Published by the Foundation for Economic Education (Click here)
Following Dr. Block’s supposition that a person can commodify themselves and effectively sell or alienate themselves (p.6), we must address the issue of capital destruction. The economic costs go beyond losses in productivity but also have more subtle ramifications throughout the economy. The act of suicide destroys a person’s body; however, the intangible assets lost are arguably the most detrimental. Most notably, in the form of squandered human capital and social capital. While these forms of social capital are refutably mere constructs, they still seem to possess a priceless qualitative value. In the absence of the knowledge, credentials, and necessary social networks financial success is not possible.
Commodifying these abstract concepts applies them to John Locke’s postulations regarding wasting resources (p.12). But if the value of commodities is subjective, we have to evaluate Locke’s assumptions regarding frivolous resource consumption. Furthermore, if we accept this notion of wasteful consumption, we must apply it to other areas of resource allocation. For example, investing too in production can be considered a wasteful form of resource allocation. Under Locke’s theory, if extrapolated, we should bar entrepreneurs from making overinvestments in their firms. Not only would such a law be unenforceable, but it also suffers from the Hayekian Pretense of Knowledge. Neither the businessman nor the lawmaker has access to perfect information. How would the lawmaker even know if a business owner engaged in malinvestment until the downstream effects have come to full fruition, paralleling the flaws of proactive legal sanctions? Entrepreneurial decision-making is enveloped in uncertainty. To quote the great Frank H.Knight:
It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term “uncertainty” to cases of the non-quantitative type. It is this “true” uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition. (p.84)
To preemptively declare a form of capital use or manipulation as “…wasteful..” is fallacious. At best, we can attempt to use market signals as a guide for appropriately deploying capital. Whether an investment was prudent or foolish will only be known once the downstream consequences are evident. In this respect suicide is just a form of managing the “… social..” capital structure through the informal destruction (p.21) of such social assets. Allowing people to dispose of capital at their own free will allows for the unfettered restructuring  of productive activities utilizing human and social capital. Allowing the substitution or destruction of “..social..” inputs.
- A reference to the Austrian Theory of Capital
Most of us that have a rudimentary understanding of economics, are familiar with the concept of the Law of Diminishing Returns. It is quite evident that this premise is unquestionably applicable to physical goods. Does this enduring economic law also apply to intangible commodities? It is salient once a person has exhausted the optimal quantity of solid objects. This is conspicuous in the disutility of engaging in hoarding behavior. While the optimum number of chairs a person should furnish their home with is debatable and depend on several factors, it is obvious once a person has amassed too many. Once an individual has so many chairs that it makes restricts accessibility to certain rooms in the house, becomes a fire hazard, or the homeowner can no longer contain all of the objects they own within the confines of the physical structure of their house- then it is problematic. Then rightward shift from the equilibrium point is universally expressed. There is no foreseeable value in obtaining more or maintaining your current collection of chairs. The assessment of whether you have too many chairs is no longer a matter of aesthetic preferences, but a matter of physical limitations. It is easy to determine once we obtained too many physical goods.
The saturation point is much more difficult to answer when about intangible goods (human capital, intellectual property, etc.). However, it could be argued that the Law of Diminishing does apply to human capital. The ultimate marketplace for human capital is the job market. Often we hear the term “saturation” be used to describe the labor market. Several factors can contribute to the overabundance of human capital available to employers. Periods of high unemployment leave firms with the ability to hire, a large pool of applicants to choose from. The saturation could be referring to a glut of similar skill sets or credentials. If history majors are a dime a dozen, but math majors are hard to come by, who is going to stand out in the job market? If everyone has basic Microsoft office skills, but there is one candidate in the resume heap that has an advanced certificate in Excel, needless to say, this will catch the eye of any hiring manager or human resources representative.
Degrees and certificates are not so much human capital as documentation of skills and formal education. Couldn’t the soaking point of specific forms of human capital also be relevant to soft skills? Well, why not? If can be applied to credential and soft skills then it must apply to more innate qualities. Such as personality types. Pre-employment personality tests not only qualify if a candidate is a good match for a specific job role but also help to bring more balance to team dynamics.
Going beyond even the job market or potential job prospects, human capital is integral in determining an individual’s overall trajectory in life. While other factors such as opportunity, motivation, and timing have a lot to do with success. Without the proper skills, most people will not rise above a certain point of attainment. One of the most coveted, but arguably overrated attributes in the panoply of human capital is general intelligence. General intelligence can only get a person so far. There is no one single factor that leads a person to success, but rather a multitude of different variables. The sum of the parts is greater than the whole certain applies. Providing some validation of Scott Adams’s postulations regarding complementary skills. No one needs to a virtuoso, but it is better to be reasonably good at many related skills than to fully master one. General intelligence is the archetypal example of being a master of one domain. We all have heard the platitude “… jack of all trades, master of none…” so frequently that it is deeply ingrained in our subconscious. However, this old saying has little applicability to the real world. It isn’t the smartest or the most diligent among us that succeed. Then again, the village idiot and the local ne’er-do-well burnout aren’t the ones rising to the top either.
