La La Land

I just saw La La Land, which is one of the best musicals ever.  Looking at the AFI  rankings, I would say that it as number four, below Singin' in the Rain, West Side Story, and The Wizard of Oz.

1	SINGIN' IN THE RAIN	1952
2	WEST SIDE STORY	1961
3	WIZARD OF OZ, THE La La Land	1939
4	SOUND OF MUSIC, THE	1965
5	CABARET	1972
6	MARY POPPINS	1964
7	STAR IS BORN, A	1954
8	MY FAIR LADY	1964
9	AMERICAN IN PARIS, AN	1951
10	MEET ME IN ST. LOUIS	1944

The film is about careers. Musicians and actresses are in among the most competitive fields, but many lines of work involve the setbacks in the story of Sebastian (Ryan Gosling) and Mia (Emma Stone).  This is the first HR musical.  

Several of the great musicals of the mid-twentieth century, such as Singin' in the Rain and A Star Is Born, were also about entertainment careers, but none had the realism of La La Land. 

"Someone in the Crowd," posted above, is a paean to networking, which I have discussed with my students for 26 years. Business values have become so infused in our culture that they have become the subject of our best art, just as heroic valor was the subject of the best classical art. 

Diversity Efficiencies and Synergies in Your Accounting Firm

I just submitted this as my monthly (March) column in AICPA Career Insider. 

Diversity Efficiencies and Synergies in Your Accounting Firm

Mitchell Langbert, Ph.D.

Associate Professor, Brooklyn College

Prejudice, stereotyping and intolerance are patterns out of place in today's commercial society.  In prehistory tribal suspicion of outsiders may have been necessary.  One of the messages of the prisoner's dilemma, a foundation of game theory, is that where information cannot be shared there will be a tendency for players to minimize maximum losses.  During the Ice Age, access to food supply may have been a zero sum game: one tribe's killing and capturing the woolly mammoth meant that other tribes went without supper.  The strategy of minimizing maximum losses may have led to inter-tribal violence and conquest.   The primitive, zero sum mentality carried forward through antiquity and the Middle Ages, when aristocrats' wealth depended on conquest and serfdom.  In assuming that profit is possible only through exploitation of workers, Marxism makes related assumptions.   

In the 18th century the world changed with the Enlightenment's development of science and of a commercial society that depended not on tribe or on ethnicity but on contract.  The win-win, profit maximizing society began to replace the tribal, zero sum society.   One result is the reduction of discrimination over time.  Gary Becker's Economics of Discrimination[i] shows why.  Discrimination inhibits the allocation of human resources to their best uses and so reduces profit.  Justice and rationality coincide, and firms that discriminate pay an economic penalty.

Given the long term progress toward greater rationality we see increasing diversity in the workplace.  The gains have taken two centuries to materialize because of tribalism's atavistic remnants: nationalism, racism, slavery, Imperialism and National Socialism.  But rationality and justice seem to be winning with respect to diversity.  A 2010 Society for Human Resource Management Survey (SHRM) found that 68% of survey respondents have diversity practices.  This was down from 76% in 2005 when the economy was more robust.

The SHRM survey also found that 71% of respondents provide diversity training but only 36% measure its impact.  HR has lagged other business disciplines in adopting metrics and performance measures.  Donald L. Kirkpatrick has argued that any training program should be measured in four ways: participant reaction, behavioral change, on-the-job performance and results. [ii] Any diversity intervention, including training, ought to be evaluated following those steps.   Too often they are not, especially in the most important way: long term results.

Moreover, the diversity training in most firms may fail to penetrate the most sensitive issues.  Only 32% of the respondents to the SHRM survey feel that their organization is diverse at all levels and just 29% say that senior management is committed to workplace diversity.  But a sound diversity program does not require hoopla or even enthusiasm.  The extent of a firm's commitment to diversity ought to depend on the extent to which diversity contributes to efficiency and justice.

In particular, it is possible that an intentional increase in diversity beyond mere non-discrimination with respect to hiring for the firm's specific jobs yields better profitability than a nondiscriminatory but homogenous firm would experience.  If this is true, then reverse discrimination may be justified with respect to specific hiring decisions. 

This claim is grounded in findings about group dynamics.  Solomon Asch, a Swarthmore College psychologist, found that when individual test subjects were placed among a group of seven of Asch's confederates and the group was shown cards with three lines, one of which was shorter than the others, if the seven confederates said that one of the longer lines was the shorter one, then 32% of the test subjects agreed that the longer line was shorter. [iii]  Arguably, diversity can counteract organizational conformity and groupthink.  Diverse backgrounds potentially contribute to one of the chief advantages of group decision making: they broaden the available information pool.  Diversity may have benefits above and beyond the absence of discrimination. These can be called diversity synergies.  Whether diversity synergies exist is an empirical question, a matter of fact.

If there are no diversity synergies, or if firms have already exploited diversity synergies, and if firms have not systematically discriminated, then we would not expect to find consistent results showing that diversity increases productivity or profit.  The reason is that if firms match the best candidates to the best jobs then they are efficient whether or not they are diverse.  If firms have discriminated, then less diversity would be correlated with lower profitability whether or not diversity synergies exist.  If firms have not discriminated then finding that there are returns to diversity would suggest diversity synergies.

