| Traditional economists argue that the best way to solve economic
problems is to rely on the economic growth generated by each individual's
pursuit of selfinterest in a free market, regulated by the forces
of market competition. In pursuit of income each person provides
something (product, service or labor) which others want and are
willing to pay for. Through a process of voluntary market exchange,
overall production is maximized while at the same time protecting
individual freedom. Since self-interest is the motor that drives
the economy, incentives are all-important. The incentive of potential
profit leads some people to take the risks involved in producing
and marketing a new product, investing in new technologies, or
lending their savings to others to do so. Other people respond
to the incentive of wage differentials and undertake the training
required to become a plumber, an accountant, or an engineer. Thus
incentives are the key to productivity and productivity is the
key to economic growth. It is efficiency, not justice, that concerns
traditional economists
| In the light of traditional economists' claims about the importance
of incentives for the operation of markets, "humanization"
of work may be impossible because of: a) the way markets create
a bifurcation of people as consumers/workers, coupled with the
competitive pressures that force business firms to become ever
more efficient; and b) the consumerism which is rooted in human
greed and the workings of the business system
| Because of competition one firm cannot improve working conditions,
raise wages, or democratize the workplace if the result is an
increase in production costs. Competition from other firms will
keep the costs from being passed on in higher prices and, thus,
profits will decline. The bifurcation of people into consumers/workers
means that what they prefer as consumers-- lower prices-- makes
what they prefer as workers-- better working conditions and wages--
less obtainable. Reliance on the market as the primary decision
making mechanism bifurcates the decision into separate areas.
What people want as workers will not be ratified by those same
people as consumers. Since competition is now worldwide, even
a whole country faces difficulties in mandating workplace improvements
that raise costs
| The problem is reinforced both by human greed and the constant
effort of business to promote consumption as the ultimate end
of life. This creates constant pressure to reduce labor costs,
undercutting attempts to improve the quality of work life. Thus,
the only hope may be to change work organization in ways that
are both humanizing and efficient.
| I argue in this paper that subordination of short-run interests
to long-run interests and moral behavior which constrains free
riding, in addition to being good in themselves, are essential
for the efficient operation of the economy. Traditional economists
are wrong when they claim that individual self-interest is sufficient
to achieve efficient market outcomes. In fact, "humanization"
of work can be more efficient than the present organization of
work. The next section of the paper outlines the theory underlying
this claim. The remainder of the paper applies the theory to the
organization of work
| Imperfect Information, Interdependence and Moral Hazards
| Scholarly work in economics over the past 15 years demonstrates
that, under conditions of interdependence and imperfect information,
rational self-interest frequently leads to socially irrational
results. Traditional economic theory assumes independence of economic
actors and perfect information. However, the more realistic assumptions
that one person's behavior affects another's and that each has
less than perfect knowledge of the other's likely behavior, give
rise to strategic behavior, or what game theorists call "moral
hazards." An example will be helpful
| A classic example of moral hazard, known as "The Parable
of Distrust" is the situation where both the employer and
worker suspect that the other one can not be trusted to honor
their explicit or implicit contract. For example, the employer
thinks the worker will take too many coffee breaks, spend too
much time talking with other workers, and generally work less
than the employer thinks is owed. The worker, on the other hand,
thinks the employer will try to speed up the pace of work, fire
him unjustly if given the chance, and generally behave arbitrarily.
When this is the case the worker will tend to shirk and the employer
will increase supervision to stop the expected shirking. If the
worker would self-supervise, production costs would be lower.
Thus this distrust between employer and worker reduces efficiency
| In this case the pursuit of individual self-interest results
in the worker and the employer as individuals and as a group becoming
worse off than if they had been able to cooperate,i.e., not shirk
and not supervise. The problem is simple and common. The employer
and worker are interdependent and do not have perfect knowledge
of what the other will do, and the resulting lack of trust leads
to behavior that is self-defeating. This outcome is made worse
if distrust is accompanied with feelings of injustice. For example,
if the worker feels that the contract is unfair( low wages, poor
grievance machinery, etc.), the tendency to shirk will be increased
| There are numerous other cases, for example inflation. A
labor union fights for a wage increase only to find that others
also have done so and thus the wage increase is offset by rising
consumer prices. No one union alone can restrain its wage demands
and maintain the support of its members. Business firms are caught
in the same dilemma. They raise prices to compensate for increased
labor and other costs only to discover that costs have increased
again. Distrust among unions, among firms, and between unions
and firms makes impossible a cooperative agreement on price and
wage increases
| The case of recession is similar. As aggregate demand in
the economy declines, each company attempts to cope with its resulting
cash flow difficulties through employee layoffs. However, if
all companies pursue this strategy, aggregate demand will decline
further, making more layoffs necessary. Most companies agree
that the result is undesirable for each company and for the whole
economy, but no one company on its own can maintain its workforce.
