We have a lot of sophisticated analyses that try, with great precision, to predict and describe existing systems in terms of an assumption of universal rationality and a sub-assumption that what that rationality tries to do is maximize returns to the self. Yet we live in a world where that’s not actually what we experience. The big question now is how we cover that distance between what we know very intuitively in our social relations, and what we can actually build with.
Please note that Yochai Benkler equates universal rationality, with the self-maximising individual which is at the basis of neoclassical economics and neoliberal politics, and not Reason as defined philosophically since the Enlightenment.
In the text below, from an Edge Video, he reviews different attempts to go beyond the reductionist views of the dominant but now crisis-ridden U.S. political and business philosophy.
Excerpt from Yochai Benkler:
“The big question I ask myself is how we start to think much more methodically about human sharing, about the relationship between human interest and human morality and human society.
There are lots of different disciplines where people have been doing work for a long time. In many cases, doing work that was peripheral during the period of the rise of selfish rationality. Really we’re talking about a period from about the 1950s until roughly now, when in economics, in political science, in law, in evolutionary biology, you got an increasing relative importance for explanations that depended on individuals acting in ways that maximize their returns, where their returns largely are assumed, though not universally, to be material with self-interest.
Game theory and mechanism design imagines people as acting with self-interest and guile. Political science builds models that are based on self-interested voters and self-interested Senators and self-interested Congressmen, each one trying to understand what is their interest. Is it to get elected again? Is it to maximize a particular position? And each time you build a system around this idea of individuals interacting, trying to maximize their own returns.
In evolutionary biology, for example, one thing that you saw was the rise of very sophisticated ways of explaining behavior that seemed to be altruistic, purely in terms that redounded to the benefit of the individual organism. This is where reciprocity becomes so important. What we see again throughout all of these different disciplines is that somewhere around the 80s in some places, like organizational sociology, somewhere closer to the 90s, if you talk for example about evolutionary biology and the resurgence of the possibility of multi-level selection and group selection where it’s not all reduced to the individual, there are also components that happen at the group level.
Certainly in the context of political science and the emergence of some studies of commons and common property regimes and collective actions — successful collective action models. In economics, we see a substantial work in experimental economics, like Ernst Fehr’s group in Zurich and Sam Bowles and Herb Gintis in Santa Fe, starting to do experiments that show that people deviate from selfish rationality. That people systematically and predictably behave in ways that are much more cooperative than would be predicted by the game theoretical impact.
You’ve got theoretical economists, like Roland Benabou, Jean Tirole, and Matthew Rabin, who begin to build quite sophisticated models that try to implement very different kinds of motivations, like even a sense of self image and a sense of ‘I’m okay’ relative to the world. (There is a beautiful study, for example, from two or three years ago about knowledge workers. (Bruno Frey and Margit Osterloh)) A sense of what’s normal and moral. A sense of what’s socially preferable. You begin to see even in economics in the ’90s and early ’00s, an increased salience and attention and major complications to(?) efforts to build much more sophisticated models of multiple motivations including pro-(Inaudible) motivations.
In organizational sociology, in management science, you look — Toyota production system was the big ah-ha moment, when Toyota came to the U.S. for the first time and created the first NUMMI plant in GM’s Fremont plant in the early ’80s. All of the stories that used to be “oh it’s Japanese culture, it’s something completely different, it’s not about us,” were flipped. One of the worst performing GM plants in 1980 closes down, opens up two years later under Toyota management, almost the entire same employees said the entire union leadership. Within a couple of years it becomes the most productive plant in the U.S.
Who knows what the situation is now, but as of the numbers last year, it continued to be one of the three most productive plants in the U.S. Same people, same industry, very different organizational structure built a lot less on hierarchy, a lot less on precise specification of exactly what everybody needs to do. Much more on teamwork, much more on supporting normative commitment to innovation, to process innovation. And still relatively very constrained. It is the automobile industry.
We’re not talking about high-tech industries. But there you have a very different orientation in terms of setting up the motivation and relationships among workers, between workers and management. You move from having 70 process engineers on the floor telling each employee exactly what to do, to having none. And having the teams have a lot of autonomy on how they do things.
That started a movement, again, in organizational sociology and management science, of people starting to say, wait, maybe we shouldn’t be thinking purely in terms of whether workers shirk or not, and how the firm exactly monitors against shirking and how it employs rewards and how it employs monitoring up and down the line, because we assume that everyone, from the top management down to the last employee, is going to be try to shirk and d therefore we need to set up the incentives just right.