Malcolm Gladwell’s book Outliers (2008) presents an intriguing example of why general intelligence alone will not ensure success. Gladwell details the near-tragic trials and tribulations of Christopher Langan. A man who is a bona fide genius. Despite his expansive and impressive intellect he never had the opportunity to thrive as a universally praised academic. Langan boosted an IQ of 195 shadowing the IQ of Albert Einstein forty-five points (p.70). As impressive as it sounds to have an IQ of 195, there is one important point to remember. A veteran scientist with an IQ of 130 is equally as likely as a colleague with an IQ of 180 to win a Nobel Prize (p.80). Meaning that Lagan’s intelligence while awe-inspiring could even be viewed as being superfluous. If a person with an IQ thirty points lower than Langan can be a Nobel laureate what value does the extra IQ points effectively bring to the table?
Despite Langan’s intimidating intellect he failed to even obtain an undergraduate degree. This was due to a string of unfortunate shifts in his vicissitudes. One notable incident transpired when he was enrolled at Montana State, he had car troubles and could not make his morning classes. He had a neighbor who offered to give him rides in the afternoon to school. Regardless of how much cajoled and begged the dean he was not allowed to change his class schedule and was forced to withdraw from his program (p.94-95). Langan’s foil must be Robert Oppenheimer who worked on the development of the atomic bomb during World War II (p.97). Here was a man who as a student attempted to murder his tutored (p.98). Not only did he get away with it, but later on after he completed his graduate program he managed to get on the prestigious Manhattan Project. It is evident his past transgressions did not dampen his career in any way. What truly separates both these men from one another? Both men were exceptionally bright, but one man couldn’t even convince his dean to do something as innocuous as changing his class schedule. Another got away with attempted murder. The difference was that Oppenheimer had a greater degree of practical intelligence (p.101).
The comparison between these two men illustrates that not only is there a ceiling in the benefits of having high general intelligence. There are also limitations if the only skills you have are related to general intelligence. Without practical knowledge, a robust IQ is tantamount to be a weight. We all need the precepts requisite to tactfully navigate the world. In the absence of this scaffolding, our intelligence is of little use and only serves to weigh us down.
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 law, instead 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.
The premise behind Gresham’s Law is that money of a higher intrinsic value will be hoarded while the money of a lower substantive value but legally recognized as having the same nominal value will be circulated throughout the economy. Succinctly put, “..bad money drives out good money…” pithily sums up this economic phenomenon. However, is this occurrence solely confined to the commodity of money? Doesn’t the observations convey in Gresham’s Law applicable to other goods? For example, unless a baseball card collect is presented with an astronomically large monetary offer, odds are they will be unwilling to part with a limited-run rookie card of a legendary major league player. This scenario reflects many of the assumptions regarding commodity value implicit in Gresham’s Law. Generally, rare collectibles are held on to, while mass-produced memorabilia is readily available at the local garage sale or swap meet. Most collectors will hang on to the items that are considered valuable unless another interested party can provide a commodity in exchange that exceeds the perceived value of the collectible held by the hobbyist in possession of the coveted item.
However, how does Gresham’s Law interact with the intangible commodity of human capital? A firm or a business unit within a firm would want to retain top-level talent and let go of the mediocre/poor performers. Before we can delve into this analysis we must distinguish what human capital is. Human capital is the economic value that the employee brings to the firm. Typically through their experience, education, certifications, knowledge of company procedures and policies, position-specific “tribal knowledge”, critical thinking skills, and other pertinent soft skills. For readers who have never worked in a corporate environment before tribal knowledge is the informal and unwritten knowledge of best practices of how to perform within a specific job role. It stands to reason that a potential employee possessing all of these attributes would be a hot commodity on the job market. If currently employed by a company would be an employee of a high value.
If human capital is valued in a similar sense to other commodities such as money, how do businesses act in a manner to retain this high-quality talent? The answer most human resources representatives would give is that their organization creates an environment that fosters career advancement. Stressing the perks such as tuition reimbursement, possession of company stock options, and opportunities for placement in vertical job positions. While these factors may play a role in some employees choosing to work long-term for the same company, there is another variable that HR will not be forthright about. That is oftentimes exceptional employees with a high degree of human capital end up getting pigeonholed to the same role. Oftentimes these individuals are blocked from transferring to other business units or positions within the company by the request of middle and executive management. The reason behind limiting this MVP’s potential is quite pragmatic, the business unit cannot afford to lose this individual. Their skills and knowledge are essential to the day-to-day operations of the business. It would be nearly impossible to fill the void if they were to get promoted or transition to a lateral position within the firm. In the corporate world, this individual may be referred to as a subject matter expert or colloquially known as a SME.