In the December 2003 issue of Journal of Management Susan E. Jackson, Aparna Joshi and Niclas L. Erhardt reviewed research on team and organizational diversity.[iv]  They write:

                Our examination of these studies yielded few discernible patterns in the results. For most

                diversity dimensions, the findings across studies were mixed… studies of sex diversity have found its

                effects on performance are sometimes positive… sometimes negative… and sometimes not significant…  

                Findings regarding age diversity were also mixed... the evidence that supports the often-made claim that

              racio-ethnic diversity improves performance is limited.

This finding suggests either that firms have not discriminated or that there are no diversity synergies beyond any that firms already have exploited.  As a result, if chief executives are not focused on diversity issues the reason may be that they have already addressed the problem.

At the same time, firms must emphasize diversity.  In their textbook on human resources, Managing Human Resources 10th Edition, Susan E.Jackson, Randall S. Schuler and Steve Werner argue that there are three kinds of justice, distributive, procedural and interactional, and all three are relevant to diversity. [v] Employees who feel mistreated are likely to retaliate or become demotivated.  Therefore, even if equity is a matter of perception a sound diversity program is essential to human resource management.  

Despite the considerable gains that have been made, individuals still often stereotype and prejudge others. We can all stand to eliminate biases and prejudices.  In establishing organizational values, top management's commitment to just dealing is essential. This includes explicit, senior level commitments to diversity and inclusion. 

Two good approaches are mentoring and training. Mentoring programs can facilitate the promotion of employees who belong to groups that have been excluded from higher level jobs.   As well, diversity can be viewed as a broadening learning experience.  For example, encouraging support for employees who celebrate different holidays and learning about others' cultures and religions can be enjoyable learning experiences that build bonds among employees.

In short, progress with respect to diversity has been made.  The issue will not disappear, but rational strategic thinking, economic analysis and program evaluation should take precedence over slogans and clichés. 

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[i] Gary S. Becker. The Economics of Discrimination. Chicago: University of Chicago Press, 1957.

[ii] Donald L. Kirkpatrick. Evaluating Training Programs Fourth Edition. San Francisco: Berrett-Koehler Publishers,, 2006.

[iii]Solomon E. Asch, S. E. Studies of independence and conformity: A minority of one against a unanimous majority. Psychological Monographs, 70 (416), 1956.

[iv] Susan E. Jackson, Aparna Joshi and NIclas L. Erhardt. "Recent Research on Team and Organizational Diversity: SWOT Analysis and Implications."  Journal of Management 2003:29: 801-830.

[v]Susan E. Jackson, Randall S. Schuler, Steve Werner. Managing Human Resources. Mason, Ohio: South-Western Cengage Learning, 2009.

New Year's Resolution: Ethics Is HR's Business

I submitted the following article to the American Institute of Certified Public Accountants' newsletter, AICPA Career Insider. 

New Year's Resolution: Ethics Is HR's Business

Mitchell Langbert,  Ph.D.

In the last two years several leading institutional players,  to include the Society for Human Resource Management, the Business Roundtable's Institute for Corporate Ethics, and the Deloitte accounting firm have noticed that trust between firms and their employees has flagged and that trust can, or ought to be, viewed as an ethical issue.  A 2009 Business Roundtable and Arthur W. Page Society survey found that the public sees a power imbalance that enables business to abuse its position.  The Business Roundtable recommends renewal of public trust in business through common sense:  the production of quality services; steady jobs in healthful environments; and reasonable stockholder returns. Last year, Deloitte found that of one third of Americans who plan to seek a job, 48 percent cite a loss of trust due to poor communication as a reason.  Deloitte notes that lack of trust affects talent management.  Moreover, competence and ethics go together.  91% of employees say that they are more likely to be ethical when they fit their jobs. 

But, if we are to believe Adam Smith's Theory of Moral Sentiments,  trust is, as statisticians might put it, a dependent rather than an independent variable. That is, trust depends on good ethics. It is not good ethics. As Smith argues[1]:

Our rank and credit among our equals…depend very much upon … our character and conduct, or upon the confidence, esteem and good will which these naturally excite... 

Three virtues, in Smith's view, constitute good character:  prudence with respect to our dealings, justice and beneficence with respect to others. Self-command is needed to ensure that knowledge of the right thing to do is accompanied by ethical action.[2] In these claims Smith follows the ideas of Plato, Aristotle and the Stoic philosopher Zeno, who emphasize virtue and self-restraint.  Smith distinguishes between commutative justice, according to which which we do no harm to others and distributive justice, according to which we give due credit. Much as Deloitte found, Smith argued in 1759 that a good life-work fit relates to ethics[3]:

(W)e are said to do injustice to ourselves when we appear not to give sufficient attention to any particular object of self-interest. In this last sense, what is called justice means the same thing with the exact and perfect propriety of conduct and behavior, and comprehends in it not only the offices of both commutative and distributive justice, but of every other virtue, of prudence, of fortitude, of temperance.