In all of these disciplines, the last 20 years and particularly the’ 90s onward, have seen emerging studies, some models, some experiments, some observational field studies, that are showing, A) that people systematically do not behave according to the traditions of selfish rationality under controlled conditions; B) that when you set up systems with different assumptions, you get different behavior, and you get actually better results. There is a beautiful study, for example, from two or three years ago about knowledge workers. Knowledge work is one of the hard things to get precise in contracts. How do you tell somebody, “How creative have you been at 11:00 in the morning?” And so that’s a classic place where having precise contracts to precisely monitor what you do and what you don’t do becomes very difficult.
They did observational studies, and they built a model and they built observational studies. What happens to knowledge-sharing within teams if on the one hand, you create explicit incentives, monitor the incentives, you share more, you get more; on the other hand, you build much more team spirit and you make it the thing that’s the right thing to do as a member of this team and create much more social relations within the team. What they found was … setting up a social dynamic that’s a team dynamic, and what’s understood to be the right thing to do achieves much greater internal knowledge flows than setting up an effort to create incentives. So you have very real implications.
As we’re sitting here talking, and GM is teetering on the edge, one of the ways that’s interesting to think about it is to see that GM in many of its structural components is the quintessential output of models based on selfish rationality. If we look both at the shop floor structure, at the supply chain structure and at the executive compensation structure, along all three of those dimensions, it’s implementing theories of organization that assume shirking unless you get the material incentives just right. At the shop floor level, a lot of process engineering, a lot of monitoring, very precise specification of actions. You basically have to specify the actions, you have to monitor, you have to compensate for successful action and punish for not, and you have to then have the managers have more managers on top of them, until you go all the way up. That’s one level in terms of the internal. It’s a very monitoring and controlling hierarchy system.
Then starting in the late ’80s but really reaching a peak in 1990, we have this invention by Jensen and Murphy of agency theory. The theory there was, everybody’s trying to shirk. And the way you solve is somebody above the monitors. Well, who monitors the monitors? Somebody above them. When you get to the very top executives, what do you have to do? You can’t monitor them. It straddles all the way down up to a point. The answer is, what you have to do is you have to align the incentives of the person at the top with the company. That way they don’t want to shirk, because for every dollar that the company is making, they are making ten cents or however much they’re making. The result? Executive compensation packages that emerged in the 1990s. If you look at the U.S. around 1980, its executives are making roughly the same multiple of what an aligned employee is making as European counterparts. Japanese counterparts making somewhat less. This is on the order of 30 to 50 times as much.
Fifteen years later, you see multiples of 200 and 500. Across the board. You get to a point where you look in the mid-2000s, and the CEO of GM is making more than the top 21 executives at Honda put together. But it’s theory-driven. You need to align the incentives just right, because otherwise, the person at the top will shirk. Well, the fact of the matter is we didn’t get this alignment. In the last five or six years, even Jensen and Murphy themselves in later studies became very cautious about the degree to which they thought that it worked. You had more fraud. The percentage of companies that had questionable tax filings, for example, was correlated to the degree of executive compensation, because you’re looking for quick fixes. You are drawing people who are particularly motivated by these high returns, and you’re compensating them in ways that allow them to pull out returns very quickly. Essentially you actually didn’t get even what you wanted there. You got a mis-alignment of incentives.
And the third is with supplier relations. Again, over the course of the last 20 years there’s been a bit of a convergence between the Japanese company’s relationship with suppliers and the American company’s relationship with suppliers. The Japanese company is becoming a little less tightly bound than they were in keiretsus, and the American firm is becoming more connected with long-term contracts. But again, if you look at the studies of this industry, what you see is that the big three continued to in various ways defect. They would get to a certain point in negotiations, then suddenly they’d demand a five percent reduction. Or suddenly they would take plans for an innovation and give it to a competitor to set up competitive bidding. You had a breakdown of trust.
Japanese companies didn’t. The same exact U.S. suppliers working with firms manufacturing in the U.S. produced different levels of technology and different levels of efficiency because of who they were dealing with. At all of these layers you see a company, and in many senses this is true of Detroit more generally, but in GM this is a specific case. There is a theory-driven set of practices that are about monitoring people below, incentivizing people above, and always trying to make sure that you set up the relationships so that you extract everything. Not a big success.”