People are Short Term Optimizers

Professor Bainbridge has an interesting post on setting the economic sliders. I view the economy as governed by four sliders, much like the one that controls your computer's sound volume. As you move any slider the other three are affected. The sliders are productivity, equity, stability, and sustainability. At any given moment, a shift towards greater equity will tend to reduce the other sliders. Over the long term economists have learned how to increase the stability slider a bit while keeping the productivity slider pretty high. We call these Keynesianism and Monatarism.

Specifically, Bainbridge is talking about these choices in terms of corporate governance. In terms of my metaphore, he asks what effect on productivity is had when we try to slide the equity slider toward greater equity as a result of greater labor influence in corporate governance.

My own extended thought experiment in the effects of socialism, but more importantly the long term evidence suggests that a shift which increases equity and lowers productivity has long term consequences for sustainability and stability.

This reinforces the notion that humans are good short term optimizers (and sometimes they prefer to maximize) but that they are poor long term optimizers. They tend to be especially bad when the consequences of action is both temporally distant and indeterminate. Eating a proper diet involves certain short term costs (mostly of a transitional nature) but provides long term benefits. Since the benifit is deferred and the costs are front loaded, eating well (or quitting smoking, or wearing seatbelts) are difficult for humans to sustain. When the consequences are not only deffered but uncertain, they are especially hard to sustain.

So, given a choice between guiding a corporation towards shareholder wealth maximization or improving worker advantages now, workers tend to benefit their immediate selves, even at the cost of their long term selves.

As Jane Galt discusses (here and here) attempts to do both simultaneously. As Bainbridge noted, "my article presents a clear explanation of why some firms find employee involvement enhances productivity and, perhaps even more important, why it fails to do so in some firms." Putting aside the question of those who fail to navigate an increase to equity and productivity, just how real are the achievements of those who appear to achieve both. Galt asks, to what extent are these successes there result of a "stakeholder" model, and to what extent is the success based elsewhere, and the equity benefits are possible therefore?

This kind of situation is very complex and understudied, but I suspect it may well be possible to find combinations of equity benefits (broadly distributed rather than concentrated in stockholder an excecutive hands) and productivity benefits in our current (and future) enviroments.

In general, I would argue that there are minimum thresholds of stability, sustainability, and equity that are required at a given level of productivity, below which, productivity is harmed. Once they are met, any play left in the system can be allocated according to the values of the society setting the sliders. However, productivy has a tendency to produce benefits to the other catagories as it climbs.

This leads me to conclude that in general, the greatest benefits to the greatest number are realized when threshold levels of equity, stability, and sustainability are met and the rest of the play is put into productivity.