 

Smith writes in the Aristotelian tradition of virtue ethics, according to which virtues or competencies ground ethics.  In Nicomachean Ethics  Aristotle claims that virtues, especially prudence, self-command, courage (risk neutrality) and most of all justice  need to be applied through practical wisdom and deliberation, which are similar to what Daniel Goleman has called emotional intelligence.[4]

Virtue Ethics as Emotional Intelligence

The 18th century Enlightenment philosophies of David Hume and Immanuel Kant created a gulf between ethics and competence.  Hume claims that there is no logical foundation for ethics and that ethics is pure emotion. Kant claims that ethics is based on practical reason.  In the late twentieth century Alisdair MacIntyre[5] pointed out that the attempt to absolutely ground ethics in emotion or reason through sweeping philosophical systems lead to Nietzsche's nihilism and rejection of ethics altogether.  Nietzschean nihilism is reflected in the evolution of management thought through writers like Chester Barnard, who claims that morality is malleable and grounded in the executive's ability to manipulate employees' emotions.[6] Arguably, the Nietzschean mindset has influenced fallen managers and investment bankers like Jeffrey Skilling and Ivan Boesky.  It is unfortunate that the Nietzschean view has come to be associated with business and capitalism when capitalism  more directly rests on the benevolent self-interest of Smith and Aristotle. 

Once the gulf between emotional intelligence and practical wisdom is bridged Milton Friedman's claim that business's job is to produce a profit in opposition to corporate social responsibility falls by the wayside.  It is business's job to produce a profit consistent with ethical norms, justice and benevolence. Neo-classical economic theory makes similar implicit assumptions.  The equation of wage and marginal revenue product echoes Aristotle's concept of justice as proportion, and some philosophers even have controversially claimed that Aristotle was the first to enunciate marginalist economic theory.   Given the free market's foundations of justice and benevolence,  illegal or unethical behavior is as bad as losing money.  We have seen this demonstrated again and again in government and business.  The failures of Robert Moses and Robert McNamara in government were failures of competence.  The failures of Long Term Capital Management and Arthur Anderson were also so.

Ethics Is a Human Resource Function

The Sophists were the first to claim that ethics is relative and can be viewed as a teachable competence.  Plato argued that ethics has a natural foundation and it depends on universal Ideas.  Aristotle agreed that ethics depends on natural foundations but that it needs to be applied particularly, to the appropriate circumstances, and the competencies on which it depends are subject to what March and Simon, 2,400 years later, call bounded rationality.[7]  Smith saw his ethical system as consistent with the Aristotelian view. Several Enlightenment philosophers, most importantly Kant, rejected Aristotle's emphasis on judicious contextual and particular application of virtues and argued for Platonic ethical universality.  This has the unfortunate effect of banishing ethics from profit seeking because there are always exceptions to universal ethical laws.  The exceptions debase ethical currency and managers adopt Nietzschean nihilism. In contrast, Smith grounded his ethics on virtue and competency and does not make universalistic claims.  Smith argues that culture modifies underlying natural ethical patterns.

Human resource managers are expert in understanding and applying competencies.  Job analysis is the gathering of valid information about jobs including job specifications or tasks and job criteria or competencies.  In fact, the trend in job analysis has been away from emphasis on duty or task and toward competency.  Yet, the classical Greek word for competency, arête, is the same as the word for virtue.  Hence, in Aristotle's view (if Aristotle could have imagined a world based on technology and trade, neither of which he saw as important or even desirable beyond a small degree) human resource managers are the arbiters of virtue in the corporation. Moreover, there are universals but they are modified by circumstances.  Universal rules need to be tempered with judgment and deliberation.

More to the point, justice is the fundamental competency on which all job responsibilities are based. Its application is imperfect and subject to cognitive limits on rationality. Practical deliberation and judgment are crucial to all professional and managerial jobs but without justice cooperation and coordination necessary in large firms are impossible.  Hence, HR managers ought to be the advocates of justice in the corporation.  For upon justice prudence, benevolence and all other competencies as we define them today depend.

---

[1] Adam Smith, Theory of Moral Sentiments. Boston: Wells and Lilly, 1817.  Volume II, p. 26

[2] Ibid., p. 65

[3] Ibid., p. 112

[4] Daniel Goleman, Emotional Intelligence: Why It Can Matter More than IQ. New York: Bantam Books, 1995.                             

[5] Alisdair MacIntyre, After Virtue: A Study in Moral Theory. Notre Dame, Ind.: University of Notre Dame Press, 1981.

[6] Chester Barnard, Functions of the Executive. Cambridge, Mass.: Harvard University Press, 1938.

[7] James G. March and Herbert Simon, Organizations.  New York: John Wiley and Sons, 1958.

Globalization and Human Resource Management

I am teaching an online human resource management class this month.  One of our first day's discussion boards was about globalization and human resource management.  I sent the class the following e-mail to cap off the class discussion on globalization and human resource management:

>The class is more balanced with respect to globalization than my classes last semester.  Globalization gets bad press but I am for it, although not in the way it is done.  The theory of comparative advantage that David Ricardo first expressed in the early 19th century shows why trade works.  Each country has relative strengths and weaknesses. If each country does what it is relatively good at (not necessarily better at than other countries, just what it is relatively productive at compared to its other opportunities) then the world will produce more and the greater productivity can be exchanged globally, making each country better off.  Tariffs and other trade restrictions thus prevent possible gains from trade.

The worst examples of tariffs were during the 1840s in Britain and Ireland and in the 1930s in Russia. In both instances there were mass starvation, first of the Irish during the Potato Famine and second of the Ukrainian kulaks under Stalin's socialism.  These two instances of trade restrictions amounted to mass murders, the first of  one million deaths and the second of I believe about 10 million deaths. Thus is the promise of tariffs, trade restrictions, economic autarky (whereby everything is manufactured at home) and government intervention.

