Towards a New Theory of Management

The conventional understanding of economics and business administration is that managers act so as to maximise profits. Disagreement seems confined to whether managers do or ought to maximise long-term profits at the expense of short-term profits; here it is assumed that the only counter-motive to the longevity of the firm is the short-range interests of the shareholders and the managers themselves. In other words, it is assumed that one economic motive is opposed solely by another.

Against this narrow-minded Homo oeconomicus assumption we need to set what we actually know about people: namely that they are powered not only by the acquisition of resources but also by the acquisition of status, which is always relative, and also by the drive to think well of oneself, deservedly or not.

Economics would suggest that workers be treated well and remunerated as much as possible within the bounds of profitability, so as to create loyalty and motivation, and also that they constitute a market for the goods that they themselves produce. Entrepreneurs and managers have no difficulty understanding how this might work for their own class; does not The Economist tirelessly advocate great rewards to entrepreneurs and managers, that they may invest and innovate and labour long in the land? The same people who claim that they will become demotivated by not being allowed to make their second billion, however, also preach that their workers be paid as little as possible and motivated solely by the fear of losing their pittances. Worker loyalty is not to be purchased, but preferably coerced. Thanks to GPS and keylogging, behaviour at the workplace can now be monitored beyond the dreams of any plantation overseer; thanks to Facebook, even behaviour in what little remains of the concept of “free time” can now be evaluated for the sake of enforcing neo-feudal loyalty.

Since this differential approach does not make much sense in terms of conventional economics (why should the market be free but collective bargaining not?) it must have different motivations, and I would like to put forward a whole new theory. In the spirit of Isaac Asimov, I would suggest that the Second Law of Management is to maximise profits, except when this would conflict with the First Law, which is to maximise the emotional satisfactions available to the manager. It is not about outcomes at all, but about process. What the manager is saying to the workers is not so much “Make me money!” as “Make me feel good!”

Now, one manager may derive emotional satisfaction from paternalistic care for his employees, which plugs direct into that part of the mammalian brain that feels pleasure at having a large brood of progeny. Thus the Maslowian manager, the benevolent and even self-sacrificing father of his company. But another manager may equally well derive emotional satisfaction from the exact opposite, namely pointless maltreatment of the workforce. If he is a zero-sum thinker, as many people are, he will justify this maltreatment to his superiors and others in terms of shareholder value, however illusory the connection; but his real motivation is the perhaps unconscious assumption that happiness is a fixed quantity, and if the workers get any then there will be less for himself. The common factor behind both benevolent and malevolent management, and the thing that managers in the real world act to maximise, is their subjectively perceived social status, that is, their sense of self-importance.

The bad things that go on at a workplace are, of course, well known, but they are conceptualised in terms of harassment and bullying and thereby as material for social psychology rather than for economics. That is, they are not considered an integral part of the theory of the firm. But not only are they a fit subject for behavioural economics, the relationships are eminently testable. Students may feasibly be set to study case histories in which managers took a decision that made the workforce unhappy even though it also reduced profitability, or failed to take a decision that would have increased profitability, on the unadmitted grounds that it would involve making nice to the workforce. Research might even yield substitution equations – just how much increased profitability would offset the manager’s pleasure in confirming his high status by depressing that of his subordinates?

Posted on March 11, 2010 at 15:00 by Hugo Grinebiter · Permalink
In: MONKEY BUSINESS, Management As Cargo Cult

4 Responses

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  1. Written by Mr Fnortner
    on April 5, 2011 at 18:44

    Hugo, My first look at your site (and it’s impressive, all right) turned up this essay. Allow me to chime in.

    The theory of the firm is that management attempts to maximize the present value of the long run profit stream. The term “present value” means the sum of all profits now and forever, discounted by the time value of money. The term “long run” means profits over the full life of the firm from this moment forward. These two parameters permit both short term and long term profits to be considered in the aggregate. Astute management will recognize that shifting profits to an earlier time or extending them out will alter the present value of the sum. Also, astute management will recognize that techniques that produce either long term or short term profits will usually affect the profits at the opposite end of the calendar, sometimes negatively, thereby reducing the present value of the sum.

    That said, achieving good worker relations, good wages, a committed and motivated workforce, and so on, becomes a business strategy, not necessarily a goal. (The same is true of the pursuit of quality, for example.) Such a strategy is in the firm’s best interest if it increases the PV of the LRPS. Wise management will “buy” just enough good will among its workforce as is necessary to produce the highest PV. This may not, and probably is not, the least amount of good will, and may require a substantial purchase. It is not in the best interest of management to make life miserable for employees, in general, although sweatshops still abound.

