Stumbling and Mumbling

Incentives as ideology

Bosses need big bonuses and share options to give them an incentive to work harder. Everyone knows this.
But it ain’t true. In this new paper, Wendelin Schnedler says:

There are plausible situations in which paying a bonus reduces the incentive to exert effort.

These situations, he shows, are those in which the marginal effect of effort upon the probability of success is low, relative to the chances of success if no effort is exerted.
Although he doesn’t say so, I suspect this might be true for quite a few CEOs with stock options. They might figure:

It’s going to be really hard work to genuinely improve this business. And even if I do so, it might not raise the share price by much, because equity analysts are stupid buggers and the company’s share price depends upon stock market conditions.  I’ll just talk a good game and hope the market rises - as it usually does over time - taking the company‘s share price up with it. If I must do something, I’ll increase the gearing of the company by buying back shares. That’s easy to do, and it’ll increase the share’s beta and hence its chances of the share price rising a lot if the market rises. 

Perhaps, then, talk of incentives is just cover for rent-seeking.

Marketing: all that's left

Matthew Parris is, as ever, excellent on the dangers of marketing politicians as if they were brands of toothpaste.
What he doesn't say, though, is that striking the poses advised by marketing men is pretty much the only strategy the main parties have left.
They can't distinguish themselves from each other, as they used, to by representing different classes. The big class divide in party politics (though not elsewhere) is now that between the political class - Tories, Labour and the MSM - and the rest of us.
Nor can they distinguish themselves by philosophical positions, such as equality vs liberty. The political class has long lost the ability to argue for philosophical or ethical principles.
It claims this is a welcome development, that ideology has been supplanted by a hard-headed "realism": as Blair said, "what matters is what works."
Even here, though, the parties can't distinguish themselves. In neither party are there many individuals who can point to a proven track record of success in managing government departments, agencies, companies, regiments or whatever.
All they have left, then, is vapid marketing and the rhetoric of managerialism.
Except that in politics this is even more vacuous than it is in companies. At least the latter - albeit much more rarely than bosses claim - can sometimes point to actual achievement.   
The difference between marketing toothpaste and marketing politicians is that toothpaste succeeds in cleaning our teeth.

"Wasting time"

Here's another idiot:

According to employment law firm Peninsula, 233 million hours are lost every month as a result of employees "wasting time" on social networking....
Mike Huss, director of employment law at Peninsula called on all firms to block access to sites such as Facebook.
He asked: "Why should employers allow their workers to waste two hours a day on Facebook when they are being paid to do a job?" 

Let's do the sums. There are roughly 13.7 million members of MySpace, Facebook and Bebo in the UK. If we assume - farcically - that no-one is a member of more than one, and that all these are in employment, this implies that the average person spends 17 hours a month on these sites whilst they are at work - roughly 45 minutes a day. If we assume only half these 13.7m are in jobs, this figure rises to 90 minutes. This is surely implausibly high; it's a lot of time to spend answering and asking damnfool questions.
Which raises the suspicion that Mr Huss might not know what he's talking about. After all, how likely is it that he knows more about what 25 million workers do at work than their own bosses know?
And what's so special about wasting time on networking sites? How much time gets wasted in pointless meetings, or because the IT is crap, or because the air-conditioning doesn't work, or because people get delayed by lousy transport etc etc? Bad management is surely a vaster source of wasted time that Facebook.
And, surely, if employees' work suffers because they are spending time on Facebook, this is a problem to be solved by managers having a word with them - just as if their work suffers because they are late, hungover, or just plain stupid.
As Rick says, moaning about Facebook is a sign of weak management.

