Monday, September 17, 2012

A Better Class Session - Disincentives against "nasty" behavior

There seemed to be more life in the class today.  I appreciate your efforts in making it so. There was good back and forth and we got participation from many students.  Both of those were delightful and in accord with my view of how things are done well with instruction.  For my part, it is definitely easier to get this if I'm reacting to you already, which is one role the blogging will play for the duration of the course.  I will try to do this even on days when we're not talking about the blog posts, but they'll be less context to use to make the points.

On the content of what we were talking about, I think it is time to bring in a metaphor that represents the opposite extreme of one I've already mentioned repeatedly, which is doing somebody a favor, being collegial, and promoting a trusting environment.  We need to talk about nasty behavior - doing bad things to others.  The next blog post is about hold up - a specific type of such nasty behavior that emerges as a person discovers that as a consequence from holding a specific asset that person has been conferred substantial bargaining power - so decides to use it.   Since hold up is the specific issue Coase had in mind when he wrote the Nature of the Firm paper, it is especially important to understand it.

However, there are other types of nasty behavior that we should consider as well.  Perhaps the "patron saint" for such predatory types is P.T. Barnum.  He is attributed with the line:

There is a sucker born every minute.  

Whether Barnum actually said the line is not important here.  What is important is the source of the power conveyed by the sentiment.  It is not anything that the predator possesses that gives him power.  Rather it's what the sucker lacks (knowledge and common sense).  The predator takes advantage of that.

Over the last 10 years there has been much written about predatory practices in financial interactions.  Originators of subprime loans, for example, have put borrowers into the wrong type of loan and with excessive principal, fooling these borrowers by initial teaser interest rates that were much lower than the longer term rates.  (Countrywide earned a reputation for encouraging such predatory lending.)  Some responded to this history by arguing that what is needed is to raise the financial literacy of the borrowers.  There may be substantial merit to this argument but do note that Bernie Madoff's customers, particularly those who lost a lot of money, were suckers yet among these are several very prominent people in New York business and social life. So, I believe, an equally compelling argument is that anyone can be cast in the role of sucker; education and intelligence may make it less likely to get duped but don't eliminate the possibility altogether.  Another alternative deterrent is regulation.  The new Consumer Financial Protection Bureau is aimed at doing just that.

Given that such nasty behavior is possible in the marketplace, it is probably reasonable to assume that it can also happen within organizations.  So while in class today I said that management tries to encourage intrinsic motivation for its employees, as that is the way to get the best work from them and enable them to get a lot of job satisfaction, it is also true that management must spend some time providing disincentive against predatory practices by its employees.  It is a darker side of the job, but some of it is certainly necessary.

Also note here that I'm sticking to predatory behavior within an economic context, as that is the scope of our course.  Surely it is possible to observe other forms of nasty behavior - bullying, sexual harassment, racial discrimination, etc.  The U of I, for example, deals with each of these via education and oversight.  The issues are certainly interesting to consider but we won't do so in our class as they run too far afield of our subject.

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