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This blog entry was inspired by feedback from Enrique at the Prior Probability blog.

If Gresham’s Law applies to retain human capital in the job market, is it possible that Thier’s law (p.9) could also be applicable in certain contexts? On money, when legal tender laws forcing vendors to accept both forms of money at nominal value, economic agents will choose to transact with the higher valued currency. Presenting an axiom that is the opposite of Gresham’s Law, “ Good money drives out bad money”. Typically in the arena of monetary economics, the divide between advocates of Gresham’s Law and Thier’s Law is a sharply delineated dichotomy. Most proponents of one will not defend the possibility that the principle could apply to the circulation of money.

However, in terms of the circulation of human capital these concepts are not necessarily opposed. Employee retention is the byproduct of several highly qualitative attributes that are generally specific to a certain firm. In corporate vernacular, the term “culture” is thrown around so frequently that it has become a buzzword deeply embedded in the American psyche. Companies such as Google, go to great lengths to demonstrate that they have a flexible, open, and innovative corporate culture. The veracity of the claims is ultimately judged by the perceptions of the individual employees. One employee may adore working at Google, while their colleague completely despises the company’s ethos. Making the ebbs-and-flows of human capital even more complex. Employee retention at the individual level is based upon a multitude of various factors. The aggregated collection of the opinions of all the individual employees regarding their work-life satisfaction tends to paint a fuller picture. If while perusing Glassdoor, you happen to see a company with eighty-five two-star ratings, chances are this is not the petty slander of a few disgruntled employees. This is why oftentimes companies will periodically send out surveys to their employees in an attempt to measure overall morale throughout their organization.

Putting aside the highly individualized variable of career satisfaction metrics for an entire firm, if there is a pattern of talented employees leaving, there is a retention problem. Sometimes this may be isolated to a specific department even if the firm as a whole has no issues keeping competent and productive workers. Certain companies and even job roles select for specific attributes that may not be conducive to attracting skilled and reliable labor. Some industries are notorious for high turnover rates, one salient example being the hospitality industry. I remember a few years back, being in between jobs, so I briefly worked at a call-center. For me, this was an income stream until I found something else, for many of the people in my training class it was a lifelong career path. This path was a volatile one. Staying only a few months at one company and then abruptly quitting, generally with no notice. Upon receiving a new job offer, I gave my supervisor my two-week notice and he was astonished by the fact I even bothered to take this step. After only six months, only five people (including myself) out of the twenty-five in my training class remained. Industries and job roles with high turnover may be more willing to retain employees with fewer skills or with a poor performance history, due to the outflow of higher-skilled employees. Perfectly mirror the effect described in Thier’s lawinstead of money, the commodity that is flowing out of the firms is quality human capital.

The question becomes how can these opposed ideas transpire concurrently in the same labor market or even the same company. The answer to this question is predicated upon a “rules of the game” type logic. Each company and each interior department within a firm operate as governing bodies directing the task of workers. Meaning both varying capacity function as “ruler-makers” within the company. Think of corporate policy as being analogous to the federal government, while the department formulated rules are similar to state law. Clearly, in most cases, corporate policy supersedes department policies. If these rules are too onerous or unjust there is little a qualified and skilled employee could other than leave. Either accept and abide by the rules set forth or resign. Resignation being a clear withdrawal of consent on the part of the employee. One relevant example of this is companies still drug testing for marijuana in states where it is legal. Granted, it is an organization’s prerogative to make employees refraining from drug use a contingency of employment. However, if enough high-caliber job candidates take to smoking cannabis they may be in a bit of a quandary. A few years back the FBI ran into this problem due to their “drug-free” employment policy.

If the rules governing the management of a firm are too oppressive, people with options are going to find another job opportunity. What the company is left with are those who lack the skills, ambition, and conscientiousness required for productivity. The employer is left with the staff that clings to their jobs for dear-life as odds are they do not carry too much value on the job market. Much how department policies such as catering to senior and skilled workers can impose an effect similar to Gresham’s Law the opposite is also true. If you create rules that disincentives tenure and self-development, odds are you will lose a lot of great workers. The kind of workers that can be a game-changer in managing strategic customers. As we have observed with the call-center example, frequently due to the oppressive rules, low pay, and dismal work environment people with potential tend to leave these positions. Leaving you with the unskilled and the desperate who are locked-in to the role due to their circumstances. Keeping this dynamic in mind, it is a wonder why people expect quality service whenever they call tech support.

12 thoughts on “Thier’s Law Applied to Human Capital

  1. What about Marx’s critique of “wage slavery”–the idea that most people work because they have to, not because they get any real enjoyment or value from their jobs? (See also: https://en.wikipedia.org/wiki/Wage_slavery) Is Marx’s critique still relevant to our times, or is it too broad and unhelpful in the “white collar” context or to tech industries?
    As an aside, in addition to its ostensible subject matter (the allocation of “human capital”), which itself is a fascinating topic, this post also poses some deep subsidiary questions, including: what is the relationship between Gresham’s law and Thiers’ law? (And if both laws are mutually exclusive in the domain of monetary currencies, what does say about economics as a “science”?) And what is the relationship between private ordering (the rules of the game at each firm) and law (the rules enforced by courts)?