Arsene vs managerialism

If I'm so down on the idea of management, why am I so chuffed that Arsene Wenger has signed a new contract?
It's because there are huge differences between football coaching, at least as Arsene does it, and conventional management:
1. Arsene's virtue lies to a large extent in detailed technical knowledge. If a 16-year old kicks a ball anywhere in the world, he knows about it, and knows how to develop the player through training, diet and technique. In this sense, his knowledge is like that of Taylorite scientific management. It's knowledge of a precise process. It's not a general transferable thing called "management."
2. Football is a practice in the MacIntyrean sense. It is sufficiently stable to permit the development of expertise; knowledge gained years ago is still partly relevant today. It's therefore possible to develop excellence. By contrast, company bosses live - or pretend to live - in a "fast-moving, changing world". In such conditions, experience depreciates rapidly so skills can't be developed. In such a world, there's a place for entrepreneurship. Less so for teachable, developable skills.
3. Football has a precise way of measuring success. Business doesn't. No-one can tell if a firm is maximizing profits; company accounts certainly won't tell you. But everyone knows if Arsenal lose. This means company bosses can bluff. Football coaches, ultimately, cannot.
4. A football coach's skill lies largely in the ability to coordinate productive assets, players - that's what tactics are. Although this should be a key function of company bosses, it's often overlooked in favour of guff about motivation and passion - sure signs of charlatanry in football or business.
5. Football coaching doesn't encourage bad habits among employees. Gilberto and Rosicky don't play badly because they are playing office politics in the hope of getting the boss's job. Robin van Persie doesn't fail to score because he's waiting for head office's approval, though he occasionally does so because scoring is rather vulgar.
6. Arsene isn't just bringing technical know-how. He's also bringing productive assets; Cesc (swoon) is at Arsenal because Arsene is. Ordinary managers rarely do this.
It is, therefore, wholly wrong to call Arsene a manager. He's doing something better, nobler, than that.

What do bosses do?

The news that bosses' pay has soared raises a question no-one seems keen to ask: what, exactly, do bosses contribute to company performance?
Truth is, it's not clear that they add anything.
Take Terry Leahy, CEO of Tesco. He's probably the most respected FTSE 100 boss. So you'd expect Tesco's performance to be much better than its competitors. Is it? Well, these figures show that in 2005-06, Waitrose made a profit of £11,830 per full-time equivalent worker. Figures here suggest Tesco's profit per worker was £8350. Leahy's allegedly superior management nous doesn't translate into obvious out-performance of a worker-owned competitor.
And this might be true generally: other evidence suggests worker-owned firms beat orthodox capitalist ones.
So, do bosses matter? The best recent evidence that they might comes from this paper. The authors looked at what happened to Danish companies after bosses die. They found that profits fall by an average of 18% in the two years after the death of a CEO. This suggests CEOs do create profits. What's more, profits also fell if the CEO suffered a death in the family - a child, spouse or parent but not (in vindication of Les Dawson) mother-in-law. This suggests company performance suffers if the boss takes his eye off the ball*.
Sounds convincing? No.
First, the study found that it's only CEOs' deaths that reduce profitability; the death of board members makes no difference, which suggests most top executives don't add to profits.
Secondly, the CEOs who die might not be a random sample of all CEOs. They might be better than average ones - say, because they are unusually highly driven and so more prone to heart disease.  If so, falling profits after their deaths might merely show that better-than-average bosses create profits, not that the average boss does. Evidence for this is that corporate profits were higher than average in these firms before the CEO died.
Thirdly, the paper leaves unanswered the mechanism whereby CEO death depresses profits. If profits fall because candidates to replace him jockey for the top job rather than do their own job, then this is evidence that hierarchy is bad for firm performance.
Fourthly, this might be evidence not that management works, but rather that the belief in management works. Maybe centuries of indoctrination by leadership ideology has led people to think that they can and should work hard only if a boss is there to lead or motivate them.
An analogy might help. Say a medieval scholar wanted to find if God existed. So he looked at villages whose priest died. And he found that sin in these villages rose relative to villages where the priest stayed alive. He infers that God as mediated by the priest is a force for good.
But this inference wouldn't necessarily be correct. Maybe God doesn't exist, and the priest is just a charlatan, and all the scholar has found is that people believe erroneously in the magic of the priesthood.
I draw this analogy because Alasdair MacIntyre did:

"Managerial effectiveness" functions much as Carnap and Ayer supposed "God" to function. It is the name of a fictitious but believed-in reality, appeal to which disguises certain other realities.

