a gain in per-unit profits or market share, so everyone stands to benefit, but the complexity of the contractual arrangement needed to realize that gain may be so difficult that it isn't made and nobody gains. This is a market failure for which I know of no formal name, but for which the Second Best solution is to change organizational structure. It arises from the fact that it is difficult to say from which subcontractor the improvement comes: he who thought of it and stands to profit from his contract arrangement, or he who has to implement it and stands to lose from his contract arrangement.

Bottom line: Williamson finds putting out to be only moderately hierarchical, but not very efficient. It succeeds in only 5 of the 11 areas of efficiency. However, if subcontracting is the same as putting out, one must wonder what Japanese companies are doing since they are apparently using more subcontracting now than in the 1980s (damned if I can remember where I saw that statistic, and note that it was "Japanese companies", not Toyota). My guess is that the TWI methods now known as kaizen and the JIT methods have shifted how putting-out works sufficiently to overcome the inefficiencies noted by OEW.

Flow

In Lean Thinking, the authors reference a book by Mihalyi Csikzentmihalyi called Flow: The Psychology of Optimal Experience. I came across it again in a series of comments and posts on Catallarchy, so I finally broke down and bought it.

I heartily endorse the book. [Update: I confess to having been overexuberant about it. I think it was a case of extreme confirmation bias. In retrospect, it was neither a great read nor breathtakingly original. As I recall, the first third was really slow and promised more than the last 2/3 delivered.] The author (whose name I remember by pontificating that what this nation needs is a good "Six Cent Tamale") has conducted research at the University of Chicago for decades, primarily by giving people beepers that go off at random intervals, at which times they answer a series of questions about what they are currently doing and what their mood is (gross oversimplification, but that's what you get from reading psychology on a blog kept by an engineer). His conclusion based on this and other data is that people are happiest when they are involved in something that is so challenging as to require their undivided attention, but not so challenging as to be impossible to complete. In other words, people should have goals that are attainable, but only just attainable. In practice, that means that many people are just as likely to be enjoying themselves at work as they are outside of work; in many cases more so. Outside of work, many people are unable to find something that keeps them challenged. Our leisure activities are too dominated by television and other unchallenging diversions and his research showed that people were not as happy doing those things as they thought they might be (You can regularly see "happiness research" debated on econlog, The Fly Bottle, and agoraphilia).

In my last post on the new workplace, I surveyed three books that discuss the changing organizational structural (The 5th Discipline, The Future of Work, and Markets in the Firm), but didn't get around to pointing out what I would like work to be like. It seems to me that purging the workplace of Taylorism is essential to balancing the seemingly conflicting goals of making work for workers enjoyable yet productive for their employers and/or customers. Taylorism can best be expressed in the statement, "Managers think, workers do," a clear formula for thwarting the "flow experience" described by Csikzentmihalyi as essential to happiness. Both W. Edwards Deming and the more recent Lean or Toyota production literature emphasize the need to banish the 8th waste, that of neglecting the creativity of workers, in order to improve quality, reduce costs, and increase profits. In Markets in the Firm, Cowen and Parker bring forth the quote that scared much of America in the 1980's, Kanosuke Matsushita's famous claim that "Yes, we will win and you will lose. For you are not able to rid your minds of the obsolete Taylorism that we never had." It appears then that the answer to improving the job for both workers and management is to challenge workers with puzzles that they can solve. The means by which this is done is the self-directed continuous improvement team concept (call it what you will - Quality Circles, TQM, whatever - as long as you do it).

Fighting Taylorism is frequently cited as one purpose for unions. However, union positions on both Taylorism and self-directed teams have been mixed. UAW chief Walter Reuther bought into Taylorism and sought only to maximize their bargaining position on economic considerations rather than on the work experience. But they aren't embracing the new paradigm, either: Stephen Bainbridge (popularly known as Professor Bainbridge) has pointed out that workers tend to favor hierarchy over self-directed production contracts. In this article, he says,

As John Witte contended in his important case study of self-directed work teams, "there is little reason to suspect that most workers would either endorse participation or become actively involved if the opportunity arose." To the contrary, Witte posits that workers generally accept hierarchical authority and perceive obedience to authority as an integral part of their job: "for the majority, disobedience is unthinkable."

