Thier’s Law Applied to Human Capital

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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.

Privatization of Defense- Central Government. The Transaction Costs Reducer.

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Hat Tip to the Marginal Revolution Blog and the Prior Probability blog for referring me to the referenced article.

The privatization of defense services could hypothetically reduce the occurrence of military conflicts. This is achieved by realigning the incentives to engage in warfare by making the costs more evident to the taxpayer. The direct costs of war are generally obscured due to a lack of clarity of how tax dollars are allocated. Operating as a form of indirect fiscal illusion. Either by design or by the context of the broad and imprecise nature of public expenditures. If a would-be taxpayer could not transfer or distribute the costs of war to the collective contributions of the tax base, frivolous objectives such as “spreading” democracy would be off the table. Military action would shift from being offensive or even preemptive to being purely defensive. Whether defense services should be provided by the local neighborhood watch or a private corporation is another matter.

There is some historical evidence suggesting that eliminating a mechanism for distributing the costs of violent conflicts makes them less apt to transpire. Per a recent paper written by Rosolino  Candela, and Vincent Geloso the French settlers of the  Bay of Fundy had virtually no violent conflicts with the Mi’kmaq tribe. Why?  The European settlers of the 18th century known as, Acaridans, had to directly bare the costs of violent conflicts. Since they received little institutional or financial support from the mother country. Having adopted informal decision-making procedures, living along aside the Mi’kmaq, they lived in a state of near-anarchy (Candelaa & Geloso, 2020, p.3-4). Providing some credence to the inference that a strong central government operates as a mechanism for reducing the transaction costs of armed conflicts. Skewing the incentives of constituents to be more lackadaisical towards the costs of unnecessary military campaigns. Often reducing transaction costs is viewed as being a positive economic development in this case it is not. The evolution of the robust warfare state in the U.S. has amounted to profligate spending, a treacherously hazardous foreign policy, the growth of government, and ample opportunities for rent-seeking.

The Acadians received virtually no support from the homeland. Outside of a “symbolic” tax that was only sporadically collected by officials, they were primarily left to their own devices (Candelaa & Geloso, 2020, p.3). Leaving the settlers able to only rely on local militias to provide the defense of the colony. Leaving the “…costs of using violence would be concentrated on the beneficiaries themselves and could not be passed on to wider groups..” (Candelaa & Geloso, 2020, p.10). Through the colonists and the natives having to fully bare the costs of violent conflict, this was one of several factors that prevented the development of interest groups (Candelaa & Geloso, 2020, p.16). Stifling the potential for wartime profiteering by removing the incentives to fabricate needless conflicts for the sake of drumming up business.

While there may be contextual characteristics that do not apply to modern times. It should be noted that a highly centralized government does have an impact on the frequency of war. Through disbursing the costs across a large number of taxpayers, the true costs of military intervention are obscured. Hence why for the Acadians, the lack of financial and military support from the motherland shifted incentives away from violent forms of conflict resolution. Making it plausible to surmise that having a centralized government is what makes war so easy to initiate. It acts as the middle-man connecting constituents with service providers (the military). Alone, a centralized government reduces the costs of coordinating complex military campaigns.  Never mind the fact that it collectively distributes the costs of the capital required for military conflicts. To truly demonstrate this point, consider the highly extravagant cost of a private citizen purchasing a tank or a submarine. Individually most people could not afford to purchase the instruments of sophisticated warfare. Combing the fact that a central government obscures the direct costs of war and provides the institutions that make the coordination efforts of armed conflict more efficient, it shouldn’t be a mystery why the size and scope of military conflicts have now become global. Providing some firm insights as to why the Acadians preferred the bargaining table to the sword in resolving conflicts with the Mi’kmaq.