It should be noted that the desperate attempts of management to relegate this individual to the same job role has the propensity to backfire. Why? Because this individual gets fed up with their limited job prospects and ends seeking career advancement at another firm. In a free market for employment, a high-quality employee has many prospective options when it comes to their career. If a firm stubbornly, confines them to a shallow career path they will simply look for employment at another company.
The renewed interest in raising the federal minimum wage is gaining steam as a hotly contested debate. Especially considering President Biden is inserting a $15 an hour minimum wage requirement in his latest Coronavirus relief bill. There are many proponents on both sides of the issue. Many advocates of a higher minimum wage claim the moral high ground on the issue, considering the rate has not kept up with inflation. Suggesting that raising it to $15 per hour would aid those working in low paid professions with being able to afford the bare necessities. Some even boldly advocating for a pricing floor of $24 per hour as being an adequate minimum wage.
However, is it economically sound to raise the minimum wage to even $15 per hour? Over the past couple of years, several papers have suggested so, but their interpretation of the data did suffer from some misconceptions. If we underwent an extremely rudimentary cost/benefit analysis of raising the pricing floor for labor we would see that it is a detrimental policy. A recent study found that raising it to $15 an hour would lift approximately 900,000 people out of poverty. As many advocates enthusiastically indicate as being evidence that this would be a good policy. Per the 2020 U.S. Census, it is estimated that 34 million people were living in poverty in 2019. Making 900,000 only a drop in the bucket in terms of battling the social issue of poverty. What the pro-raise the minimum wage camp neglects to inform us of that the same study they cite also estimates that 1.4 million people would also stand to lose their jobs! Making it reasonable to question whether raising the minimum wage would truly benefit the poor members of society.
The resurgence of the minimum wage debate mirrors the arguments for imposing pricing ceilings on in-demand goods during the beginning of the COVD-19 pandemic. Why? Because minimum wage laws and price gouging laws both operate as forms of price controls. Generally, these policies are implemented to insulate the consumer or work from “exploitation”. Either being paid inadequate wages or having to pay exorbitant prices for commodities during a time of crisis. However, prices are the key market signal that bridges the information asymmetries between consumer and supplier. Prices are contingent upon the supply of a product or service and the level of demand. Hinging on one of the most basic and universally known economic laws. Despite the good intentions of the activists pushing for an elevated minimum wage they are doing more harm than good. By mandating by law that the minimum wage needs to be at a certain dollar amount it immediately creates distortions in the labor market.
In an abstract sense, the worker is selling their time, services, and human capital when they agree to accept a job offer. In the job market, the corporations and small businesses looking for workers are the consumers. The job seekers are the ones supplying the labor. High wages alert prospective job seekers were the most lucrative job opportunities are which generally require less common skills. Directing the job seekers to make the appropriate investments in human capital. Implicitly detailing which degrees, certificate programs, and other forms of job training are required to stand out in the job market. Workers with little in the way of skills command a lower starting wage. Compensation is based on a worker’s productive output capacity. If a worker has few skills their productivity would be relatively lower from an economic standpoint. When the minimum wage is raised there is an imminent risk of displacing low-skill workers. If a fast-food worker is only producing $9 an hour worth of productive output and the minimum wage is raised to $15 an hour the business owner stands to take the loss. Then he may decide to cut corners and operate with fewer people, compromised product quality, or automatic the process. The threat of automation is real. Several studies have found that driving the price floor for labor up results in increased automation of operations. It is clear that the distortion of prices in the labor market could lead to displacing more low skill workers. The result being more low skill workers harmed than helped. Some income better than no income at all?
Diversity awareness programs on their surface appear to be noble endeavors designed to provide equal opportunity employment to historically disadvantaged groups. Over the years, there has been some controversy over the conclusive impact and application of workplace diversity programs. Due to claims of only marginal success in increasing the diversity of the workforce. One major shift has been to couple diversity with “inclusion”, having a diverse workforce is not enough. The company now needs to also provide a welcoming environment. This is a profoundly difficult task considering the subjective evaluations of what is defined as “welcoming” may vary wildly depending upon the perspective of the individual employee. There is a growing prevalence of what is known as “diversity fatigue”. Many managers and H.R. personnel succumb to the stress of attempting to fulfill lofty and unstandardized goals. Making the achieving the goals of diversity and inclusion an ever-present uphill battle. Especially with the hyper-dynamic and ever-changing trends in what is deemed as being politically correct by the intellectual upper crust.
