Organizational justice III

[This may be the third -and last, I swear- part of a paper to be submitted to a conference in the Jesuit University Ignatianum in Krakow w the same title, or may be not, depending on how happy I am with the final result… it is, however, an issue I have been wanting to tackle for some time now but had postponed so far to deal with lighter matters. You may find the first and second part here: OJ I and OJ II ]

In my previous post on this subject I sketched what a framework for justice within an organization may look like based on the Kantian twin precepts of:

a)       granting dignity and recognition to each individual (which implies seeing them as ends in themselves, and never using them as means for a certain end of ours that they have not willingly agreed to pursue themselves) and

b)      construing every decision as the application of a rule we could wish was universally followed

Although I concluded that an organization where everybody follows such precepts (what I called a “KoE organization”) is clearly preferable to a “utility maximizing” one for its members I introduced the possibility that it may not be so clear cut for other groups, be them consumers, stockholders or society in general. In this post I want to close the series extending the previous analysis to those wider groups, seeing if there is something we can conclude (regular readers of this blog surely know that reaching ultimate conclusions is not exactly one of its strongest selling points…)

To make the analysis as comprehensive as possible I will distinguish four groups of people with a legitimate interest in the organization’s operations:

·         employees (the people formally affiliated with the organization, the members, who typically receive payment from it in exchange from their work)

·         owners (the people that have advanced the capital required for the organization to start operating, in the expectation of receiving in exchange a percentage of the benefits it produces proportional to the capital each one has given). Note that the juridical personality of the owners can be very varied, ranging from stockholders (a wide set of individuals with limited liability, as they only risk a fixed amount of money) to partners (typically fewer, who may potentially risk all of their wealth) to other corporations (be they industrial conglomerates or financial institutions who do not actively participate in running the organization)

·         consumers (the rest of the society that can potentially buy what the organization produces, or at least be impacted by the way it operates -be it because it depletes some common good or it contributes to the common well-being)

To make the analysis more dynamic, I will also consider a fourth group:

·         potential employees (people that still does not belong to the organization, but may do so in the future if certain decisions are taken)

What I will do then is analyze how the framework we sketched deals with the potential conflicts of interest between the (current) employees and each one of the other groups, in opposition to what the economic (utility-maximizing) framework would dictate. I can advance that in most cases we will find that the utility-maximizing theory serves to perpetuate the existing relationships of production and systematically defends the interests of the owners over the employees, the employees over the consumers and the current employees over the potential ones, in ways that are very difficult to reconcile with any widely accepted definition of justice. It remains to be seen to what extent a Kantian (or contractualist, we will highlight some of its limitations) approach con overcome similar difficulties.

Employees vs. Owners

We don’t need to get all Galbraithian here (although coming back to the insights of good ol’ Kenneth is always a good thing) to remember how modern capitalism relies on a “caste” of people with a distinct, hard-to-acquire knowledge (what has been somewhat pompously called “management science” that, to be honest, isn’t that difficult to acquire to begin with) to run most businesses. That managerial class is what Galbraith termed a “technostructure”, and it tends to pay itself nicely leaving little to distribute in the form of benefit to the poor capitalists that originally risked their hard-earned money to get the concern going (never mind that with decreasing social mobility the savers with capital to spare have mostly inherited it, and are conforming a new rentier class not that different from the most famed one of the gilded age). Of course, in the eighties of the past century those cunning little capitalist had already developed a sure-fire way to align the interest of the leading managers with their own: link the reward of the top executives (in the form of bonuses and stock options) almost exclusively to their ability to increase the return of the money they had been entrusted with. Conveniently, that’s when the theory of Shareholder value as main (and almost only) metric of the success of a company was born (along with the theory of efficient markets, to provide a patina of legitimacy to such patently absurd construct).

