What They Tell You
Adam Smith famously said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” The market beautifully harnesses the energy of selfish individuals thinking only of themselves (and, at most, their families) to produce social harmony. Communism failed because it denied this human instinct and ran the economy assuming everyone to be selfless, or at least largely altruistic. We have to assume the worst about people (that is, they only think about themselves) if we are to construct a durable economic system.
What They Don’t Tell You
Self-interest is a most powerful trait in most human beings. However, it’s not our only drive. It is very often not even our primary motivation. Indeed, if the world were full of the self-seeking individuals found in economics textbooks, it would grind to a halt because we would be spending most of our time cheating, trying to catch the cheaters, and punishing the caught. The world works as it does only because people are not the totally self-seeking agents that free-market economics believes them to be. We need to design an economic system that, while acknowledging that people are often selfish, exploits other human motives to the full and gets the best out of people. The likelihood is that, if we assume the worst about people, we will get the worst out of them.
How (Not) to Run a Company
In the mid-1990s, I was attending a conference in Japan on the “East Asian growth miracle,” organized by the World Bank. On one side of the debate were people like myself, arguing that government intervention had played a positive role in the East Asian growth story. On the other side, there were economists supporting the World Bank, who argued that government intervention had at best been an irrelevant sideshow.
The World Bank economists argued that even if intervention had worked in East Asia, government officials who make policies are (like all of us) self-seeking agents, more interested in expanding their own power and prestige rather than promoting national interests.
A distinguished-looking Japanese gentleman in the audience raised his hand. Introducing himself as one of the top managers of Kobe Steel, the then fourth-largest steel producer in Japan, he said:
“I have a PhD in metallurgy and have been working in Kobe Steel for nearly three decades, so I know a thing or two about steel-making. However, my company is now so large and complex that even I do not understand more than half the things that are going on within it. Despite this, our board of directors routinely approves the majority of projects submitted by our employees, because we believe that our employees work for the good of the company. If we assumed that everyone is out to promote his own interests and questioned the motivations of our employees all the time, the company would grind to a halt.”
Selfish Butchers and Bakers
Free-market economics starts from the assumption that all economic agents are selfish, as summed up in Adam Smith’s assessment of the butcher, the brewer and the baker. The beauty of the market system, they contend, is that it channels what seems to be the worst aspect of human nature—self-seeking, or greed—into something productive and socially beneficial.
Given their selfish nature, shopkeepers will try to overcharge you, workers will try their best to goof off from work, and professional managers will try to maximize their own salaries rather than profits for shareholders. However, the power of the market will put strict limits to, if not completely eliminate, these behaviours: shopkeepers won’t cheat you if they have a competitor around the corner; workers would not dare to slack off if they know they can be easily replaced; hired managers will not be able to fleece the shareholders if they operate in a vibrant stock market.
We May Not Be Angels, But…
The assumption of self-seeking individualism has a lot of resonance with our personal experiences. We have all been cheated by unscrupulous traders. We know too many corrupt politicians and lazy bureaucrats.
However, we also have a lot of evidence showing that self-interest is not the only human motivation that matters even in our economic life. Self-interest, to be sure, is one of the most important, but we have many other motives—honesty, self-respect, altruism, love, sympathy, faith, sense of duty, solidarity, loyalty, public-spiritedness, patriotism, and so on—that are sometimes even more important than self-seeking as the driver of our behaviours.
Work to Rule
A good example to illustrate the complexity of human motivation is the practice of “work to rule,” where workers slow down output by strictly following the rules that govern their tasks. You may wonder how workers can hurt their employer by working according to the rule.
However, this semi-strike method—known also as “Italian strike”—is known to reduce output by 30–50 per cent. This is because not everything can be specified in employment contracts and therefore all production processes rely heavily on the workers’ goodwill to do extra things that are not required by their contracts or exercise initiatives when the rules are too cumbersome.
The motivations behind such non-selfish behaviours by workers are varied—fondness of their jobs, pride in their workmanship, self-respect, solidarity with their colleagues, trust in their top managers or loyalty to the company. But the bottom line is that companies, and thus our economy, would grind to a halt if people acted in a totally selfish way.
The Japanese Production System
Not realizing the complex nature of worker motivation, the capitalists of the early mass-production era thought that, by totally depriving workers of discretion over the speed and the intensity of their work, the conveyor belt would maximize their productivity. However, the workers reacted by becoming passive, unthinking and uncooperative, when they were deprived of their autonomy and dignity.
The pinnacle of a different approach is the so-called “Japanese production system” (sometimes known as the “Toyota Production System”), which exploits the goodwill and creativity of the workers by giving them responsibilities and trusting them as moral agents. In the Japanese system, workers are given a considerable degree of control over the production line. They are also encouraged to make suggestions for improving the production process.
This approach has enabled Japanese firms to achieve such production efficiency and quality that now many non-Japanese companies are imitating them. By not assuming the worst about their workers, the Japanese companies have got the best out of them.
Morality Is Not an Optical Illusion
When people act in a non-selfish way—be it not cheating their customers, working hard despite no one watching them, or resisting bribes as an underpaid public official—many, if not all, of them do so because they genuinely believe that that is the right thing to do.
Contrary to Mrs. Thatcher’s assertion that “there is no such thing as society. There are individual men and women, and there are families,” human beings have never existed as atomistic selfish agents unbound by any society. We are born into societies with certain moral codes and are socialized into “internalizing” those moral codes.
Of course, all this is not to deny that self-seeking is one of the most important human motivations. However, if everyone were really only out to advance his own interest, the world would have already ground to a halt. More importantly, if we design our economic system based on such an assumption, the result is likely to be lower, rather than higher, efficiency.
If we assume the worst about people, we will get the worst out of them.