In effect each company says it will not layoff its employees
if all the others also do not layoff their employees. Yet, again,
no agreement is concluded
| These cases have two things in common. They all have a group
( in these cases, workers and their employers) with a common interest
in the outcome of a particular situation. And, second, while
each attempts to choose the best available course of action,
the result is not what any member of the group desires. In these
cases the individual motives lead to undesired social and individual
results. Adam Smith's"invisible hand" not only fails
to yield the common good, but in fact works malevolently
| Why is it so difficult for the individuals involved to cooperate
and make an agreement? The reason is that exit is cheap, but voice
is expensive. Exit means to withdraw from a situation, person,
or organization and depends on the availability of choice, competition,
and well-functioning markets. It is usually inexpensive and easy
to buy or not, sell or not, hire or fire, and quit or shirk on
your own. Voice means to communicate explicitly your concern
to another individual or organization. The cost to an individual
in time and effort to persuade, argue, and negotiate will often
exceed any prospective individual benefit.
| In addition, the potential success of voice depends on the
possibility of all members joining for collective action. But
then there arises the "free rider" problem. If someone
cannot be excluded from the benefits of collective action, they
have no incentive to join the group agreement. Self-interest will
tempt people to take the benefits without paying the costs; i.e.,
watching educational television without becoming a subscriber.
This free riding explains why union organizing is next to impossible
in states that prohibit union shops( where a majority of the workers
voting for a union means all workers must join and pay dues).
| The problem is further complicated by the possibility that
what started simply as a self-interested or even benevolent relationship
will become malevolent. Face-to-face strategic bargaining may
irritate the parties involved if the other side is perceived as
violating the spirit of fair play. This can result in a response
of hatred rather than mere selfishness. Collective action is
even more unlikely if the members of the group are hateful and
distrustful of one another
| These moral hazards are situations where there is some act
under the individual's unilateral control that promises to produce
a welfare improvement for that individual that is not consistent
with what individuals who share a common preference want to obtain
as a long run result. The alternative line of action that would
be consistent with the more preferred long run result is marked
by no matter how hard the individual tries, alone she can produce
no net benefits or fewer than in the unilateral activity. So the
moral hazard exists because the alternative line of action requires
some level of trust which can lead all to engage in the process
necessary to reach group agreement.
| A common consciousness of one's interdependence with others
is required for an individual or organization to overcome moral
hazards. Collective action requires a degree of mutual trust.
If malevolence arises, the moral hazard will be strengthened.
In addition, morally constrained behavior is necessary to control
free riding. Thus self-interested individualism fails, for moral
hazards are ubiquitous in our economy.
| Could not a traditional economist construct an "enriched"
notion of self-interested behavior that would overcome moral hazards
without the need for moral values? I think the answer is a qualified
yes. An enriched concept of self-interest could encompass the
foregoing of short-run interests for long-run interests, but moral
commitment makes this much easier. Furthermore this would leave
the free rider problem unresolved.
| The argument might proceed like this. A self-interested person,
recognizing the reality of interdependencies and imperfect information,
is willing to cooperate with others if it increases his personal
welfare. Thus cooperation becomes one more means to maximize one's
self-interest
| However, the flaw in the argument is the failure to account
for the likelihood of cooperative behavior based only on self-interest
to degenerate into individuals cheating on the collective agreement.
Free riding must be accounted for. Pushed to its logical extreme,
individual self-interest suggests that faced with interdependence
and imperfect information, it is usually in the interest of an
individual to evade the rules by which other players are guided
| This problem can be illustrated by the case of OPEC. The member
countries can be considered to be acting out of enlightened self-interest.