    Second, employees are free (not counting indentured and enslaved people) to leave their employment at any time. This is the greatest weapon an employee has and is secretly the fear that will wake up managers at night. Unscrupulous managers will strive to push employees to the limit without going over the edge. It is fear by employees that keeps them shackled to employers they don’t want. A word of caution, however, against an a priori judgment that employees are being taken advantage of. Because we cannot know the system of values and constraints of any individual, we cannot say that they are working under duress. Every decision a person makes is a primitive economic decision, a cost/benefit analysis in which the gain is worth at least the price. Therefore it must be taken as given that, for those who labor for any employer, the perceived cost by the employee of changing employers is greater than the cost of remaining.

    Third, management and owners have a natural conflict. As agents of the owners, managers owe owners a duty of compliance, fidelity, communication, honesty, diligence, care, and accounting, among others. This runs counter, as you noted, to management’s natural tendency to maximize their power, pleasure, prestige, and personal wealth. (I didn’t mean so many p words–they just came out.) To the extent that management can maximize their own “profits” while not diminishing the owners PV, they are probably ethically on solid ground. When management begins to nibble away at what is owed the owners, regardless of how little the owners’ interest is affected, management is in error and should be replaced. The behaviors you lament in your essay are management’s behaviors, not necessarily the owners’.

    The need for your second law arises from misplacing the responsibility for wealth creation in the hands of management. It is the owners’ enterprise, and their desire to create wealth, that is at play here. Managers are simply part of the help hired to achieve that goal. Unfortunately, owners often grant managers extraordinary powers, and managers usurp others, so that it seems the business is being run for the benefit of the management team. When managers believe this themselves, they are dangerously close to being on the road to ruin. Interestingly, it’s important to realize that corporation law in the various states is written to minimize the influence owners have in the operation and control of public companies. The management tail wagging the owner dog leads to law number two. But law number one is probably sufficient. Similarly, the same law of gravity that works for objects going up works for objects going down. We don’t need two laws. But I don’t disagree that you have characterized management behavior and motivation quite well.

  2. Written by Hugo Grinebiter
    on April 5, 2011 at 20:30

    Welcome, Mr. Fnortner! I trust you recognised and didn’t mind the hiatus while WordPress held you for moderation.

    I am well aware of the theory of the firm whereby managers are the mere agents of the owners, I merely ignore it as not being applicable to this man’s planet. It is a polite fiction. In much the same way, a feudal knight started out as the agent of a set of village communities, the Carolingian “manse”, who supported him to do military service to the Crown on their behalf. One might even regard the manorial lord as theoretically a hired chief executive to whom the village assembly had delegated certain management security functions; the medieval readily sued his lord and occasionally won, about as often as our contemporaries win against the megacorps.

    I am not, however, enamoured of the doctrine that the employee is free to vote with his feet. It is true that we no longer raise the hue and cry against runaway serfs (though having your health insurance paid for and revocable by your boss is surely an enserfment situation), but your dictum reminds me of a distressing line in Hoover’s memoirs, to the effect that in 1929 many people “left their jobs for the more profitable one of selling apples on the street”.

    That was before my time, of course, but I have lived through a period in which government (which Marx, we remember, called a committee of the employers) quite deliberately destroyed manufacturing in order to create high unemployment so as in turn to break the unions and thereby reduce wages. I doubt that was macroeconomically sound, or even sound in terms of the LRPS of the surviving firms, but the emotional satisfaction of my betters was highly visible and eternally memorable. And now it is happening again. If happiness is a zero-sum game, as many managers appear to believe, the misery of the former American middle class must surely have created stupendous quantities of managerial ecstasy.

  3. Written by Mr Fnortner
    on April 5, 2011 at 23:52

    Fair enough.

    I am aware of any number of polite fictions: to protect and serve, innocent until proven guilty, government of the people, defending our freedoms, voluntary income tax, free market economy, and too many more to list. So including management as agents in this set is no stretch, as is voting with one’s feet. While we’re looking for fundamental truths, perhaps we should ask what all these fictions have in common. It seems to me that the oppressive and inescapable hand of government is manipulating all of them. I don’t have the energy today to pen the necessary exposition, but I believe all who read this can imagine how this works. For starters, our “free market” is actually crony capitalism, with lawmakers as patsies for big business by regulating competition while providing largess to corporate management. Freedom to change jobs is also a victim of government entanglements from retirement programs and health care, to work rules and labor laws, to unemployment payments and employment controls. Anyway, this discussion could go on for a long time, which I don’t have right now, but we could pick it back up later.

  4. Written by Hugo Grinebiter
    on April 6, 2011 at 09:55

    There will be a whole chapter on neo-feudalism later, that might be a forum conveniens.

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