Witte's pessimistic prediction is confirmed by a wealth of data. Only about half of the participants in Witte's own case study were willing to change jobs in order to get more participation and that rate declined rapidly if doing so would require longer hours or lower pay. A study of transportation firms found that long-term use of employee involvement initiatives increased stress and decreased employee fulfillment. [Anderson (1996).] A study of "empowered" employees versus a control group of unempowered employees within a single insurance company found no statistical difference between the two groups on such productivity-related issues as motivation or even on some job satisfaction measurements. [Thorlakson & Murray (1996).]

And at the website of the United Electrical, Radio and Machine Workers of America (UE), where they claim that "Most of these programs [kaizen, QC, and Just in Time] have evolved from the work of Frederick Winslow Taylor, who is credited with developing 'scientific management,'" they dedicate two pages (starting here) to throwing FUD at such management "schemes", among which there are two types:

One type strives to get the workers, with or without the union, to act in groups to help management improve productivity. These are sort of brainwashing sessions. They strive to get workers to think like a boss and to come up with ideas on how to cut other workers, speed-up production and ways to do more work. Quality Circles, Team Concept, and Kaizan [sic] fit into this category. These schemes often try to undermine the union by setting up non-union committees that will "make decisions for the workers."

A second employer scheme is usually tied to changes in how production or the work being done is organized. This could be cell manufacturing, Just in Time, Direct Flow Technology, pay for knowledge etc. These changes can have a direct effect on parts of the contract. Seniority, layoff and recall procedures, pay grades, and transfers may all be affected. This also gives the union some power, because in most cases the employer cannot make changes to the contract without the union membership's approval. [all emphasis in the original]

In other words, it appears that the ongoing demise of the Sloan/Taylorist management method in favor of the Toyota system, which achieves flow in both the production process and in each workers' experience, is coinciding with the demise of the unions in spite of them, not because of them. (Still, I caution readers to consider the reasons cited in the Bainbridge article: some worker resistance to self-direction may be understandable).

Since completing Flow, I started reading From the American System to Mass Production, 1800-1932 : The Development of Manufacturing Technology in the United States by David Hounshell, which I first saw referenced in the other Womack, et al book, The Machine that Changed the World. I was immediately struck by how Ford employees referred to their processes as "flow".

William Klann, a Ford deputy who was deeply involved in the innovation [the assembly line], agreed but noted that an equally important source of inspiration was flour milling technology as practiced in Minnesota. Klann summarized this technology in the expression "flow production."

So far, I find this book to be full of surprises, having already exploded the myth that Eli Whitney developed the first musket with interchangeable parts, and having revealed that the idea came from a French general through both Jefferson and a lieutenant of Lafayette who also happened to propose the idea for West Point.

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Are hierarchy and team production the only two possibilities for organizing labor? What about the old methods of putting-out and inside contracting? What about communally owned facilities?

Oliver Williamson attempts to address those questions in The Economic Institutions of Capitalism. Though the analysis is ultimately unsatisfying, for reasons explained by Williamson himself (and to which I will return in a later post), it is an interesting start and at least as interesting as the other books surveyed in my last post (but substantially more difficult reading). Williamson analyzes 6 different schemes on 11 different criteria (listed below in his notation style) and determines that hierarchy is the best system in terms of efficiency. In my next few posts, I propose to relate this analysis with comment.

Production modes:

• Putting-out
• Federated
• Communal-emh (every man for himself)
• Peer groups
• Inside contracting
• Authority relation (hierarchy)
  

Efficiencies:

a. Product flow

1. Transportation expense
2. Buffer inventories
3. Interface leakage

b. Assignment attributes

4. Station assignments
5. Leadership
6. Contracting

c. Incentive attributes

7. Work intensity
8. Equipment utilization
9. Local shock responsiveness
10. Local innovation
11. System responsiveness

The New Workplace

I just finished reading Thomas Malone's The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style and Your Life (2004) on the basis of this review at the Austrian Economists blog, and because I've been searching for answers to questions that Malone purports to answer. The same review references a paper written by Tyler Cowen and David Parker called Markets in the Firm: a Market-Process Approach to Management (1997), which I read today. Of the two, Markets in the Firm was a much better value, but it still didn't answer my questions.

