When capitalism went wrong, how homo economicus has evolved, and why mutuality is more effective than selfishness: on September 29, Paul Collier, Professor of Economics and Public Policy at the Blavatnik School of Government, took part in the NES Public Lecture series with his lecture on the past and future of capitalism. Econs.online publishes excerpts from Collier’s lecture.
Before speaking about the future of capitalism, it is necessary to say a couple of words about its past. Victory in WWII was a massive push forward for Russia, Britain, and America. The enormous sacrifice made for a common goal grouped people together in the sense of shared identity. The ability to forge a forward-looking unity of purpose was a huge asset that laid the foundation for economic progress. But we had different economic systems. Capitalism has decentralized decision-making: firms solve their problems themselves to survive competitively. This system is able to discover solutions to problems more quickly than the highly centralized system of the Soviet Union. Because of this advantage, Western countries moved ahead much more rapidly.
However, in the 1980s, capitalism, especially in Britain and America, started to go wrong. Before that, for 200 years the less educated had been gradually catching up in terms of income with the more educated, but in the 1980s, the gap started to widen again. City dwellers with decent university education found themselves on a rising escalator of prosperity, meanwhile, the less well-educated from provincial cities ended up on a descending escalator. The shared identity collapsed.
It eroded not from the bottom of society, but from the top: the most successful people started to shift their identity away from the country they lived in. A new philosophy arose: “We succeed because of our education, we are productive, we work hard, and we deserve it”. This philosophy infected society in the 1980s: individualism was on the rise, and people began to identify themselves as members of a group of high achievers rather than a group of fellow citizens.
Homo economicus in firms
In the meantime, a particular theory of business management was taking shape. It was based on the notion of the ‘economic man’ (very popular in the 1970s-1980s), who was greedy, selfish, and lazy. Milton Friedman’s idea that the sole purpose of a firm is to make profits for shareholders prompted the arrival of super managers whose main job was to make lazy and greedy employees work for the prosperity of the company. However, these super managers turned out to be the same selfish greedy men, which is why shareholders had to use incentives to make them productive. In fact, managers just kept increasing their income, and that is how the incentivized bonus culture began. The pay gap between chief executives and their workforce has widened from 30 to 1 in the 1960s to 300 to 1 these days.
Monitoring systems ubiquitous at all levels of the firm that allow shareholders to control managers and managers to control their workforce started to appear. As a result, we now find ourselves in a system where the chief executive knows best, people lose the power of discretion and become mere cogs in a machine. Over the last 25 years, we have asked British workers whether they have enough power of discretion in their jobs to do them properly to their satisfaction; 25 years ago, most people said 'yes', now, most people say 'no' because they feel like cogs in the machine. This system did not work even in the firms that inspired it.
In the 1960s, General Motors was extremely successful and worked under a system of top-down monitoring control, in which all workers had to do what managers said. Then there came along an upstart little rival from Japan called Toyota. It was an unknown company, and at that time, Japan was not associated with high quality. Toyota had an entirely different philosophy: the management dressed like the workers, ate in the same cafeteria, and their salary was not that much higher than that of the workers. Toyota’s quality control system was based on the notion that the responsibility for quality lies with every worker on the production line. There were cords hanging along the line and if workers saw faults, they pulled the cord and stopped the entire line. The cost of stopping the car assembly line was $10,000 a minute! If workers pulled the cord needlessly, they could inflict massive damage. But Japanese workers were conscious of the responsibility they held: they spotted faults and fixed them in a timely manner, eventually outranking GM in quality.
GM management began to understand that the company was losing its market share. They analyzed Toyota’s approach and introduced a similar policy of stopping the assembly line if faults were detected. However, for dozens of years, antagonism had been building up at GM between its workforce and the management; the workforce was considered greedy and selfish. The line managers at General Motors knew all too well what would happen if any old Fred or Joe were given an opportunity to inflict damage of $10,000 a minute on General Motors. The managers hung the cords in a way that prevented workers from actually using them because they did not trust their workforce. This system, based on the notion of ‘homo economicus’, did not work socially. It turned out that stringent monitoring and incentives are not enough to make “greedy, selfish, and lazy people” work well.
Human nature and the nature of capitalism
People turned out to be very different. We are not just greedy, lazy, and selfish creatures, although this can be the case. We are much more complex, and we are not driven by greed. We are the only mammals that are pro-social. We're designed to solve common problems together. And we want to belong to a group: we are willing to follow the norms of the group and make an effort to win the respect of the group we identify with.
Get a sheet of paper and write down the three things in your life you regret the most. I do not think it will have anything to do with material things but with your relationships with others. I doubt you will regret not having bought shares in Apple. It will most probably be about letting somebody down, i.e. betraying the unity of purpose. And that, actually, proves that we are hardwired to observe the unity of purpose.
Socializing has other positive effects, too. Thanks to close ties, people can imitate the success of others, apply new solutions, and experiment, thus, fostering progress. Let me offer you a comparison with the squirrel. The squirrel now is exactly the same as it was 1,000 years ago but it has a limited understanding of the future and no imagination. Over the last 1,000 years, humans have not changed genetically but their life and attitudes have changed dramatically. People have become more cooperative, we have learnt to learn from each other, we experiment, we try things by trial and error. That is why the decentralized system works much better than the centralized one.
In a centralized system, the politicians are inclined to say: “I know what to do, and we all are going to do it.” Very few politicians have the courage to say: “I do not know what to do, work it out for yourself.” But this is the proper way to deal with future problems: somebody will get it right, someone will get it wrong, but either way, we will learn from each other. Capitalism works because it has decentralized decision-making, not because people are greedy and selfish. Capitalism gives economic agents more freedom. This allows for the faster implementation of new ideas and solutions. The more complex a system is, the less centralized its management should be. The triumph of meritocracy wrought by the notion of the greedy, selfish, and lazy man has eroded our sense of shared identity underpinning mutual support and economic progress, as history shows. It is high time we turn back to fundamental values and remember the responsibilities we have to people who have been less fortunate.