While such extremes are unlikely here, at least in the near future, there are other repercussions to trade restrictions.  For instance, trade restrictions preceded the Second World War.  The Smoot-Hawley Tariffs, the most extreme in American history, were passed in 1930 at the outset of the Great Depression. It is difficult to prove that World War II and the Great Depression were entirely caused by the Smoot Hawley tariffs. But it is astonishing the labor movement now advocates similar kinds of tariffs.

The Great Depression was far worse than any that preceded it and there was much less government intervention in the economy until within 20 years of the Great Depression.  Hence, the Smoot Hawley tariffs and the increased regulations of the 1890-1920 Progressive era and the New Deal along with the establishment of the Federal Reserve Bank in 1913 all may be part of the reason for the Great Depression of the 1930s.

Astonishingly, Americans under George W. Bush and Barack H. Obama have opted for policies that are similar to the policies that were adopted preceding the Great Depression: expansion of the money supply, more regulation, higher tariffs. Have fun, guys. My career is drawing to a close. You are the ones who will be hurt by economic insanity.

One of the chief policies that the Federal Reserve Bank and the US government have emphasized is ever increasing foreign indebtedness.  Numerous foreign countries have been holding large shares of treasury bonds. This has the effect of propping up the dollar.

The natural response to excessive outsourcing ought to be a weakening dollar.  As firms move overseas demand for dollars declines. When the dollar declines demand for foreign goods also declines and firms move back.  But the US government and the Federal Reserve Bank have orchestrated a pattern where foreign countries hold our debt, keeping import prices low.  Thus, the two-party system, specifically including the Democrats under Obama and the Republicans under Bush, have pushed for policies that ensure that jobs leave the country.

Of course, given the huge indebtedness now to foreign countries, if those countries were to unilaterally sell off the US debt there would be a currency collapse here. The dollar would be worth pennies, much like the Papiermark in Weimar Germany in the early 1920s.

The effect of the twin policies of monetary expansion by the Federal Reserve Bank coupled with subsidization of the dollar by foreign central banks and governments has been a weakening of the manufacturing sector here and the comparable strengthening of the competitiveness in European and emerging market countries, for instance, the BRIC countries, Brazil, Russia, India and China. At the same time, consumers here are better off than they ought to be as merchandise is at low prices.  However, the inflation due to the Fed's monetary expansion can be seen in the rising property taxes and cost of services such as construction, government, health care and education.

Thus, it is inaccurate to view globalization and its implications as separate from monetary and Federal Reserve Bank policy. These issues are linked as well to human resource management.

Many students note that culture clash, complexity and the need to increase skill levels are coupled with slow job growth, outsourcing and increasing competition.  All of these factors coincide with monetary policies.

There will be no easy way out for the US.  The dollar will become weaker and consumers will be worse off before manufacturing will return here.

There were several interesting responses to this discussion board, one of which was R's:

"Some employees who have lost their jobs have either relocated, changed their career, returned to school, negotiated with their former employer for a part-time position, pay-cut, or have accepted a lower level job. In turn, this has often led to a decline in living standards.

"2. Many employees who had maintained their jobs, felt insecure and were under constant pressure at work. This led to chaos, over-achievement, competition to outperform colleagues and an obvious decrease in desire to help co-workers leading to decreases in efficiency and lower product quality. This marked a  withdrawal in loyalty toward the employer and the employer’s goals. The low morale and insecurity would also heighten the employee's interest in social insurances (health, social security, education…) as the fear of job loss intensified.

"3. On the other hand, the import of these goods manufactured offshore has created end-line positions at retail stores...This yields a boost to the nation’s economy and the acceptance of diversity and multiculturalism. It can also foster positive feelings towards others cultures and harvest communication and cross-cultur(al) exchange of ideas on an international, national and intra-company level. (Of course the reverse exists due to globalization as well, with Dunkin Donuts, Starbucks, Walmart, McDonald's etc…  opening worldwide.)"

All of these behavioral and economic outcomes are linked not only to globalization but also monetary policy.

The error virtually everyone who discusses this makes is to blame globalization for phenomena that would not occur without the Federal Reserve and other central banks' monetary policies that have pegged other world currencies to the dollar.  The dollar has been propped up, encouraging exodus of manufacturing jobs.  If the propping stops, consumer prices of imports will rise and job losses (and foreign trade deficits) will come to a halt.

My Day at the Police Academy

I spent this afternoon at the NYPD's Police Academy on 20th Street between second and third avenues. The executive training department asked me to provide an hour and a half lecture on team building and human resource management to the Captain's Leadership Effectiveness Training Program, which is given to newly promoted precinct captains.  There were about 15 new captains in the group and they were obviously excited about their recent promotions.  Many excellent points were raised.  I have been lecturing at the Police Academy once per year.  I hadn't done my usual executive training seminar because I'm on my Sabbatical, but someone requested that I do this instead.  One of the interesting things I learned today is that crime rates have been sharply cut in New York over the past twenty years. Since 2000 the crime rate has been cut by 60%, including both property and violent crime.  The head of the training program told me that policing has vastly improved in productivity because of new technology.  When I lived in Astoria, Queens in the 1980s, auto theft was common.  That particular crime has been reduced by 90% since then, to less than 10% of the level it was.  The size of the police force has been cut by one fourth since 2000, but crime has been reduced by 60%.  The NYPD is doing a great job.  I am never disappointed by the uniformed services.