I find it convenient to highlight that this particular conflict plays out with high frequency in the boardrooms of almost every company that has a board as supreme governing body. Every time the results go south or when the yearly salary review comes around it has to be decided how much will be taken from the employees (how many of them will be laid off or how little the total salaries will rise for the coming year) vs how much will the benefit be reduced or how much loss will be suffered by the capital owners. Only there isn’t usually much conflict, because nobody represents the employees in the boardroom (I know, I know, in Germany that’s not the case, but my German contacts luridly tell me how the worker’s representative can be easily bought, manipulated or outmaneuvered, so the dynamics in big German corporations are not that distinct from those of the rest of the world). And any CEO worth his salt knows just how many people he has to give the pink slip to have the analysts praise his resoluteness and have his share value recover from the most negative profit warning. You are going to sell a 25% less than what you had announced just a few quarters ago, and your planned 25 cents per share of benefit rather look like a 5 cent per hare loss? No biggie, lay off a few tens of thousands of workers and the share will probably stay put, or even recover a bit if the market is generally on an upward trajectory. Some astute observer may object that laying off a substantial percentage of the headcount may compromise the ability of the company to meet tis production targets, thus further endangering its very survival, to which I reply reminding my readers that the average corporation carries within its ranks a 20% (and that’s a conservative estimate) of bullshit positions, that add no value whatsoever to its bottom line. Any given company, from the biggest corporate behemoth to the slickest family firm can sustain a significant reduction of its workforce without losing much of its ability to deliver on its existing commitments, and to take on additional contracts.

So how does the dominating economic theory propose we deal with such type of conflict? On paper it is pretty easy: Each worker “deserves” to be paid as much as he contributes at the margin to the value of whatever it is his employer sells. If the last machining operator adds 20 $ per hour worked to the final product, 20$/ hour is what he should make. If, due to the law of diminishing returns, the next machining operator the company hires only adds 18 $ per hour then it would be fit and proper if all the machining operators already hired saw their salary reduced to 18 $/hour (the fact that such reductions rarely happen is a testament of the extraordinary generosity of modern corporations, for sure). Of course, such answer contains a double dose of baloney: first, there is no way a company knows how much each worker adds to the value of the product (believe me, I’ve designed enough analytic accounting systems to know, doesn’t matter what the GAAP says, doesn’t matter if it is ABC, Pareto costing, proportional allocation, rule of thumb or whatever, the process of determining how much value any given activity and any given position adds is rife with subjective allocations, hunches or right away creative obfuscation) and second, even if it knew, if in some ideal world there were unassailable rules (not subject to manipulation to favor the rich and powerful and better informed at the expense of the poor and weak and ignorant) to determine how the work of A compares with the work of B regarding how much they each contribute proportionally to the final price that may be demanded for their joint product, why should it be more just to pay A and B in the same proportion? There are a number of confounding factors that it may be equally just to have in consideration (A may need to devote much more time than B to complete his contribution, the work of A may be more physically or mentally demanding, A activity may be more hazardous, or injurious, etc.) To top it off, the abilities demanded to perform A’s and B’s work may be very different, and command a very different reward in the market. So, although the “differential value contribution” may sound nice, it is but a justification. The truth of the matter is that what I’ve termed the “economic approach” has no answer at all to the question of what is just to pay each worker (or how many workers should the company employ). What it has is the following rule: “use as few workers as you can get away with (given the work laws of the country) and pay them as little as possible (given what it would cost you to replace them with somebody with similar skills hired in the market) to maximize the profit of the company”. A pretty ugly rule when formulated that way, but I myself have been a relentless applier of it for my first fifteen years in business, and am still frequently called to keep on applying it and selling it to the ranks, so I know firsthand it is not as simple as “selfish and megalomaniacal executives throw workers under the bus every time the going gets tough”, as sometimes you either 

a) have no other choice or 

b) become very good at rationalizing and convincing yourself you have no other choice, although in fact you do…