They have many fundamental differences-- political, economic,
religious, geopolitical. At times two of the members-- Iran and
Iraq-- have been in such disagreement as to be in a declared state
of war. Nevertheless, OPEC has survived because each member realizes
that its own well-being is closely connected with that of the
others. OPEC tries to maintain high prices and profit levels by
setting production quotas. However, since 1973, their biggest
problem has been evasion of the quotas by individual member countries.
Enlightened economic actors do cheat. Each member country has
an incentive to cheat on the cooperative agreement because, with
the production quota holding up prices, if one member expands
its output it makes even greater profits. However, if one country
violates the agreement, the others usually follow. The result
is that the increased output from all the member countries drives
down the price and every member is worse off than before. Thus,
enlightened self-interest results in a cooperation that is inherently
unstable
| Traditional economists could respond with the claim that establishing
enforcement mechanisms is the answer to cheating on collective
agreements. As an example, OPEC sets up committees to determine
production quotas and verification groups to ensure compliance.
However, even with a great amount of resources expended on collective
enforcement, cheating continues. Not only is cheating a major
problem for OPEC but the costs of policing collective agreements
is substantially more than the costs of maintaining those agreements
through internalized moral commitments
| How then can we overcome the moral hazards generated by interdependence
and imperfect information? The resolution of the problem is not
easy, for they are persistent and intractable. There are at least
three possibilities: government intervention; group self-regulation;
and institutional reinforcement of those moral values that constrain
self-interested behavior
| Market failures such as pollution or monopoly have generally
been seen as warrants for government intervention. However, there
are ubiquitous market failures of the moral hazards variety in
everyday economic life. In these cases private economic actors
can also benefit from government measures for their protection,
because interdependence and imperfect information generate distrust
and lead the parties to self-defeating behavior. Certain kinds
of government regulation-- from truth-in-advertising to food-and-drug
laws-- can reduce distrust and thus economic inefficiency, providing
gains for all concerned. However, government regulation has its
limits. Where the regulated have concentrated power (i.e., electric
companies) the regulators may end up serving the industry more
than the public. In addition, there are clearly situations in
which government operates to serve the self-interest of the members
of its bureaucratic apparatus. Free market economists would have
us believe that such is always the case. This is an exaggeration.
Government can serve the common good, but it has clear limits.
One major limitation on the ability of government to regulate
is the willingness of people to be regulated.
| The Kennedy administration's wage-price guidelines were a
partially successful attempt to control inflation through public
encouragement of labor and management cooperation to limit wage
increases to productivity increases. The cooperation broke down
because of the growing struggle among social classes and occupational
groups for larger shares of GNP. More formal cooperation between
labor and management, monitored by government, might reduce the
distrust that cripples their relationship. In order to do so government
would have to be accepted by all sides as above the fray and willing
to encourage agreements that would benefit society. The experience
of the 1970's in which government activity delivered less than
it promised, and of the 1980's when it was used to serve the agenda
of bureaucrats and to facilitate the goals of the powerful both
imply a diminished capacity of government to play this role.
| The second way to overcome moral hazards is self-regulation.
Sellers could voluntarily discipline themselves not to exploit
their superior information. This is the basis of professional
ethics. Surgeons, for example, take on the obligation, as a condition
for the exercise of their profession, to avoid performing unnecessary
operations, placing the interest of the patient first. The danger
is that their professional association will end up protecting
its members at the expense of others.
| This leads us to the final possibility-- developing institutions
to heighten group consciousness and reinforce moral values that
constrain self-interested behavior so that the pursuit of short-run
rewards and free riding can be controlled. Is it possible to rebuild
institutional mechanisms so that long-run interests and moral
values become more important in directing economic behavior?
Yes, but we must re-think our view of people as simply self-interested
maximizers. Economists have made a major mistake in treating
love, benevolence, and particularly public spirit as scarce resources
that must be economized lest they be depleted. This is a faulty
analogy because, unlike material factors of production, the supply
of love, benevolence, and public spirit is not fixed or limited.
These are resources whose supply may increase rather than decrease
through use. Also they do not remain intact if they stay unused.
These moral resources respond positively to practice, in a learning-by-doing
manner, and negatively to non-practice. Obviously if overused
they become ineffective
| A good example is a comparison of the system of blood collection
for medical purposes in the United States and in England. In
the U.S. we gradually replaced donated blood with purchased blood.