Goal Setting for Human Resources: A Revolutionary Management Tool That Works

My column "Goal Setting for Human Resources: A Revolutionary Management Tool That Works" appears in this month's AI-CPA Career Insider. I note:

"Over the past 17 years I have assigned a goal setting exercise to approximately 2,500 MBA and undergraduate students. The exercise involves the students’ development of a mission or visualization of what they would like to achieve in light of their personal values and a specific action plan. About one third of the students have considerable difficulty in expressing their mission and goals. Even when MBA students have been out of school for six or seven years and have achieved managerial levels of responsibility, it is difficult for many to “own” their career paths or to visualize achievements in which they believe. Only about a third of students can express a mission or visualization of what they aim to achieve in light of concrete values. Most students know that they want to make more money; move up in the hierarchy; or start a business. But few can express a tangible picture of what they would like to achieve or why."

Read the whole thing here.

Herbert Clark Hoover on Twentieth Century Human Resource Management

In most standard treatments of twentieth century history such as Louis Hartz's Liberal Tradition in America Herbert Hoover is painted as a conservative advocate of laissez-faire who caused the Great Depression through indifference and inaction. He is contrasted with Franklin Roosevelt who is painted as a true social democrat and harbinger of socialist progress. In New History of Leviathan Murray Rothbard does a good job of debunking this nonsensical mythology. Hoover was very much a Progressive in the early twentieth century sense, and his policies anticipated much of the substance of the New Deal. One of the sources that Rothbard cites is the reprinting of a speech that Hoover gave in November 1920 to the Federated American Enginnering Societies in the American Federationist, the journal of the American Federation of Labor (January 1921 issue, volume XXVIII, pp. 35-40).

What is remarkable about Hoover's speech is not just his warmth toward organized labor and his fulsome expression of favor toward regulation of industry and collective bargaining but also the degree to which he anticipated flexible labor relationships that characterized late twentieth century Japanese and US factories. Hoover advocates competency-based pay, cooperation between labor and management guided by collective bargaining, employee involvement in problem solving, flexible work hours to adjust for business downturns, hours of labor that vary with trades and government restructuring of labor markets to facilitate job search among seasonal workers. This last concept was being touted as innovative by labor economists of the 1990s, seventy years after Hoover discussed it. Along with the flexible work practices, Hoover advocated collective bargaining and regulation of industry. He was not an advocate of laissez-faire. One must wonder about the historians who would claim so given easily available evidence such as this speech. Allow me to quote from part of the speech:

"Among the greatest of the problems before our country -and in fact before the world- are those growing out of industrial development....The congestion of population is producing subnormal conditions of life. The intermittency of employment due to bad coordination of industry...The aggregation of great wealth with its power of economic domination, present social, economic ills which we are constantly struggling to remedy...Our mass of regulation of public utilities and of many other types of industry...is a monument to our efforts to limit economic domination...A profound development in our economic system apart from control of capital and service during the last score of years has been the great growth and consolidation of voluntary local and national associations. These associations represent great economic groups of common purpose...And to me, one question of the successful development of our economic system rests upon whether we develop the aspects of these great national associations towards coordination with each other in the solution of national economic problems or whether they grow into groups for more violent conflict...There are certain areas of conflict of interest but there is between these groups a far greater area for common interest...

"...In the question of industrial conflict resulting in lockout and strike one mitigating measure has been agreed upon in principle by all sections of the community. That is collective bargaining...

"There lies at the heart of all these questions the great human conception that this is a community working for the benefit of its human members, not for the benefit of its machines or to aggrandize individuals..."

Among the steps that Hoover advocated to encourage community of interests were hours of labor varying with trades; improvement of labor exchanges; flexible hours to adjust for business downturns; competency- or pay-for-knowledge-based wages with wage structures graded for skill; cooperation between labor and management; employee involvement in problem solving; and the use of the closed shop to encourage greater worker efficiency. The Japanese have done much along the lines of the last point with their "enterprise unions", but Hoover was not saying "company unions" or "representation plans". He used the phrase "closed shop", an approach that was illegalized under the Taft Hartley Act as granting excessive power to labor.

It is also of special interest that Hoover emphasized the role of factions or special interest groups. His hope that they would cooperate never really materialized, although as Rothbard shows during World War I and as Radosh shows during the early period of the New Deal, fascist-like regulation of the economy through governmentally-mandated cartels were attempted.

Profit Sharing Circa 1868

Leter to Railroad Executive Charles Francis Adams, Jr.* written in New York, February 8, 1868, almost 140 years ago to the day:

"I am very much obliged for your note and for the pamphlet on "Railroad Legislation" by which it was accompanied...