Malone is a professor at MIT, the same place Womack, Jones, and the Lean Manufacturing cheerleaders call home. It is also the home of Peter Senge, whose 5th Discipline (1990) was a disappointment. The 5 disciplines referenced are:

1. Building Shared Vision
2. Mental models
3. Team Learning
4. Personal Mastery
5. Systems Thinking

If he had simply done a better job with the systems thinking and then referred readers to Stephen Covey's The 7 Habits of Highly Effective People (also written in the same year), I would have been more satisfied. Systems Thinking is old school to anyone with an undergraduate degree in engineering (especially electrical), but Senge tries to give the impression that this is something really new and radical. It could be, but his explanations and simplistic diagrams leave much to be desired. I think a great deal of the emphasis on systems thinking comes from MIT's past success with this theory: MIT researchers made a lot of press with their application of Systems Thinking in Limits to Growth and Senge quotes LtG co-author Donella Meadows extensively.

The rest of the book left me flat. I felt that Covey does a better job of describing how to build a vision and how to achieve personal mastery. Developing mental models and performing team learning mostly involve getting your assumptions out on the table and then building extensive computer programs around your processes. Both of those require skilled facilitators and model builders - since most of us don't have access to Senge and his associates for free, I think it's safe to assume that we can't access the methods described in the book.

Malone, on the other hand, stretches what should have been a 20 page magazine article in HBR into a 175 page book. Yes, the cost of communication is getting cheaper. Yes, you will be able to communicate laterally. Yes, that means that knowledge workers will be able to work in quasi-craft production groups. According to David Friedman (via Roderick Long and the Multualist Blog, there is a word for it: agoric. But after telling us that it is happening, and giving a few examples, the advice was rather sparse. As a manager, if you have the right type of firm (not clearly specified), you will have to give up command and control and instead use cultivation and coordination. What will you cultivate? Good practices. What will you coordinate? Profitable activity.

Malone specifically talks about using outsourcing so that the firm will simply be a center about which creative, productive, and profitable activity will take place. He uses Wikipedia and linux as examples, but ... Wikipedia is not done for profit, and linux has only been profitable for people who were in early. At some point, if you are in the business of selling things, someone actually has to make them. And if they want to get paid for it, they can't give them away for free.

The Cowen and Parker article was the most satisfying of the three. For one thing, it summarizes recent economic theorizing about the nature of the firm in a short section. This includes Transaction Cost Analysis, or New Institutional Economics, of which Oliver Williamson's work is the best known. For people interested in it but who don't want to tackle The Economic Institutions of Capitalism, this is the way to go. They trace the changes in industrial organization from craft production through the Industrial Revolution, Taylorism, and into the modern age. They declare Taylorism to be dead, killed by the intense competition brought by globalism.

The goal of their paper is to introduce the idea that firms are similar to states, Taylorism is analogous to central planning, and modern organizations are starting to look more like a market economy. This was obviously appealing to me in light of this post I wrote several months ago. I wrote that Lean production was Hayekian in that it allows people to share information and organizations to learn more quickly. In additioin to emphasizing that principle, Cowen and Parker write that firms should try to be more market like by design by using market-like incentives and clarifying property rights and responsibilities within the firm. They use Koch Industries as an example; Koch actually trademarked the phrase Market-Based Management (R). As the book he co-authored with Norm Bodek seemed especially concerned with the comparative accounting practices of GM (and especially Donaldson Brown) and Toyota, Bill Waddell should be especially interested in one of their closing comments:

This paper has considered some general principles which are a guide to how market economics can aid management. Future research needs to focus on the internal and institutional impediments to the use of these principles. One particular area that needs exploring is current accounting practices. The development of 'activity-based accounting' appears to be a step in the right direction by allocating joint costs or overheads more effectively so as to identify the true costs of production in various parts of the firm. [emphasis added]

Still, I am dissatisfied with the general sharing of information between management science books like 5th Discipline and The Future of Work and economic theory. Cowen and Parker mention W. Edwards Deming, but don't elaborate. Markets in the Firm was written in 1997, so they would have had access to many of the Lean canon (they cite The Machine that Changed the World in the bibliography), but don't explore much of it. If an article mapping Lean methods to transaction cost economies hasn't been written, it needs to be.