Perhaps in a few decades' time, we shall regard CEOs in the same way atheists today regard the corrupt medieval clergy - as people who exploited a fictitious and regressive ideology to accumulate power and wealth at the expense of others.

Tories against managerialism

Rejoice! The Tories are starting to get it. Their proposals for the NHS recognize, albeit dimly, that managerialism is the problem, not the solution. Healthcare professionals, they say, "should be
engaged in decisions about the future shape of services", and it should be easier for clinicians to become managers.
This recognizes three apsects of the anti-managerialist case:
1. Management is not a general skill that can be applied to any organization, but is instead embedded within particular practices. This means managers must have organization-specific backgrounds. As Protherough and Pick say in their marvellous Managing Britannia:

The notion that [19th century managers] had in common a single talent which can be identified as "managerial skill", capable of ready transference between their different callings, is pure fantasy. That Dr Barnardo could equally well have run a chain of newsagents, or that Thomas Cook could just as readily have run a chocolate factory, is manifestly absurd.

2. Professsional standards matter. And these cannot be fostered by management. "Professionalism cannot be imposed by government or by a regulatory culture" the report says.
3. The motivation and retention of staff requires more than money. It requires them to have a say.
Of course, the Tories haven't abandoned managerialism completely; their report contains too much guff about "effective leadership."
But this is a start. And it raises some questions. If empowering professionals - albeit partially - is a good idea in healthcare, why shouldn't it be a good idea too in other public services such as teaching? Why, even, shouldn't it apply in the private sector? And if the Tories continue in this direction, might there come a time when those of us who favour worker control would have to support them rather than Labour?
Strange times indeed.

The truth within managerialism

The Public Accounts Committee reports that "government is still not achieving good value for money from the £1.8 billion spent on consultants" - corroborating the message of this book. There are several legitimate reactions to this.
One is that profligacy and incompetence is just what you'd expect.  As Milton Friedman said: "If I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government."
Another - of course - is that it's a sign of New Labour's faith in the magical powers of management.
There is, however, another reaction. It's that New Labour's instincts are right here - the civil service is a failing organization; not all the multiple failure of government are due to consultants.
There are (at least) three factors behind this:
1.  Motivation is low; this is a natural consequence of its enormous size.
2. The "gentleman amateur" culture of the civil service - the belief that if you've read Thucydides you can do anything - leads to turnover of senior civil servants between departments, with the result that insufficient expertise is accumulated.
3. Selection effects. When I left university in the mid-80s, few of my contemporaries entered the civil service; pay was poor relative to the private sector, and it was thought to be politicized. The upshot is that there's now a missing cohort - very few able civil servants in the late 30s-mid 40s. (though there are of course exceptions).
New Labour's instinct to look for outside help therefore has a kernel of justification. But only a kernel.
For one thing, this means they should have used consultants earlier. And it means the failure to transfer consultants' skills to permanent staff is especially deplorable.
More importantly, though, New Labour has failed to see a key truth. The main reason why the private sector is more efficient than the public sector is because the market acts as a cleansing mechanism, destroying (albeit slowly and imperfectly) bad management.
The solution to bad management is not to choose experts to solve the problem - the PAC, like the National Audit Office earlier, shows that this experiment has failed. Instead, incompetence is the inevitable result of lack of competition.   

Managerialism vs the rule of law - again

I know I risk sounding like a one-trick pony, but almost all the nasty aspects of New Labour arise from its managerialist ideology.
Its decision to abandon the SFO's investigation into the al-Yamamah arms deal - thus proving that the rule of law is as weak here as it is in the US - illustrates this.
Oliver Kamm gets it right:

There is no agreed standard for judging the public interest apart from a system of rules, enshrined in statute and convention, that binds everyone – including government. A system of rules makes policy more predictable, and thereby more efficient. It also makes a freer society, as citizens can live without fear of arbitrary authority....The public interest beyond upholding the rule of law is hard to pin down.