"The plan of paying railroad employees in funds out of profits has been tried on the Orleans railroad in France. I am not quite sure about the particular line, but certainly it is one of the French ones, and I am informed with great success. I think cooperation, or some modification of it, will yet be resorted to in all employments and occupations, in which zeal is of high importance, and cannot be secured by constant inspection. On railroads, the effect of dependence of the servants for part of their wages, on net receipts, would undoubtedly diminish waste, promote vigilance and politeness to passangers. I think the employer's art--the art that is of getting the most out of men, of bringing their faculties most effectively into play in industry, is still in the rudest condition in all civilized countries. Fixed wages is one degree better than slavery, which only appeals to one motive of action, and that a low one."

--Edwin Lawrence Godkin, founder and editor of the Nation and editor of the New York Evening Post
William K. Armstrong, editor, The Gilded Age Letters of E.L. Godkin,, pp. 119-20
Albany, NY 1974: SUNY Press

Question: How much has management improved since 1868?



*"Adams was...the great-grandson of both United States President John Adams and United States Secretary of the Navy Benjamin Williams Crowninshield, and the grandson of president John Quincy Adams...After graduating from Harvard University in 1856, Adams served on the Union side in the American Civil War...He received the brevet rank of brigadier-general in the Regular Army in 1865...Adams was president of the Union Pacific Railroad from 1884 to 1890, having previously become widely known as an authority on the management of railways. Among his writings are Railroads, Their Origin and Problems (1878)."

Moses Maimonides, Profit Maximization and the Case of a Disabled Actor

I recently posed the following discussion question to students in my web-based human resource management course:

>"Your name is Daryl F. Zanuck, co-founder of Twentieth Century Fox. It is the early 1950s. A talented actor, recently graduated from Yale Drama School, asks to meet with you. He says that he wants to be a leading man for Fox. The problem is that the actor is missing an eye. He had lost an eye in a childhood illness. You tell him that although he has acting ability, it is not realistic for someone missing an eye to be a leading man. Appearance is an essential job requirement, a job related requirement or a business necessity, and you cannot consider him for such a role. Only one in a million people gets to be a movie star. Someone missing an eye has to be ruled out. The answer was "no".

(1) Did Zanuck make the right decision?
(2) What are the two or three chief ways to validate staffing decisions and employment tests?
(3) Did Zanuck apply a potentially validated selection criterion?
(4) Does your answer to (3) matter to your answer to (1)?

All students must participate. Do not wait until the last minute as failed postings will not get credit."

Of the twenty-odd responses, only two or three said that it might be possible that the actor should be hired. Most said that he should not. Several students contrasted profit-maximization (not hiring) with altruism (hiring). None suggested that the profit maximizing decision would be to hire the actor if he were competent.

The following response was typical:

>"Depending on how you look at it the decision that was made could have been right or wrong. The two ways of looking at it is the legal way or your own selfish way. Legally the decision Zanuck made (may be) against the law, since it's discrimination to reject some one due to a defect or appearance (if they're the best qualified and reasonable accommodation can be made). But on the other hand if I was looking from my own selfish point of view I made the right decision because the job does require appearance and for this job he was not the right candidate even though he might have been an outstanding actor but sex sells."

(Technically, the above answer is incorrect because if appearance is an essential job requirement, as it is with actors, then the Americans with Disabilities Act does not mandate hiring.)

The question is a trick one, because it is based on the A&E biography account of Peter Falk.

Wikipedia's entry on Peter Falk states:

"Falk's unusual gaze is due to a glass eye that he has had for most of his life. His right eye was surgically removed at the age of three because of a malignant tumor."

According to the Peter Falk official site, Falk has appeared in 38 films, to includ "Murder, Inc.", "It's a Mad, Mad, Mad, Mad World", "A Woman under the Influence", the (1979) original "In Laws" in which he co-starred with Alan Arkin, "Wings of Desire" and "The Sunshine Boys". He has been nominated for two Academy Awards. Imdb.com indicates that he has appeared in 130 television shows.

Falk is best remembered for his starring role as Detective or Lieutenant Columbo, one of the best known and most memorable roles in television history.

According to Falk's A&E Biography, Daryl F. Zanuck told him that he could not be a star because of his eye.

In Economics of Discrimination Gary Becker showed that not discriminating, basing hiring decisions on pure performance criteria, is profit maximizing. Thus, economic justice and the maximization of profit coincide. The individual who best fits the job ought to be hired regardless of race, creed or disability.

The idea that a disabled actor might be best qualified is not intuitively obvious. Human resource management ought to serve the end of rationalization; HR ought to overcome psychological and social biases and develop employment methods that are profit maximizing. This is an ethical quest. However, the rationalism of good human resource management is seldom appreciated because it does not acknowledge the egos of senior managers, who may flatter themselves into believing that their judgment is more reliable than methods that are statistically validated over long periods of time. One example might be not doing something stupid like hiring an actor with a glass eye.

In fact, few American firms utilize human resource management policies that could improve financial performance to the extent that they might. One example is in hiring boards of directors. I have not heard of firms using statistically validated selection methods in hiring boards. The idea is almost never suggested. Yet, current governance problems could be swept away if the current "I shoot pool with a guy so let's put him on the board" approach to corporate governance is replaced by identification of the skills needed; development of ability, knowledge or assessment center tests; and application of those tests to the rational selection of corporate boards.