As the campaigns for donated blood declined, because purchased
blood was sufficient, the amount of donations declined. In effect,
our internalized benevolence towards those unknown to us, who
need blood, began to atrophy from nonuse. In contrast, blood
donations remained high in England where each citizen's obligation
to others was constantly emphasized
| People learn their values from their families, their religious
faith, and from their society. In fact a principal objective
of publicly proclaimed laws and regulations is to stigmatize certain
types of behavior and to reward others, thereby influencing individual
values and behavior codes. Aristotle understood this: "Lawgivers
make the citizen good by inculcating habits in them, and this
is the aim of every lawgiver; if he does not succeed in doing
that, his legislation is a failure. It is in this that a good
constitution differs from a bad one."( Nicomachean Ethics,
1103b)
| Habits of benevolence and civic spirit, in addition to heightened
group consciousness, can be furthered by bringing groups together
to solve common problems. Growth of worker participation in management,
consultation between local communities and business firms to negotiate
plant closings and relocations, establishment of advisory boards
on employment policy that represent labor, business, and the public,
all are steps toward a recognition that individual self-interest
alone is insufficient, that mutual responsibilities are necessary
in a world where interdependence and imperfect information generate
distrust and tempt individuals into strategic behavior that, in
turn, results in sub-optimal outcomes
| The Organization of Work
| Distrust between workers and employers leads to inefficient
results, if neither side trusts the other to live up to the contract.
As a result the worker has an incentive to shirk and the employer
has to increase supervision costs to counter the possibility.
If somehow workers would self-supervise, i.e. not shirk, productivity
would be higher and all could benefit
| Changing the institutional environment from a purely competitive
one by adding cooperative mechanisms might enable the trust to
grow that is necessary for people to alter their behavior. The
most likely approach is encouragement of workers' selfmanagement
and worker ownership. Of course, most firms and their managers
believe that efficiency and discipline require one absolute center
of control over work their control. Nevertheless, in some cases,
managers are exploring ways to change the organization of production
to increase their workers' job satisfaction. Quality-control circles
and profit sharing are becoming common management responses to
encourage employees to make their work contribution through the
social group in the factory.
| The reason for these new management initiatives is clear under
the old system, many workers expressed their boredom, anger and
despair by working as slowly as possible, by appearing at work
irregularly, by doing poor quality work, by occasional acts of
sabotage, and by frequent job changes. The "efficient"
system of authoritarian discipline and minute division of labor
has been a contributing factor to lagging productivity in the
U.S. economy. These managers see profit sharing and other worker
participation devices as a means of establishing the more cooperative
relationship with their employees that is necessary to compete
in the economic world aborning
| It is useful to look at some ways workers have tried to gain
control over their work situations. I summarize a particular form
of cooperation, worker management, and two specific instances,
the Employee Stock Option Plan (ESOP) at Weirton Steel in the
U.S. and the industrial cooperatives of Mondragon in the Basque
region of Spain
| Worker Management
| Worker-owned and managed firms are
relatively new on the national scene in the United States, though
some have existed at the local level for many years. They have
become important for several reasons. It is becoming clear that
profitable plants are being closed, not just unprofitable ones,
and this is more common when the plant is a small part of a conglomerate
holding company. The plant may be closed because higher profits
can be earned if it is moved to a lower wage area, for a tax write-off,
or for a variety of other non-production related reasons. In
these situations, purchase of the plant by the present employees
preserves jobs, which makes it an attractive possibility. In
addition, there is now a legal mechanism, Employee Stock Ownership
Plan (ESOP), to facilitate employee ownership, and it provides
significant tax incentives to firms
| There is increasing evidence that worker-owned firms incorporating
employee participation and workplace democracy have rates of productivity
at least as high and frequently higher than traditional firms.
Thus worker-owned firms have been used to maintain employment
at plants that otherwise would have closed and have been
used to maintain and improve productivity as well as the quality
of work life. In fact, they all appear to be linked. As employees
become owners and managers, the old distrust that led to shirking
and excessive supervision can often be reduced. The new environment
enables workers to see that the short-run advantage of shirking
is outweighed by the negative impact on long-run productivity
and profits that they share in. Free riding is still possible,
of course, if the employees never develop the moral commitments
to coalesce as a group
A 1988 report published in England indicates that stock ownership
and profit sharing schemes actually stimulate worker performance.