    Liked by 1 person

    1. Marx’s critique of “wage slavery”:

      I don’t think it is even a matter of Marx’s critique isn’t applicable today or is even too broad to be relevant to our technologically advanced economy. I would argue it was never valid in the first place. Why? In my humble opinion, his concept of “wage slavery” is a natural corollary of a labor theory of value. Something that the marginal revolution of the 1870s quickly squashed with a pivotal revelation, the value of a commodity is not derived from the inputs but rather by the consumers’ subjective evaluation of value. One of the few vestiges of the Austrian School of political economy that was absorbed by the mainstream, in the form of marginal utility. From this departure from the Classical conception of value, we see that the inputs of production (higher-order goods) derive their value from the perceived value of lower goods (goods produced in the later stages of production). The fertile soil in the Cognac region of itself is not in itself highly coveted, but it is highly desirable because it possesses attributes conducive for producing grapes ideal for world-renown Cognac brandy.

      So what does the subjective theory of value have to do with job satisfaction? Quite a bit. Much how the value of a commodity is subjectively determined, the same is true of whether you enjoy your job. One man’s heaven is another man’s hell. The intrinsic satisfaction you derive from your job is solely based on individual perception. Man is only being exploited if he believes he is being exploited. Otherwise, unless the labor arrangement is involuntary slavery, the worker is not being exploited.
      Despite the Marxist narrative of firms parasitically separating the worker from the value yielded from their toil. If anything, the firm operates as a middleman, connecting workers with customers and simultaneously absorbing the opportunity costs of establishing business relations and the risks of financial and legal liabilities. But if an individual worker does not see their relationship with their employer as exploitative then why should Marxists be evangelically preaching to this “misguided” mopes that they are wrong? If they are happy or at least content with the status quo, who cares? If their present circumstances are troublesome at least under a capitalistic system they have the freedom to find another job or better yet start their own company. While I believe that the premise of the “wage slave” theory of human capital is a natural outgrowth of the flawed labor theory of value, we still should be cautious in applying this logic to worker job satisfaction metrics. The vast majority of people still hate their jobs. It is estimated that a staggering 85 percent of people hate their current jobs. Unlike a planned economy where if the government deems it fit, an aspiring young doctor is assigned, under penalty of incarceration, to work as a carpenter. Needless to say, this ambitious young person will not be too happy with this arrangement. So I can’t imagine in the planned labor market it would be much better. The name of the game in the modern economy is being able to apply your skills in a meaningful and novel manner. I believe there would be much more job satisfaction if more people could figure out how to more strategically apply their human capital.
      Then again, it could also be the overall disutility of work that is driving us to be less happy with our jobs. As the number of potential activities we can engage in our free time becomes more expansive, the unpleasantness of labor becomes more salient. Leading me to believe that job dissatisfaction is unquestionably a first-world problem. If you are purely motivated by basic survival needs, the premise of job satisfaction isn’t even a consideration.

      Whether or Not Gresham’s Law and Thier’s Law are Mutually Exclusive Occurrences:

      When it comes to the monetary policy I am far from being as well versed in as George Selgin (one of my intellectual heroes). However, based upon my limited understanding of the circulation of money or other commodities of value, I would suggest that both are rules-based phenomena. As a layperson, how can I be so sure? Let’s take Thier’s Law for example. Let’s take the below definition of the monetary concept from an outstandingly well-written undergraduate thesis on cryptocurrency.

      “Thiers’ Law, named after French historian Adolphe Thiers, asserts that in the absence of legal tender laws forcing them to accept both currencies, sellers will choose to transact with the currency of higher perceived long-term value. (P.9)”

      In the context of this very description of the concept, the mention of the “absence” of legal tender laws comes into play. Meaning that given there are no rules coercively forcing us to accept the two currencies of varying degrees of intrinsic value at the same nominal value. Giving the observant reader the impression that the occurrence of Thier’s Law is the byproduct of the rules governing monetary exchange. In contrast, Gresham’s Law has always implied the existence of legal tender laws. The overvalued money with the distorted nominal value would never be assigned such a value by the market. Such a proclamation could only come in the form of government fiat. Gold and silver (bi-metallism) are of equal nominal value because the king says so. Regardless of the edicts of royal decree individual market participants are going to respond accordingly to the irrational rules set forth by the king. That would be to use the less valuable silver in day-to-day transactions and save the gold.

      Liked by 1 person

      1. Excellent points! I will need a day or two to digest them and think them over before I report back. In the meantime, have a great weekend. (I have one last seminar session this morning and am then hoping to catch a spring training ball game today.)

        Liked by 1 person

      2. I absolutely “love” your critique of Marx here; it could even serve as a stand alone blog post. I will, however, need some more time to think about legal tender laws. Why can’t I just print my own currency as long as I don’t coerce anyone into using it?

        Liked by 1 person

        1. Thank you for your kind words in my brief critique of the Marxist “wage slave”.

          My hypothesis regarding the interaction of money circulation and legal tender laws, it is extremely high level. Many monetary economists would probably roll their eyes derisively at the concept , stating it’s a oversimplification of much more complex mechanism. While their is some truth to this statement, this would be a great research topic for future exploration.

          The prohibition on private money production is just an attempt for the federal government to hold its monopoly on money. Which leads to
          a number of bootlegger and baptist scenarios.

          Liked by 1 person

  2. So, firms (assuming they wish to avoid losing their most qualified and hence valuable employees) should have an internal structure that incentivizes productivity and ingenuity, or one that is at least not predominately characterized by burdensome rules (?)

    Liked by 1 person

    1. I actually couldn’t have summarize my core points any better than you just did. Companies need to think about what is going to convince top-shelf talent to stick around. Otherwise, there is always something better out their in the job market.

      That’s part of the reason why so many corperations stress the significance of their “culture”.

      Liked by 1 person

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