The equation of justice and ethics has Aristotelian roots and has many links to the Judeo-Christian tradition. In an article in Online Athens Ronald Gerson discusses the ideas of Moses Maimonides, the famous Aristotelian Jewish philosopher, about the rungs of charity:

>"While he emphasizes anonymity in the higher rungs, when he reaches the eighth and highest level, this is what he says: 'The highest form of charity is to strengthen the hand of the poor by giving him a loan, or joining him in partnership, or training him out of his poverty, to help him establish himself.'"

That is, the best form of charity is to enable people to help themselves. This is done by empowering them with competence and the ability to succeed on their own. Good human resource management involves uncovering the competencies that can best support firms' performance; finding most competent employees; and finding ways to enable the most competent employees to flourish.

Regulated Versus Free Labor Markets

I teach a web-based class in human resource management. The class covers most of the traditional personnel material such as job analysis, compensation and employment discrimination. In the section on employment discrimination, I asked the students to participate in several discussion boards about (1) "employment at will, pro or con?"; (2) "affirmative action, pro or con?" and (3) "the regulated workplace versus free labor markets". The last question was taken from the course text by Randall Schuler and Sue Jackson and read:

"Some people feel there are simply too many laws and regulations governing how companies may manage their employees. These people believe that everyone would be better off if we let the free market system work without so much government interference. Other people believe that employees are not sufficiently protected against unfair treatment. They believe that employers would treat employees unfairly if our laws didn't forbid it. Which position do you most agree with? Why?"

The majority of students supported affirmative action; a larger majority opposed employment at will and 100% favored regulated as opposed to free labor markets. To quote three students' comments (they were almost all along these lines):

>"I wholeheartedly do not believe employers would treat employees fairly if our laws did not forbid it. Industry in our country is a business. The bottom line is the more profit you make the more successful the business."

>"I think government intervention, as far as the employee-employer relationship is concerned, is a positive thing. I wouldn’t go so far as to say that, 'employees are not sufficiently protected against unfair treatment', but I would say that if laws didn’t forbid it employers would treat employees unfairly. Government intervention, I believe has proven to be most helpful to employees, in form of regulations/laws/policies."

>"I am glad there is government intervention, if the government rules and regulations did not exist it would be a catastrophe. The EEOC, OSHA and ADEA were created to protect our employees because of unfair treatment to employees. I do believe without the governments laws that employers would treat employees unfairly. We have come a long way but there is still room for improvement because there are still a lot of employers that still break the rules and get way with unfair treatment towards their employees. I do not believe Free Labor Market would help improve the work environment it would just do the opposite. Government intervention is a positive thing definitely not a negative thing."

My response to the class was as follows. Note that unlike the majority of left wing professors, I do not try to suppress the students or give them low grades because I disagree with their views. Rather, I engage in civil debate.

"I enjoyed reading the class's comments and I urge you all to look at what your classmates had to say in the three excellent discussions on affirmative action, employment at will and workplace regulation. However, I must say that I disagree with the majority of students on all three topics, particularly with respect to the regulated workplace. Thus, I do not agree with affirmative action; I do agree with employment at will; and I do not think that employment regulations are helpful to workers. Instead I would argue that workplace regulation is harmful to workers and does not make workplaces more ethical.

While I agree with the argument that affirmative action need not involve quotas and is primarily a means to encourage consideration of previously excluded groups through non-intrusive methods such as advertising in newspapers in neighborhoods where "under-utilized" groups are predominant (this is the traditional description of it), I do not believe that it works that way in reality or that its proponents really believe that it works that way. As Thomas Sowell has ably pointed out in a long list of books, such as his recent "Affirmative Action Around the World", affirmative action, defined as hiring preferences based on race, have repeatedly led to anger, conflict and violence.

In "Affirmative Action Around the World" Sowell traces the implications of affirmative action in five countries, to include India, Malaysia, Nigeria, Sri Lanka and the United States. He notes that affirmative action has often led to extreme resentment and even violence. In Nigeria, the genocide of the Ibo people in the 1960s was largely the result of resentment of affirmative action policies. Likewise, affirmative action policies favoring "Untouchables" in India has done nothing to improve their economic position but instead has tended to help a small, privileged segment within the Untouchable group who would have had access to the best schools and jobs anyway. In turn, resentment against the privileged group has lead to violence against the bitterly impoverished Untouchables not in the privileged category who cannot benefit from the affirmative action laws in part because they live in rural areas where there are no schools or transportation to schools.

Sowell argues that this is characteristic of affirmative action: that it leads to increased resentment and discrimination against the least privileged members of the group that affirmative action claims to help, while it is the most favored members who benefit. But the most favored members of the group whom affirmative action claims to help often have greater advantages in the first place than the majority in society, including the less privileged members of the dominant group (e.g, the white working class in the U.S.) as well as the less privileged members of the group whom affirmative action claims to help. For instance, there are probably no groups in America more downtrodden than the WASPs who live in Appalachia. Yet, they are not helped by affirmative action and in fact are potentially excluded from jobs because of it.

Similarly, in Malaysia laws favoring the "sons of the soil" that amount to apartheid-like discrimination against the ethnic Chinese minority have resulted in the impoverishment of Malaysia. In other words, by excluding highly productive Chinese entrepreneurs, who are a self-made minority in Malaysia, the Malaysian economy has suffered. The Malaysians, who live as a minority in Signapore but a majority in Malaysia, have a higher per capita income in Singapore than in Malaysia. (Malaysia cut off Singapore from the rest of Malaysia because it was primarily Chinese and Singapore is now much more successful than Malaysia.) In other words, the affirmative action policies in Malaysia against the Chinese (in favor of the so-called "sons of the soil", i.e., the native Malaysians) have made the average Malaysian poorer, not richer.