It analyzed the results of 414 companies in the period 1977-1985
and showed that those with such programs did consistently, and
in some cases spectacularly, better than the others. Also, the
smaller the firm, the more direct was the impact
| Weirton Steel
| An interesting case in the U.S. is Weirton
Steel. Since 1984, some 8,400 employees have owned the company
under an (ESOP) and have operated the plant profitably. Management
and labor attribute this success-- under the previous ownership
of National Steel the company was on the edge of bankruptcy--
to the implementation of the ESOP. In the face of general decline
in the steel industry, Weirton has expanded its employment from
7,800 when the ESOP began to 8,400. The company has paid out about
one-third of its profits each year-- $15-20 million-- while reinvesting
the remainder in plant modernization. R. Alan Prosswimmer, company
Vice-President and chief financial officer, attributes the company's
turnaround to the ESOP: "Over $10 million in savings last
year alone were attributable to our employee programs." Walter
Bish, President of the Independent Steelworkers Union, added that
the workers, since becoming owners, "are much more aware
of the fact that quality is important." Rank and file workers
speak similarly saying that the ESOP has resulted in "a lot
of attitude changes," because previously workers "were
working for National Steel and the profits went there. Now the
profits are staying here."
| Mondragon
| Of particular interest as a model for employee-owned
and managed firms are the industrial cooperatives of Mondragon
in the Basque region of Spain. Their achievements are quite impressive.
The first of the Mondragon cooperatives was established in 1958.
Twenty years later the 100 cooperatives together had sales close
to $1 billion, one-fifth of which was exported to other countries.
Among the many goods produced are refrigerators and other home
appliances, heavy machinery, hydraulic presses, steel, semi-conductors,and
selenium rectifiers. Among the cooperatives are the largest refrigerator
manufacturer in Spain, a bank with over $500 million in assets,
a technological research center, a technical high school and engineering
college, and an extensive social security system with health clinics
and other social services.
| The ownership and management structure of the Mondragon cooperatives
are of particular interest. Every new member must invest a specified
amount in the firm where they are employed. At the end of each
year a portion of the firms' surplus or profit is allocated to
each worker's capital account in proportion to the number of hours
worked and the job rating. The job rating schedule allows for
a quite narrow 3:1 ratio between the highest and lowest paid workers.
The result is a pay scale quite different from that prevailing
in private industry. In comparison lower paid workers earn more
in the cooperatives, middle level workers and managers earn the
same, and top managers earn considerably less. Each cooperative's
board of directors is selected by all the members and, in turn,
the board appoints the managers. There is a social council made
up of elected representatives of the lowest paid workers which
negotiates with the board over worker grievances and other issues
of interest.
| The purely economic results are impressive. When both capital
and labor inputs are accounted for, the Mondragon cooperatives
are far more productive in their use of resources than private
firms in Spain. One comparison with the 500 largest firms in
Spain found that in the 1970s the average cooperative used only
25 percent as much capital equipment per worker but worker productivity
reached 80 percent of that in private industry.
| How might we explain this highly efficient labor force in
the Mondragon cooperatives? Clearly worker motivation plays a
major part. As workers became owners and participated in management
decisions the incentives to shirk were lessened. The structural
environment made it easier for trust to develop. Thus strategic
behavior declined as workers saw that their short-term individual
interests could conflict with their long-term interests. Shirking
might benefit them here and now but productivity would benefit
them over the long haul.
| The free rider problem was controlled by moral commitment
to group solidarity. Basque nationalism clearly has been the foundation
for this moral commitment, which makes it difficult to transfer
the Mondragon experience whole. However, this may be a chicken-egg
problem. Must the moral commitment to group solidarity exist
first or will the experience of ownership and management help
create it? I do not know but the continued deterioration of our
industrial structure is creating the conditions for worker buyouts.
Other factors also inhibit the transferability of the Mondragon
experiment. Ties with local communities and limited labor mobility
appear important to the success of the cooperatives. In the United
States, where there is more labor mobility and weaker ties of
community, the moral commitment to group solidarity may be more
difficult to generate.
| Fostering subordination of short-run interests to long-run
interests and moral constraints to free riding are our most important
challenges. To realize a vision of humanized work, changes in
work organization must not decrease productivity. Thus building
institutional mechanisms, such as worker management structures,
that overcome moral hazards and create trust is essential to provide
the necessary incentives.
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