So how would a contractualist, or Kantian approach look like instead? Let’s start with the owners: when someone chooses to finance a new operation they should clearly state what is the return they are aiming for (typically above the market average, depending on the risk level). Sadly, an investment in any enterprise beyond a purely commercial one (entered for a single or a at most a very limited number of transactions) may take years to come to fruition, years in which the market conditions will change, new competitors will enter the market, business cycles will effect their deleterious influence, technology will evolve and potentially disrupt existing practices, etc. Which means that God only knows what may happen with the targeted return, regardless of how good or bad the executives tasked with steering the company turn out to be. And it’s not like all investments are similarly liquid. If you own shares of a company (thus negotiated in a secondary market) you can always sell them if you are not happy with how said company is performing, but not all companies are publicly traded, and selling a stake in one that is not may be fraught with difficulties, and end up costing to more than erase any potential gain. Still, a clearly stated desired rate of return set as a target for the administrators is the only valid, just solution for clearing up that side of the equation.

What about the employees’ side? We face a similar difficulty, as you may be (indeed you should be) as transparent and straightforward as possible when negotiating each hire regarding not just salary and overall working conditions (overtime compensation, holidays, health coverage, safety measures, responsibilities) but also scope of professional advance and career prospects. People work not just for what you pay them today, but also for what they hope to get from it in five, ten, even twenty years (although given market dynamics it’s difficult to fathom what company can still offer some serious semblance of stability over such long term). When I left/ was kicked out my first job what really pissed me off was not that my employer was not honoring some short-term aspect of our contract, but how a whole long-term promise of what working there and committing to the kind of work-life (un)balance it required was being voided and trampled, not just for me but for all the employees that remained. I do know that companies have to adapt to changing market conditions, and that labor contracts can not be renegotiated continuously to reflect such changes, but I still think the twin obligations of any director are honoring the contract with the owners and honoring the contract with the employees, giving both similar weight. And at some point in time both will be largely verbal, implicit, based on a shared understanding and not subject to being claimed in a court of law. And of course one side (the owners) have the power of firing you, while the other has not (workers nowadays have really to be pressed crazily, and badly mistreated, before they may threat with collective action against their employer) so it is only human we give more weight to the interests of the former against the latter. Even then, the Kantian right thing to do is to strive to balance both.

Employees vs. Consumers

According to classic economic theory, there is no real conflict here: a company tries to sell as dear as it may (regardless of who reaps most of the benefits of the income they try to maximize) and its clients would pay as little as possible. That’s shown by the slope of the supply curve tilting upwards with price, whilst the demand curve tilts downward. Where both curves intersect we find the equilibrium price at which the market clears, and at that price everybody has as much of the product as makes them maximally happy: the consumers ideally derive as much marginal utility from consuming that precise amount of what the company produces as they would from any other combination of consumables (by definition, were that not the case, they would choose the alternative combination they more pleasurable, or more utility-maximizing), and the company uses its inputs with maximal efficiency, deriving from them as much income as possible given the technological possibilities of the age.

A very neat and nice construct (let’s forget for a moment there is no such thing as a continuous supply or demand function, as in most markets there are so many more variables that determine how many units would be sold as to render price almost immaterial) that allows us, as a society, to forget that old concept, so exhaustingly discussed for ages, of value. What is, in a market economy, the value of an item for sale (be it the hour of a strategic consultant, or a car, or a house or an epipen to self-inject a life-saving medicine in a moment of dire need)? Being blunt, who cares. Every one of those items has a measurable amount attached to it: its price. And the moment somebody is willing to pay such price, the question is settled, regardless of how much effort it took to put such item in the market, or any other scholastic nicety (the scarcity of capital or land, the marginal productivity of the factors required to produce it or whatnot) that people have resorted to in the old times to explain such price. What is actually paid is all there is to it when it comes to valuing any commodity offered in the market, and any alternative concept of “value” is but a metaphysical fiction. So there is not such a thing as a “just price” that may be calculated independently of what people pays for things, so it may conceivably deviate from the latter amount and thus may point to a “market failure”. By definition, the market has no failures.