New Labour clearly rejects this. As Shuggy says, it thinks the national interest exists outside the rule of law.
Now, in what circumstances could New Labour be right and Oliver and Shuggy wrong?
It would a world in which the government had perfect foresight - so it could tell precisely when breaches of rules were welfare-enhancing.
In the real world, of course, such foresight doesn't exist. We need rules precisely because the unaided judgment of the authorities is flawed, and would lead to arbitrariness. It's bounded rationality and limited foresight that makes rule utilitarianism more attractive than act utilitarianism. It's no accident that one of the greatest proponents of the importance of limited knowledge - Friedrich Hayek - was also a great advocate of the importance of the rule of law.
But managerialism rejects the idea of bounded rationality. It claims that leaders do have perfect foresight.
Those who decry New Labour's shameful breach of the rule of law are correct. Where they err is in believing this is a peripheral aspect of New Labour government. It is, instead, a natural consequence of its essential managerialism.

Booze culture and managerialism

Shuggy, Not Saussure and DK all say good things about the National Alcohol Strategy. What they don't say is that this reveals one of the sillier features of New Labour ideology.
I don't mean merely the assumption that heavy drinkers are irrational or ill-informed, nor the hubris that it's possible to change a "drinking culture" that's existed for centuries, nor even the ignorance of the fact that there are already laws against being drunk and disorderly.
Instead, the policy reveals New Labour's addle-brained managerialism.
Put it this way. Let's assume there is a problem of heavy drinking.
Now, faced with any problem any proper craftsman or professional would immediately ask: what tools do I have to solve this?
And the obvious answer in this case is: higher alcohol prices.
But the government has explicitly rejected this. Brown's latest Budget only uprated most duties in line with inflation, and froze spirits duty for the 10th successive Budget.
Instead, its "strategy" seems to consist mainly in talking and labeling bottles.
Here we see two characteristic features of New Labour.
One is the belief that you can change people by hectoring them rather than by changing incentives - that is, prices.
The other is the Blair's failure to act as a proper manager. One justification for hierarchy is that it's necessary to coordinate different departments. But this is exactly what Blair's failed to do in this case: there's no coordination between what the Department of Health does and what the Treasury does.
Rather than do what Libby Purves rightly enjoins - to be boring but efficient - Blair prefers windy talk of "leadership."
Buth this is the ideology of management, not good practical management.

Endemol's opponents: wrong

There's something that stinks about Endemol's programme  in which a dying woman chooses whom to give a kidney to.
No, the stink isn't the programme itself. What stinks is the sanctimonious hypocrisy of Endemol's critics.
There are four things I object to here:
1. The careless use of the word "unethical." Many seem to mean by this: "eek, I don't like it." It's unreflecting emotivism.
2. Their failure to recognize liberty. You might object that it is wrong for programme makers to exploit the desperation of people who need a kidney transplant. But these people benefit from appearing, because there's more chance of getting a kidney from the programme than there is from the ordinary waiting list. Why should anyone complain about the free decisions that people make, which make them better off?
3. "Shooting the messenger." Tom Watson says Endemol is "sick." No, Tom. What's sick is that people are dying because of the shortage of kidneys - a shortage exacerbated by the refusal of our managerialist rulers to consider using markets. Endemol is merely publicizing this fact. Whilst there is such a shortage, kidneys have to be rationed somehow. In practice, this means doing so by luck and by medical protocols that discriminate against the mentally ill. It's not obvious that rationing according to popular vote is much worse than this.
4. Closed minds. Endemol raise genuine and important issues: how can we increase the supply of kidneys and how should we allocate scarce ones? These questions deserve consideration. But then, so many people prefer glib judgmentalizing to serious thinking.
None of this, of course, is to defend Endemol. They're doing it just for the money. But we've known ever since Adam Smith that, sometimes people who are motivated by money can inadvertently do good.