23 Things They Don't Tell You About Capitalism

To free-market economists, public officials – politicians and government bureaucrats – pose a unique challenge in this regard. Their pursuit of self-interest cannot be restrained to any meaningful degree because they are not subject to market discipline. Politicians do face some competition from each other, but elections happen so infrequently that their disciplinary effects are limited. Consequently, there is plenty of scope for them to pursue policies that heighten their power and wealth, at the cost of national welfare. When it comes to the career bureaucrats, the scope for self-seeking is even greater. Even if their political masters, the politicians, try to make them implement policies that cater to electoral demands, they can always obfuscate and manipulate the politicians, as was so brilliantly depicted in the BBC comedy series Yes, Ministerand its sequel, Yes, Prime Minister. Moreover, unlike the politicians, these career bureaucrats have high job security, if not lifetime tenure, so they can wait out their political masters by simply delaying things. This is the crux of the concerns that the World Bank economists were expressing in the meeting in Japan that I mentioned at the beginning of this Thing.

Therefore, free-market economists recommend, the portion of the economy controlled by politicians and bureaucrats should be minimized. Deregulation and privatization, in this view, are not only economically efficient but also politically sensible in that they minimize the very possibility that public officials can use the state as a vehicle to promote their own self-interests, at the cost of the general public. Some – the so-called ‘New Public Management’ school – go even further and recommend that the management of the government itself should be exposed to greater market forces: a more aggressive use of performance-related pay and short-term contracts for bureaucrats; more frequent contracting-out of government services; a more active exchange of personnel between the public and the private sectors.

We may not be angels, but…

The assumption of self-seeking individualism, which is at the foundation of free-market economics, has a lot of resonance with our personal experiences. We have all been cheated by unscrupulous traders, be it the fruit seller who put some rotten plums at the bottom of the paper bag or the yoghurt company that vastly exaggerated the health benefits of it products. We know too many corrupt politicians and lazy bureaucrats to believe that all public servants are solely serving the public. Most of us, myself included, have goofed off from work ourselves and some of us have been frustrated by junior colleagues and assistants who find all kinds of excuses not to put in serious work. Moreover, what we read in the news media these days tells us that professional managers, even the supposed champions of shareholder interest such as Jack Welch of GE and Rick Wagoner of GM, have not really been serving the best interests of the shareholders (see Thing 2).

This is all true. However, we also have a lot of evidence – not just anecdotes but systematic evidence – showing that self-interest is not the only human motivation that matters even in our economic life. Self-interest, to be sure, is one of the most important, but we have many other motives – honesty, self-respect, altruism, love, sympathy, faith, sense of duty, solidarity, loyalty, public-spiritedness, patriotism, and so on – that are sometimes even more important than self-seeking as the driver of our behaviours.[1]

Our earlier example of Kobe Steel shows how successful companies are run on trust and loyalty, rather than suspicion and self-seeking. If you think this is a peculiar example from a country of ‘worker ants’ that suppresses individuality against human nature, pick up any book on business leadership or any autobiography by a successful businessman published in the West and see what they say. Do they say that you have to suspect people and watch them all the time for slacking and cheating? No, they probably talk mostly about how to ‘connect’ with the employees, change the way they see things, inspire them, and promote teamwork among them. Good managers know that people are not tunnel-visioned self-seeking robots. They know that people have ‘good’ sides and ‘bad’ sides and that the secret of good management is in magnifying the former and toning down the latter.

Another good example to illustrate the complexity of human motivation is the practice of ‘work to rule’, where workers slow down output by strictly following the rules that govern their tasks. You may wonder how workers can hurt their employer by working according to the rule. However, this semi-strike method – known also as ‘Italian strike’ (and as ‘sciopero bianco’, or ‘white strike’, by Italians themselves) – is known to reduce output by 30 –50 per cent. This is because not everything can be specified in employment contracts (rules) and therefore all production processes rely heavily on the workers’ goodwill to do extra things that are not required by their contracts or exercise initiatives and take shortcuts in order to expedite things, when the rules are too cumbersome. The motivations behind such non-selfish behaviours by workers are varied – fondness of their jobs, pride in their workmanship, self-respect, solidarity with their colleagues, trust in their top managers or loyalty to the company. But the bottom line is that companies, and thus our economy, would grind to a halt if people acted in a totally selfish way, as they are assumed to do in free-market economics.

Not realizing the complex nature of worker motivation, the capitalists of the early mass-production era thought that, by totally depriving workers of discretion over the speed and the intensity of their work and thus their ability to shirk, the conveyor belt would maximize their productivity. However, as those capitalists soon found out, the workers reacted by becoming passive, un-thinking and even uncooperative, when they were deprived of their autonomy and dignity. So, starting with the Human Relations School that emerged in the 1930s, which highlighted the need for good communications with, and among, workers, many managerial approaches have emerged that emphasize the complexity of human motivation and suggest ways to bring the best out of workers. The pinnacle of such an approach is the so-called ‘Japanese production system’ (sometimes known as the ‘Toyota production system’), which exploits the goodwill and creativity of the workers by giving them responsibilities and trusting them as moral agents. In the Japanese system, workers are given a considerable degree of control over the production line. They are also encouraged to make suggestions for improving the production process. This approach has enabled Japanese firms to achieve such production efficiency and quality that now many non-Japanese companies are imitating them. By notassuming the worst about their workers, the Japanese companies have got the best out of them.

Moral behaviour as an optical illusion?

So, if you look around and think about it, the world seems to be full of moral behaviours that go against the assumptions of free-market economists. When they are confronted with these behaviours, free-market economists often dismiss them as ‘optical illusions’. If people look as if they are behaving morally, they argue, it is only because the observers do not see the hiddenrewards and sanctions that they are responding to.

According to this line of reasoning, people always remain self-seekers. If they behave morally, it is not because they believe in the moral code itself but because behaving in that way maximizes rewards and minimizes punishments for them personally. For example, if traders refrain from cheating even when there is no legal compulsion or when there are no competitors ready to take away their businesses, it does not mean that they believe in honesty. It is because they know that having a reputation as an honest trader brings in more customers. Or many tourists who behave badly would not do the same at home, not because they suddenly become decent people when they go back home but because they do not have the anonymity of a tourist and therefore are afraid of being criticized or shunned by people they know and care about.

There is some truth in this. There aresubtle rewards and sanctions that are not immediately visible and people do respond to them. However, this line of reasoning does not work in the end.

The fact is that, even when there are no hidden reward-and-sanction mechanisms at work, many of us behave honestly. For example, why do we – or at least those of us who are good runners – not run away without paying after a taxi ride?[2] The taxi driver cannot really chase us far, as he cannot abandon his car for too long. If you are living in a big city, there is virtually no chance that you will meet the same driver again, so you need not even be afraid of the taxi driver retaliating in some way in the future. Given all this, it is quite remarkable that so few people run away without paying after a taxi ride. To take another example, on a foreign holiday some of you may have come across a garage mechanic or a street vendor who did not cheat you, even when there really was no way for you to reward her by spreading her reputation for honest dealings – particularly difficult when you cannot even spell the Turkish garage’s name or when your Cambodian noodle lady, whose name you cannot remember anyway, may not even trade in the same place every day.

More importantly, in a world populated by selfish individuals, the invisible reward/sanction mechanism cannotexist. The problem is that rewarding and punishing others for their behaviours costs time and energy only to the individuals taking the action, while their benefits from improved behavioural standards accrue to everyone. Going back to our examples above, if you, as a taxi driver, want to chase and beat up