Adam Smith's two economies

Adam Smith thought there were two economies – meritocratic for the poor and powerless and anti-meritocratic for the powerful:

In the middling and inferior stations of life, the road to virtue and that to fortune, to such fortune, at least, as men in such stations can reasonably expect to acquire, are, happily in most cases, very nearly the same. In all the middling and inferior professions, real and solid professional abilities, joined to prudent, just, firm, and temperate conduct, can very seldom fail of success…The good old proverb, therefore, That honesty is the best policy, holds, in such situations, almost always perfectly true. (The Theory of Moral Sentiments, Part I, Sec 3, Ch 3)

But:

In the superior stations of life the case is unhappily not always the same. In the courts of princes, in the drawing-rooms of the great, where success and preferment depend, not upon the esteem of intelligent and well-informed equals, but upon the fanciful and foolish favour of ignorant, presumptuous, and proud superiors; flattery and falsehood too often prevail over merit and abilities. In such societies the abilities to please, are more regarded than the abilities to serve.

This fits the theory of a friend of mine. He says that further up the hierarchy one goes, the longer it takes to identify merit, and so the more chance shysters and bluffers have of thriving. You can spot immediately whether someone is capable of sweeping a factory floor, but it takes longer to discover whether they can manage the factory.

Which raises the question: how extensive is the anti-meritocratic economy? Karen Bradley’s recent admission to being clueless about the province’s politics before she became Northern Ireland secretary was merely the latest and most egregious reminder that in politics merit and abilities are not always decisive to preferment.

And since Smith’s time, we’ve seen the rise of celebrity culture – a whole sub-economy of media and entertainment where abilities to please (and dumb luck) produce Adler superstars (pdf), people whose success rests upon simply being talked about. Boris Johnson and Kim Kardashian have much in common in this respect – the difference being that one has a massive arse and the other is a massive arse.

It’s easy to believe the same is true near the top of corporate hierarchies. Top managers often prefer to hire men in their own image – partly because they are more likely to trust them. This gives (pdf) us the Peter principle – that people are promoted to their level of incompetence – and the Dilbert principle, that duffers are more likely to be promoted. And their charm and deceitfulness mean that psychopaths are over-represented in top jobs.

All this is compatible with evidence that there is a “long tail (pdf) of extremely badly managed firms” with low productivity (pdf): this is what we’d expect if managers are promoted on factors other than ability. (And no, the wheels of competition don’t grind so finely as to swiftly eliminate such laggards.)

In this context, a new paper (pdf) by Andrew Oswald and colleagues challenges my priors. They estimate that only around one-eighth of workers in Europe has a bad boss – fewer than one would expect if ; flattery and falsehood too often prevail over merit.

Perhaps, though, the question here is not merely about numbers. Instead (as is often the case) it is about mechanisms. Are the mechanisms that select for merit and abilities rather than flattery and falsehood really as extensive as they should be? And if not, how can we change this – assuming of course that we want to?

Comments

[Matthew Moore]

'And if not, how can we change this'

Good luck with that. Given the large private incentives to do so, could it be that we are at the limit given human nature?

Maybe some data/technological improvement will improve selection in the future, but I sort of doubt it.

[Dave Timoney]

How can we change this? Mandatory reselection.

[Callum]

People need to be able to sack their boss and employ someone else.

[Nick Drew]

I'd describe it a bit differently. In most traditional organisations (before the advent of zero-hours) very few people ever get fired, at any level: there is an amazing tolerance of individual uselessness, which people just work around with a shrug. But rarely do utterly useless people get promoted, either.

The problem is more that some people just insert themselves (or are inserted) into upper echelons on a free pass - rather in the manner of a purchased commission into the army, or the way in which ex-service officers used to enter the police force at the rank of Inspector. Other examples: the boss's son-in-law who just gets given a senior job out of nowhere; a political appointee; an outright shyster or con-artist; a 'diversity' hire into a senior job; etc etc.

