The big bonuses paid at Barclays and Lloyds pose a question: do some once-good ideas outlive their usefulness?
What I mean is that years ago, there was a good reason why merchant banks and stockbrokers paid bonuses. It was because revenues were volatile, as they depended upon stock market conditions and merger activity. Bonuses were a way of ensuring that costs were flexible enough to respond to this volatility. Nobody seriously thought they were a means of incentivizing staff; this was accomplished by the fact that ordinary staff worked a few feet away from well-informed business owners - partners - and so were subject to good oversight.
These days, though, bonuses no longer play that useful stabilizing role. Quite the opposite. Insofar as they incentivize risk-seeking, they can be a source of instability*.
Bonuses, though, aren't the only example of good ideas gone bad. Here are some other contenders:
- Union bashing might have made sense when we were in a profit-led regime, when bosses needed higher profit margins to induce them to invest. But it is counter-productive in wage-led regimes, when a shift from profits to wages would raise aggregate demand and hence profit rates.
- The protestant work ethic is a good idea in times of full employment, when output is constrained by labour shortages. But it's a source of misery and frustration at times such as now when jobs are scarce.
- German hostility to inflation and printing money was useful in the 60s, 70s and 80s, as anti-inflationary credibility and low inflation expectations might have helped improve the unemployment-inflation trade-off. But it is now a menace (pdf), to the extent that it is an obstacle to lasting solutions to the euro crisis.
- Hierarchical workplace organization makes sense when information is costly and when workers are mere drones. But it might be less (pdf) appropriate when information is freer and when the firm needs creative employees.
- Taxing income and profits is reasonable in a pre-globalization era when capital and labour can't move. But if they are footloose, it makes more sense to tax immobile things, such as land.
Ideas such as these are not the same as John Quiggin's "zombie ideas". He meant bad ideas that stayed alive despite being killed by reason, whereas I'm thinking of good(ish) ideas that turn bad because they outlive the institutional frameworks which made them good.
It is, of course, understandable that such persistence should occur. Beliefs are path-dependent partly for bad reasons - Bayesian conservatism - but also for good; Burke wasn't wholly wrong when he said that there is wisdom in the ages which we should be loath to reject. This, though, means there can be a mismatch between beliefs and the facts which would justify them.
* Cynics please note: I am not so old that I'm saying that bonuses were good when I got them but are bad now others are getting them.
in a way, this is a restatement of your blog about Krugman and the nature of economics. Claims about policies are always conditional. Conditions change.
Posted by: Luis Enrique | February 13, 2014 at 02:31 PM
The whole of the banking system and money creation is an idea gone bad. There is no purpose or wider benefit to most banking activity since their primary function is no longer needed due to industrialisation being no more.
Indeed blowing property bubbles and financial speculation mean they are parasites on the real economy.
Posted by: bill40 | February 13, 2014 at 04:30 PM
There were land taxes in the 18th C. because land was visible and there wqas general agreement on value. Likewise the infamous window tax. There is no hiding place- off shore accounts etc- for land. So roll on Robert Walpole the high ground is yours.
Posted by: Chris Purnell | February 13, 2014 at 05:19 PM
Bonuses can still be useful, provided that they are used properly, to reward exceptional personal performance. The trouble with recent bank practice is that they have been misused, in a way that creates undesirable incentives. Abusus non tollit usum.
Posted by: Elliot Grant | February 13, 2014 at 07:29 PM
Marxism?
[*only teasing - don't hit me!!*}
Posted by: Andrew | February 13, 2014 at 09:10 PM
Elliot
"Bonuses can still be useful, provided that they are used properly, to reward exceptional personal performance. "
Why? A few years ago I was up for promotion in a genuinely owner managed business. It was made clear to me that the owners did not give a shit about past personal performance. They (rightly) did not care. All they cared about was whether I would make them money in the future. Why reward people for past performance?
Posted by: Luke | February 13, 2014 at 10:24 PM
"Bonuses can still be useful, provided that they are used properly, to reward exceptional personal performance."
In a socialist society maybe. But when decisions are made for profit this becomes problematic. For example, the head of a utility company will be judged on how much money he makes for the company, this is how exceptional performance will be measured. So screwing the customers and raising prices will be viewed as exceptional performance. This is the kind of exceptional performance the rest of us could do without!
Another example would be where an accountant very successfully defrauds the state of vital revenues to the benefit of his filthy rich client. The client will hail the exceptional performance.
Down with excpetional performance!
Posted by: Socialism In One Bedroom | February 14, 2014 at 10:01 AM
«Hierarchical workplace organization makes sense when information is costly and when workers are mere drones. But it might be less (pdf) appropriate when information is freer and when the firm needs creative employees.»
This particular point was made at length and persuasively in the old idea of "Situational leadership" by Hersey and Blanchard.
They made the rarely considered point that there is not single way to dealing with people that always works, and it depends on the type of people and of organization, and boiled down to 4 main types of management style.
«Claims about policies are always conditional. Conditions change.»
The attitude is generally valid: it is not so much that good ideas turn bad, but that for most topics there is no single good idea, but what is a good idea depends on circumstances, on which point of the curve(s) the situation is.
«Burke wasn't wholly wrong when he said that there is wisdom in the ages which we should be loath to reject.»
Burke made a valid point in that old things represent empirical explorations of tradeoff landscape and ignoring that is a waste; in particular as bad consequences often take time to become manifest (there are lots of cumulative "poisons", like smoking).
But Burke was a great hypochrite because political conservativism is not at all about not indulging in adventurism; it about protecting the interests of incumbents (the thesis in "The reactionary mind" that it is about reaction to emancipation seems very weak to me), and political conservatives will resort to new and untried policies if they promise to protect the interests of incumbents, as in "everything must change so that everything will stay the same".
Posted by: Blissex | February 14, 2014 at 11:13 PM
This is similar to Krugman's thoughts on the crisis, that we've entered a through the looking glass world and now thrift destroys wealth working over time earns less.
Posted by: AltoBerto | February 17, 2014 at 03:49 AM