The purpose and benefit of unions

I have moved from being a non-exempt employee in a union shop to an exempt employee who works with unionized employees. Over that time, my thinking about unions has shifted to -- believe it or not -- one that is more friendly toward unions. More recently, I made my way through Oliver Williamson's The Economic Institutions of Capitalism, where I got an even wider perspective. Williamson discusses three facets of unions (Monopoly, Efficiency, Voice), among which efficiency (agency and governance) is the one which coalesced some recent thoughts I have had on the subject. I cover here four of those areas:

• Monopoly: The union restricts the availability of labor by keeping the company from going out to find competitive providers of labor. The resulting artificial scarcity is used to increase the price of labor. Also called rent-seeking.
  
• Power: The union provides additional bargaining power to the individual, balancing the unfair advantage held by the firm. This is the unions' rhetorical perspective, and one that Mark Graban seems to have bought into in this post considering his choice of one-sided support for the position. Bill Waddell's explanation of the situation in China is much more interesting and congruent with my own views on sweatshops.
• Governance: The union agreement is used to protect both the company and the individual, both of whom invest in specific assets. The company trains workers in its unique processes and neither desires early quits nor excessively harsh or arbitrary discipline by maverick supervisors, while the workers want protection from expropriation. CBA is a constitutional arrangement for a system where management and workers figure out the details for themselves. This is clearly the focus of Williamson's analysis.
• Agency: The union is a convenient way of aggregating opinion, developing consensus, and communicating with management more effectively. This is a transaction cost reduction.

One question raised in EIC was why Collective Bargaining Agreements (CBAs) are subject to frequent renegotiation.

1. One reason is the National Labor Relations Act (NLRA or Wagner), which allows decertification in only two circumstances: the first is if a contract is not in place, the second if a contract has gone on for more than three years. During decertification, a competing union could organize the workers, so it is in the interest of the existing union (though not necessarily the workers) to make contracts that last no more than three years.
2. Another possibility is that the parties are not privy to complete information about the future, consistent with Williamson's governance model. I agree with this, also, since most of the adjustments to our contracts serve to clarify language that resulted in a disagreement in the previous contract.
3. The truth probably includes those reasons and more. We might expect to see longer term contracts in stable industries (railroads), and shorter contracts in volatile industries (airlines) with built-in COLA adjustments.

In spite of these rather positive views, though, the unions themselves continue to push "us against them", class war mentality. The idea of union as a necessary evil to stand against corporate abuse is probably not valid today. To believe it, you have to believe that the government is the worst employer there is today since that is where unionization is concentrated and increasing. You also have to believe that management thinks they will get more out of miserable employees everywhere and always, and that no good innovations take place in the absence of government and unions. You only have to know about people like Robert Owen, Henry Ford, Eiji Toyoda, and J. J. Hill to know that's not true. In fact, in this story [hattip: CafeHayek] in the NYT about minimum wage activism, author Jon Gertner point out that the business owners "were not unsympathetic":

[T]he restaurateurs who took the stand, like Rob Day or Elizabeth Draiscol, who runs the popular Zia Diner in town, opened their books to show that their margins were thin, their costs high, their payrolls large. They cared about their employees (providing health care and benefits), trained unskilled workers who spoke little or no English, gave regular raises and paid starting salaries well above $5.15. They had built up their businesses through an extraordinary amount of hard work. Draiscol testified that her restaurant, for instance, had $2.17 million in annual revenue in the fiscal year of 2003. Though her assets were substantial - a restaurant can be valued at anywhere from 30 to 70 percent of its annual revenues, and Draiscol said that Zia had been appraised at 66 percent of revenues, or about $1.4 million - she earned a salary of $49,000 a year. [emphasis added - $49,000 a year is about $23/hour for a 40 hour/week job, or about $12/hour for the average small business operator. It does not account for capital appreciation of the business, though.]