Then, by virtue of the inertia principle described above, they get to stay long after it's fairly clear they don't deserve to be there.

This is job equivalent of inherited wealth. Doesn't mean it'll stick, or increase, but it can certainly provide an 'unearned' boost to the beneficiary's fortunes for a number of years

[Dave Timoney]

I'm a little concerned about the methodology of the quoted study because it divides management into "bad" and everything else.

In reality the bigger problem is mediocre bosses - those who aren't notably bad but not notably good either. As Nick Drew notes, the hierarchy is often gummed up by these people.

If there is a "poor management" angle to low UK productivity, it may be down more to the slight shittiness of the average than the awfulness of the long tail.

[Nick Drew]

PS, I have worked extensively in Germany and can report that German companies are equally prone to tolerating uselessness (at all levels)

- and given the very high levels of unionisation / works councils etc in DE, virtually no-one gets fired on any pretext whatsoever

[Blissex]

Our blogger finds many interesting topics of discussion, but so often the framing is just right-wing elitist/managerialist, which is ironic (at best) from a marxist and anti-managerialist.

In this case the argument seems to me critically based on the assumptions that elitism is well founded, as people are either competent and nice and evil because incompetent, and that "talent" is very scarce and "meritocracy" (that is "the markets") therefore works when unleashed.

In my experience etc. sufficient-to-good talent is common, most people can do most things adequately and a significant minority can do some of them fairly well, and competence and "flattery and falsehood" often go together, as many people are competent, so some seek an edge on that by underhand methods. Similarly for incompetence and genuine and honest character.

Most managers in my experience are sort of good enough, whether good or users of "flattery and falsehood", and the difference in performance between great and average managers is not huge, organizational culture and technology matter far more.
Sure bad managers can do quite a bit of damage, but they are fairly rare, and most organizations are somewhat resilient even to bad managers.

Consider promotions: to promote to position "manager of X" usually the candidates are all at the "deputy manager of X" level, and to get to that level pretty much all of them need to be good at what they do; it is often genuinely difficult to choose one over another (see the succession of J Welch at GE).

Then my usual story: most of the improvement in productivity and living standards in the past 200 years has come not from "the great inventions" (as per prof. Gordon) or good management from meritocratic managers, but from the adoption and diffusion of coal first and oil second (with electricity usually one of the means to that diffusion).

If the argument is that talent is scarce, and that the few talented people rise (or should rise) to the top meritocratically except for the few (or many) bad apples that resort to "flattery and falsehood", that's just Ayn-Randian worship of the heroes of wealth creation.

[Alex]

"You can spot immediately whether someone is capable of sweeping a factory floor, but it takes longer to discover whether they can manage the factory."

This is important - recessions tend to destroy the accumulated information workers and firms have about each other, and therefore people get selected into jobs below their previous level of productivity. See this AFOE post:

http://fistfulofeuros.net/afoe/a-little-model-of-the-labour-market/

I couldn't replicate JW Mason's results from the data but I still like the model.

[rogerh]

Certainly there are useless people in all industry sectors. But where do they all wash up? Looking back I would say they tend to go into consultancy, into the regulators, into quangos. But not so much into the upper reaches of business, for the public sector I cannot speak.

Then I am a bit sceptical about the "long tail of extremely badly managed firms". One would expect each industry to have say 4 or 5 'leaders' followed by a tail of specialists and also rans. The 'long tail' paper goes along with this. The leaders are big and presumably productive but the specialists and also rans tend to struggle in niches and are not so productive. Not necessarily because their management is poor but simply because they are small. Those that have some visible potential get bought up and so necessarily the 'tail' is of the poorer strugglers. Not so much badly managed as stuck in niches. Not everyone can work for a front runner.

From this perspective I have more sympathy with the Oswald paper, just kicking the smaller bosses will do no good at all imho. We need to look more widely and higher up the dunghill.

[Alex]

and given the very high levels of unionisation / works councils etc in DE, virtually no-one gets fired on any pretext whatsoever

Thank god I didn't buy that BMW then.