Remember that old canard about “use value” and “exchange value” and how the difference between both allowed the evil capitalist to appropriate the excess work capacity of the proletarians, and grow rich exploiting their immiseration? That was Ol’ Karl talking nonsense (well, he was actually talking mostly nonsense, anyway, so you may be pardoned for not paying attention to this particular point). But we don’t need to resort to Marxist obfuscations based on a muddled understanding of Hegel’s dialectics to recognize the market may indeed fail to reflect in the price for which certain commodities exchange the whole loss of collective utility to produce and consume them, the difference between such real costs and what society can successfully pass to the producers normally being known as “externalities”. Such failure creates an unfair distribution of burdens and rewards, as the costs are borne by groups different from those obtaining the benefit of such production and consumption. 

The examples are well known, from the environmental degradation caused by polluting companies (a negative externality borne by consumers that breathe a worse quality air, or drink a less clean water, or simply enjoy some utterly spoiled landscape) to the commonly enjoyed benefits of security and rule of law not paid by tax avoiders (a positive externality that creates the problem of “free-riders” that profit from such shared goods without having to pay for them, leaving others with a higher price tag to pay).

Economic thinking doesn’t have much to say about externalities, other than they may be bad indeed, and the only way it prescribes to minimize them is to put a price on them, so they can be properly internalized and taken into account as normal costs by the producers. Those are the vaunted “market solutions” for many problems that besiege modern economies, from overfishing to climate change to healthcare to pollution. How do they work? Let’s say charitably It’s a decidedly mixed bag. Acid rain and the excessive content of Sulphur dioxide in the air due to coal plants has been quite successfully tackled in the West through cap & trade and taxing, but CO2 emission hasn’t. On the other hand side, the global population of whales in the Ocean seems to be slowly recovering, but surely no market solution here, just every country except Japan accepted to friggin’ stop killing the poor beasts, which constitutes as good an example as you may dream of of the virtues of plain ol’ government steppin’ in and mandating was what self-evidently good and just, markets be damned. Another example? the only country that stubbornly sticks to a supposedly market driven approach to providing health care to its citizens has an abysmal record, with skyrocketing expenses for very sub par results. 

I think the evidence points clearly and unequivocally in the direction that in certain areas there is no rational way to put a cost in the productive activity so its costs are fairly borne, and there simply is no alternative to regulation to protect the common goods. I myself formulated an utopian approach for all economic activity, which I dubbed the “zero footprint rule” (Good stewards of the Earth) stating that all and every degradation of the environment was a cost to be borne by future generations, so all and every economic activity should be required to leave said environment exactly as it encountered it when its activity started (meaning they should potentially contribute to a fund not only for cleaning their short-term, immediate activity, but also for 100% recycling of whatever they produce and for the replacement of whatever non-renewable resource they consumed).

What then about contractualism? Other than avoiding fraudulent advertising, what does it have to say about the legitimate distribution of burdens between the enterprising manufacturers and the passive consumers down the road. Well, it turns out that a load of things, because even if no contract can be signed between producer and consumer (or, even less, between producer and future potential consumers that may not have been born yet) there are a couple of concepts that should be taken into account. First one, what Habermas dubbed the “ideal communicative condition”, which in this case means that the producer should try to imagine itself in an ideal world where he has the same power as the consumer, both have access to the same information, are blessed with a similar discernment (so he can not hope to outwit his client) and both have an infinite amount of time to reach a voluntary agreement both could feel happy about. That provides a set of stringent, “strong” boundaries to what a company can do regarding its possible externalities, starting with openly recognizing them, and ending with giving the affected parties a say in how they value them when it comes to minimize their impact. Second, let’s remember that old deontological tool, the categorical imperative: Producers should act under rules they could wish universal. They can pollute the water to the extent they would be OK with everybody else similarly polluting the water they themselves would have access to, and then drinking it unfiltered. They can add toxic (but addictive) carcinogens to the cigarettes they produce if they were similarly OK with other people adding similarly toxic components to other products they consumed and hiding it (that is, IF they were truly rational in a deontological sense, there is no way Jose in God’s green Earth they would behave as they have factually been doing for decades… but hey! They weren’t acting deontologically at all, just plain’ ol’ utility maximizing, and according to venerable Milton that’s all that could be asked from them: Friedman's everlasting shame ).