The move for diversity for its very sake is not without adverse consequences. Beyond merely making aimless strides towards an arbitrary and idealistic goal. If mismanaged minority employees may feel alienated or there may be an increase in the incidence of conflicts between employees. Two downsides are often not accounted for in the application of diversity programs. Neglecting these variables not only determines the purported objectives of diversity programs but the inevitable flaws of human nature. The old expression “… you can bring a horse to water, but you can’t make him drink…” comes to mind. Prejudice cannot be eradicated by the edict of corporate policy nor by the stroke of a lawmaker’s pen. Freewill and personal perception have a massive role in fostering and maintain prejudice. A naively wide-eyed and idealistic diversity awareness program provided by an employer will not inculcate the virtue of tolerance into their employees. These are conclusions that the individual must independently arrive at deep introspection.
These lofty expectations mirror the Holier-than-thou virtue signally exposited by contemporary Progressives. Modern Progressive has firm ideological roots dating back to the early 20th century. A careful examination of history will lead any thoughtful observer incredulous of the true aims of the diversity movement. Many of the moral objectives of the Progressive Era were nothing more than circuitous means of rent-seeking. Making the whole notion of workplace diversity truly about diversity dubious at best. Few employees ever question how their employer benefits from promoting diversity programs. A business enterprise exists to provide a product or service not to proliferate the virtues of tolerance. What do they stand to gain through attempting to cultivate a culture of hyper-tolerance?
What emerges from this situation is a potential example of Bootleggers and Baptist coalition. An internal coalition between the human resources department and upper-management. Typically, the individual representing the moral argument for a diverse workplace is the “Diversity Ambassador”. A role within the company that carries quite a bit of prestige, yet how this position direct benefits day-to-day operations is questionable at best. Even when employees who are crucial to daily business are laid-off the Diversity Ambassador gets to keep his job. Although such a role is nothing more than a luxury. This actor is undoubtedly our Baptist due to his incessant persistence in exalting the values of diversity and inclusion. His rhetoric comes just short of mirroring a political propaganda campaign. Boldly asserting that everyone possesses some degree of prejudice or implicit bias. His obtuse repudiations make countering his claims (regardless of the accuracy of his claims) a futile endeavor. Below details a scenario witnessed by the author that demonstrates the zero-sum nature of the accusatory discourse of the typical Diversity Ambassador:
“ I have conducted this exercise for over twenty years and not once has anyone ever mentioned that I was black. I told you all to list the inferences you can make from just looking at me. No one even mentioned the most obvious characteristic of me. I am black. Why is this? None of you have followed my instructions! Why?!
Audience Member (Attempting to answer his question):
“ Because none of us see color.”
“ Don’t ever tell a diversity and inclusion coach that you don’t see color!!”
The above conversation between a corporate Diversity Ambassador and an hourly employee exhibits the perverse quiddity of this wanton advocating for diversity. This is not the tone of a man who wants to educate, but rather who wishes to indoctrinate. Pedagogically and condescendingly force-feeding us the moral imperative of admitting our own biases. Versus attempting to foster understanding or attempting to provide us with the genuine precepts for being more tolerant. The man was simply describing our sins without truly prescribing a means of reconciling them. Paralleling the fervor of an Evangelical preacher, we can do no right. We must fully accept that we are in the wrong with no hope of ever being right. Presenting a situation where the participant can only lose. Generating such a compelling moral narrative for the imperative to proselytize the virtue of diversity that it also doubles as an impenetrable smoke-screen that insulates the company from accusations of discrimination.
The Bootleggers in this dynamic are the individuals in upper-management. There are two main benefits of this variety of moral rent-seeking are deflecting the possibility of having a hostile work environment and social currency for appearing to be forward-looking. Over the years the United States has become quite a litigious society. Considering the increased sensitivity towards various minority groups, the opportunities for discrimination lawsuits have only become expanded. Providing a sizable incentive for those at the helm of the company to avoid any transgressions against their employees that could be viewed as discriminating in nature. By painting the opposite picture, even if this image is illusory, diverts, or weakens claims of discrimination. Not only does promoting diversity and inclusion have monetary incentives, but it also fosters a positive image for the company. It creates the facade of being open, progressive, modern, and may lead to the company to earn accolades for their culture. All of which will benefit the company and make the jobs of the CEO, CFO, etc. more secure. The reputation of the company for inclusive will attract talented young professionals that will only add value to the organization. One only needs to look at the example of Google to see how company image matters when it comes to acquiring skilled employees. Work culture almost operates as a form of non-monetary compensation. It is another variable that may sway top-notch young professionals towards one company versus another. Merely operating to the benefit of those in the top-tiers of management.