Williamson also makes a strong case for his governance theory by looking at the order of unionization. In his efficiency explanation, unions serve to protect both the employees and employers in a bilateral relationship where each has a vested interest in maintaining firm-specific skills. He observes that the first successful unions were in those industries where workers developed specific skills, like railroads. Unionization occurred much more slowly in areas where workers have no specific skills (agriculture) where they can (relatively) easily find new employers and employers can easily find replacements. He points out that industrial unions have been successful only in post-Wagner environment, but that class-based unions would require much greater legislative interference to survive.

One last point that undermines the unions' class warfare, "us versus them", power-based mentality is that they frequently act in their own interest rather than that of the workers and thus reveal their true beliefs. Their anti-sweatshop activism is usually a cover for their anti-free trade, pro-minimum wage rent-seeking which works for unionized workers, but is somewhere between neutral and negative for the poor and working classes generally. Consider the recent evidence:

• Unions outsource strikers against Wal-Mart. In spite of all the outsourcing rhetoric, they seem to have found that it sometimes makes sense.

• ACORN (a non-union, living wage activism group) is opposed to unionization and minimum wage laws. Although ACORN is not a union, and is in fact anti-union within their own organization, I think this goes to show the wedge that arises between activists' stated goals and their actions when actually involved in bargaining. In their own arguments in California state court, minimum wages would adversely impact them. As summarized in the court's finding,"According to ACORN, this adverse impact will be manifested in two ways: first, ACORN will be forced to hire fewer workers; second, its workers, if paid the minimum wage, will be less empathetic with ACORN's low and moderate income constituency and will therefore be less effective advocates."

What union would ever admit to wanting lower wages to reinforce class solidarity among its workers? Not one that would likely get certified.

• Garment workers unions run sweatshops: "According to a 1999 report, the vast majority of garment shops in San Francisco, despite being mostly non-unionized, still manage to pay the city minimum of $8.15 an hour and comply with labor laws, while in New York unionized workers were making under $5.15 an hour and repeatedly subject to wage and hour violations." Yikes. This may be a case where the union locals have opportunistically used the union's reputation to exploit labor, and illustrates one reason why the national union needs to check up on the locals the same way McDonalds or any franchise needs to carefully craft franchise agreements.
  

• The 1997 UPS strike did not benefit employees as much as was claimed in the press at the time, and was probably only brought about in an effort by Teamster President Ron Carey to save himself from a widening scandal. At the time, based on the median wages that were published in the press and on their website, strike pay, and the wages lost while on strike, I calculated an 8 year payback based on 0 inflation, longer for all positive inflations. A major issue was the conversion of part-time to full-time jobs (the union wanted 10,000 jobs converted). Many part timers already had benefits, and UPS had a track record of converting part time positions to full time positions (13,000 over the 3 years prior to the settlement), so this was illusory. During the strike, UPS lost market share to FedEx and others (see note 5), slowing growth, and probably decreasing the number of full time and part time positions relative to what might have been. UPS actually offered a better retirement package before the strike, and withdrew it afterwards, but the Teamsters headquarters decided to strike without allowing the membership to vote on the package. The entire affair resulted from Teamster President Ron Carey's attempt to divert attention from an election scandal in which they were found to be illegally money-swapping with the 1996 Clinton-Gore campaign. The charges were initiated not by rabid Republicans, but by James Hoffa, who had lost the Teamster election, and confirmed by the election judges.

I am not cynical about unions per se. I believe that unions and management can work well together when the management is serious about their commitment to the customer, and when the union sees and shares their sincerity. After reading Oliver Willamson's treatment, I believe that bargaining agreements are useful to both workers and management to encourage the development of firm-specific skills that some workforces need. The representatives at the industrial and trade unions' national (ahem, excuse me) international headquarters don't share that same commitment or view: their customer is themselves, and they believe it serves their purpose to foment class warfare. For this reason, I believe Toyota and Honda are wise to avoid the UAW; Toyota in particular is able to get the best of both worlds because they have developed a reputation for dealing fairly with their employees. Local employees no longer believe such rhetoric, and that is why unions are declining today. Unfortunately, state interventions like the NLRA have locked us into the conventions popular in the 1930s.

Public employees unions? Different story. I think they are largely engaged in naked rent-seeking.