The pattern of unforeseen effects stymies all regulatory systems. Employment at will is another example. In Europe, employees are protected by extensive legal requirements, the so-called social contract. The effect of the "social contract" is to reduce employment and increase unemployment. Britain, which has the weakest "social contract" among the major European nations (excluding the newly free nations of eastern Europe) has seen a massive influx of young French men and women, who cannot find jobs because of the "humane" regulation of the workplace in France. Likewise, the Muslims who dominate the low-income suburbs or banlieue have been excluded from jobs precisely because there are so few jobs. They lead lives of desperation, excluded from the workplace, because of the benign "social contract". The French majority feels very good about how generous it is, but France is a society rife with ethnic hatred and anti-Semitism. The "social contract" is anything but benign.

There are so few jobs in Europe (unemployment is much higher than here) because there is so much beneficent regulation. The riots in the banlieue have gone on for several years, and recently have broken out again. There is so much "ethical" and "humane" regulation in France that it is not unusual for French college grads to fail to find jobs for ten or even twenty years after graduation. Not very humane in my book.

The tradeoff between Europe and America is clear. Where there is heavier workplace regulation, as in Europe, unemployment and the exclusion of unfavored and unlucky workers goes up. In America, where there is employment at will, unemployment goes down and employment goes up. The jobs may not be as good, and perhaps the employees aren't as treated well, but you don't have the social exclusion of large segments of the population in America that you have in "ethical" Europe, a continent whose history is blighted with mass murder as well as the "benign" social legislation of Bismarck.

I wold argue that if most regulation were repealed in the US, then demand for employees would skyrocket. Contrary to what several student claimed, regulation hugely reduces wages. It doesn't increase them.

Wages are determined by the interaction of supply and demand. Wages are an economic phenomenon that are enhanced by a more competitive economy. Deregulation means more demand, which means higher wages.

The best security for all is a competitive economy that is generating considerable innovation and lots of jobs. That can be done in a deregulated, laissez faire economy. The more regulation in America, the more Brooklyn will look like the French banlieue, economically depressed and full of people who cannot find jobs.

Nor do I believe for a second that government is more ethical than business. I do not believe that at all. In fact, the worst crimes against humanity have been perpetrated by government, not by business. The Nazis, the communists, the fascists, the Castros, the Hugo Chavezes have all advocated workplace regulation in the name of beneficence.

If you look, for instance at Hitler's 25 point program in the 1920s, the Nazi Party advocated workplace regulation similar to what American liberals advocate:

"14. We demand profit-sharing in large industries.

"15. We demand a generous increase in old-age pensions.

"16. We demand the creation and maintenance of a sound middle-class, the immediate communalization of large stores which will be rented cheaply to small tradespeople, and the strongest consideration must be given to ensure that small traders shall deliver the supplies needed by the State, the provinces and municipalities.

"21. The State has the duty to help raise the standard of national health by providing maternity welfare centers, by prohibiting juvenile labor, by increasing physical fitness through the introduction of compulsory games and gymnastics, and by the greatest possible encouragement of associations concerned with the physical education of the young."

Thus spake Hitler.

Rather than relying on government, the approach that made America successful was allowing individual initiative as much free rein as possible. No system is perfect. But in the 19th century, the average worker improved their standard of living tremendously even as 100s of thousands of Europeans, Italians, Irish, Jews, Poles, etc. flocked here. No other nation in history has seen such a large influx of immigration, yet the economy was able to create better jobs for these people BECAUSE OF FREE ENTERPRISE. The economy didn't start slowing down until government intervention began in the 1900s.

How to Make US Business More Competitive?

Q. Dear Professor Langbert,

I really enjoy the feedback you supply at the end of the forums. I have one question for you- what can be done to "save" U.S. economy, and provide decent jobs for everyone?

A. In my opinion there need to be 6-7 reforms:

1. Reform the education system. Make sure that all elementary students have good training in the three r's as well as socialization and interpersonal skills. Use objective testing and tighter management of elementary schools to motivate such outcomes.

2. Stablize the monetary system by adopting a fixed rule whereby money supply grows at the same pace as productivity times population or adopt a metal (i.e., gold) standard

3. Change the something for nothing mentality that has infected all walks of life, from Wall Street to MTV. The idea that manipulation, deception or luck is the chief ingredient that leads to success a problem. The TV show "Entourage" is as bad as the Jim Cramers
who scream for lower interest rates and welfare for the rich

4. Limit government to a smaller, fixed percentage of the economy than currently. This smaller percentage could not be changed except in times of emergency or war

5. As well, the companies need to became more careful about how they hire directors on the board as well as CEOs. Criteria for promotion and advancement need to be clearly articulated and revealed publicly, and the reasons for the promotions need to be publicly revealed. Hiring criteria at all levels need to be objective. The current fixation on college degrees needs to be either proven/rationalized or eliminated.

6. Companies need to do a better job of training, empowering and using incentives to motivate employees.

7. Adoption of HR strategies that motivate innovation and quality. Many manufacturing firms have focused on costs at the expense of quality.