Why management by money doesn’t work

 
When the great British economist Lord Keynes was trying to modernize the study of economics in the 1930s, he was beset with criticism from Practical Men. These Practical Men (they were all men, then) knew that you couldn’t spend your way out of a recession, that reducing wages would cut unemployment, that all the economic ills of the country could be cured by chopping government spending, and so on. They weren’t sure how they knew these things — since they had no empirical evidence to go on — but that didn’t stop them clinging firmly to their beliefs. So when Keynes came to publish his magisterial General Theory in 1936, he reserved an especially waspish comment for them:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

When the Second World War broke out, the Practical Men shut up: even the most extreme market fundamentalists realized that increasing government spending was better than losing the war. When the British and American economies recovered, when unemployment disappeared but inflation was kept under control, they went into a state of shock, and remained that way during the generation after 1945, when economies were sensibly managed without unemployment or poverty and with strong growth and low inflation. But you can’t keep a bad idea down forever, and the Practical Men (now joined by Practical Women) began to take their revenge after the 1970s.

I’m not concerned here with the damage they did to the world economy, which is still continuing. I’m concerned rather with another issue: what these Practical Men and Women also absorbed from defunct economists — this time about economic behavior at the everyday level — because it’s this ideology that has shaped the organizations for which many of us work.

Economic Individualism

I’m talking about Economic Individualism, or, if you prefer, selfishness. As Keynes put it:

. . . the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone.

 
This theory—that somehow it all comes out all right if people pursue their selfish financial interests—is often associated with Adam Smith and his theory of the Hidden Hand. In fact, Smith didn’t really say this.

Smith, an eighteenth-century Moral Philosopher not an economist in the modern sense, believed that God intervened in the details of everyday life to make everything as nearly perfect as possible. He claimed that divine intervention meant that, in spite of everybody behaving selfishly, God would arrange things so that the common interest was served. In its banal form — its Hollywood version, if you like — this has been interpreted as meaning that because everyone pursues their selfish interests, the common good will result, which is the opposite, of course, of what Smith thought.¹

The Practical Men and Women who run today’s corporations have absorbed this distorted ideology, whilst still assuming, of course, that they themselves are exempt from any intellectual influence, and that their views are based firmly on experience and common sense.

The ideology has had many bad effects. The gravest, perhaps, is the idea that people work solely for money (selfish economic interest again), and that decisions about taking or leaving jobs are therefore purely financial ones.

Old-fashioned economics saw wages as the price of persuading someone to move from sloth to a job. It was assumed that people did not want to work, and that they would only agree to give up their time if they were paid to do so (which is why there are no voluntary organizations, of course).

So getting and retaining staff became just a question of paying enough, but not too much, to buy enough of peoples’ time; and getting them to work harder either by bribing them with more money, or threatening them with less.

It followed that selfish behavior should also be encouraged within an organization. Staff should be forced to compete with each other, so that the best, or the strongest and most ruthless at any rate, would come out on top, and so benefit the company. And private companies, as a whole, were seen to have no function except to enrich their shareholders by competing to make the largest profits possible.

How this is ruining our organizations today is the subject of the next article in this series.

An Englishman now resident in Europe, John Fletcher has had a long career in the public sector in several countries. He has spent a good deal of time in working environments outside the Anglo-Saxon world, and has written and lectured on organizational issues.

photo © Darren Hester for openphoto.net CC:Attribution-NonCommercial

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Technorati Tags: economics, market fundamentalists, world economy, Economic Individualism, selfish financial interests, today’s corporations, distorted ideology, selfish economic interest,

1. It’s interesting that Alan Greenspan has acknowledged being heavily influenced by Ayn Rand — another extreme proponent of individualism. [Editor] [↩]