So, kids, utility maximization doesn’t have a stellar track record regarding the internalization of externalities (doesn’t matter what economists of the Chicago school may want to tell you), whilst a Kantian approach (with some Habermasian sprinkling) may take you closer to a fairer, more just world. Let’s turn our eyes, finally, to the last potential conflict we identified at the outset.

Actual employees vs. potential ones

Including people that only exists theoretically in your moral calculations is always tricky, as Derek Parfit famously showed in Reasons and Persons (where he essentially defended that we can literally do no wrong to future generations, as doing anything differently would imply they would not be born in the first place -other, different people would- so whatever shitty world we bequeathed them, such shittiness would be a necessary condition for them coming into existence, so it could only be seen as a net positive provided their life was at least barely livable, that is, barely better than not being born at all). We have seen that utilitarianism (or marginal economic reasoning) gives us a lot of latitude to engineer organizations that are less just than what deontology would allow us, both for their members and for society in general. But what if we extend the scope of our concerns to those people that do not belong yet to the organization, but may end up doing so (and profiting from such belonging) if it were more economically efficient, and guided itself by profit maximization (and rewarded its members by equalizing such reward with their contribution at the margins, however difficult it may be to calculate it)? May we find that the greater injustice  within the organization (in the form of the extra exploitation of its workers it condones) and within the wider society (in the form of greater externalities it allows) can be somehow compensated by the extra employment opportunities it provides, bringing more people into its beneficent (or not so beneficent, but let us leave that aside for a moment) fold?

Such consideration has historically been behind the discussion of the overall benefit of minimum wage laws: economists of a libertarian bend tend to disparage such laws, saying that “artificially” rising wages (by legislative fiat) depresses employment, as companies hire less people than what they would choose to do in a “free” market situation. For an example of such disparaging, see Tyler Cowen: Minumum wage is evil and his co-blogger at MR Alex Tabarrok: And awful and And the absolute worst. For Scott Sumner, the fact that higher wages cause fewer people to be employed was “one of the few certainties in economics” (and those few were already precious, if we want to take seriously Economics claim to be a “science”), that’s him comparing his musical chairs model with Keynes’ (or at least with Keynes’ first 50 pages of the General Theory: Money Illusion charitably reading (part of) the GM.  On the other hand side, economists of a non-libertarian persuasion (and that may well be the majority of the profession, from Neo-Keynesians to more statist bent) tend to minimize the impact of such laws, and to highlight the social benefits of people earning a “living wage” that, complemented by generous state aid if needs be, allow every worker (regardless of level of qualification) entirely participate in the benefits of shared socio-economic life (something that earning less than 8 $/hour makes damn hard, especially if hired on a temporary basis).  Recently, two studies analyzing the impact of Seattle rising it’s minimum wage to 15 $/hour and reaching opposing conclusions (one, from UCB, found little impact on employment level, whilst another one from WSU found a significant impact, a good summary of the difference and potential origin of the differing interpretations can be found at the NYT: Is the minimum wage in Seattle good or bad for employment?)

It has to be noted that the contractualist framework we have used as a counterbalance to the prescriptions of what we may term “crass utilitarianism” (as I readily confess I’m “slightly” strawmanning here to make my case more clearly) seems to fail us in this case. You can not “give voice” or “out yourself in the shoes of” people that doesn’t actually exist, being only potential. You can not imagine an “ideal communication situation” where the other part can be any of your countrymen, or even as yet unborn generic human beings. Deontology and contractualism require an actually existing other whose actual concerns and preferences can be duly taken into account.

In this later type of conflict, then, I will not resort to the superiority of the deontological ethical position, but on a three pronged approach, based on three observations about how our society works:

·         If instead of every potential worker that may find employment at a given wage level we fix our gaze in society as a whole, it seems evident that the lower the wage the less attracted new cohorts of workers seem to we towards paid occupation. That observation seems to be confirmed by the low participation rate in the economy where (overall) minimum wage regulations seem to be laxer, or have stopped decades ago updating them with the rate of inflation, and thus stand today with minimum wages stuck as a smaller percentage of the median salary (the USA, which now shows one of the lowest participation rates of the advanced economies). So paying shitty wages may seem a good idea in each individual organization that does it (it may provide employment to more people, which at first blush seems a net positive) but end up hurting the whole of society as it discourages more people from seeking work in the first place (I admit this argument is tentative, and a lot of additional research should be conducted to test its robustness)

·         An economy in which companies are allowed to pay peanuts to their less qualified employees may indeed have a higher aggregate employment level (again, it may not, as hinted in the previous point) and even produce more goods and services (translate that higher employment level – which means it uses more intensively one factor of production, labor- into a higher aggregate supply). But that doesn’t mean that their citizens end up deriving more utility of such state of things. That in our opulent societies we may have reached a limit to the amount of things we value consuming, and that may in turn explain the low productivity gains in most advanced economies was recently pointed to me by this interesting article: (What if we grow less because we want?) whose implications I will probably develop in more detail in a further post.

·         Finally, we shouldn’t forget that each organization’s decision (about salary and production levels) are taken in the context of a certain dominant reason which dictates what both employers and employees should understand as a life well lived, what desires they are allowed to act upon in the pursuit of such life, and how they should defer to each other when acting on those desires. The utility-maximizing mindset is, in this context, part and parcel of the dominant reason of our times (desiderative reason), and the outcomes of such mindset are inseparable from the more encompassing consequences of such reason (something Daron Acemoglu recently recognized in one of his latest posts: We need to grow because... growth! -he calls it “commodification and the insatiability of needs”, but recognizes previously that such commodification is based on setting the social hierarchy on the amount of goods each individual can command)

So for a society that accepts the tenets of desiderative reason (grading people based only on what they earn, and teaching them to value only what translates into a better grade) it may be that the conflict between exiting workers and potential ones can indeed be solved along utility-maximizing lines, and the it is indeed better to pay each member as little as possible because then there can be more of them.

But I hope I have sufficiently argue that we shouldn’t resign ourselves to live forever in such a society (I do recognize it is undeniable that we do live under such one now). And what I say regarding the resolution of the conflict between current employees and potential ones can be extended to the previous two (between employees and owners and between employees and consumers). Both can be solved appealing to utility-maximization rules, and in both cases the solution fits with the overall framework for organizing social relations we collectively adopted in the second half of last century (desiderative reason). Not only fits, but they necessitate each other: desiderative reason needs a way of organizing society (a set of rules within organizations) that steer everybody to produce as much as humanly possible (and then some), rewarding each individual in strict proportion to their contribution (regardless of how “deserved” his ability to contribute is in the first place) and punishing them for any perceived defect (the biggest defect being any inability to actively produce and participate in the system of social signaling that determines everybody’s position in the social hierarchy). Such way of organizing society needs a conceptual framework that legitimizes its rules and makes them acceptable to the many, regardless of how unfair it is in allocating the social product.

As a final aside, I’ll remind my readers that the original justification for accepting Desiderative Reason (“a life well lived is a life in which the maximum number of desires are satisfied or, which is the same, a life in which a maximum balance of pleasure over pain is achieved”) is 

a) inconsistent (pursuing such kind of happiness in the end is detrimental to achieving it) and 

b) unfair (at the end of the day, and after a couple decades of widely shared growth, a tiny minority has seen their ability to satisfy more desires enhanced to unprecedented levels whilst the vast majority has seen their desires grow, but their ability to actually satisfy them stagnate or even decrease -in the West, I know the story in the undeveloped world has been very different). 

But, and I’ve said this a million times already, dominant reasons do not evolve because they are “good” for the societies that adopt them, or because they make their members happier. They evolve because they become better at crushing (either by forcing imitation or by outright military annihilation) the competition.

Which, as I stated at the beginning, has very little to do with justice…