Chesterton used to say that funny is the opposite of not funny, and of nothing else. His point was that the truth is funny, and that its hilarity is no excuse for ignoring its seriousness. Above is the reality of corporate operations. And public-sector operations as well. I could spend a million words trying to explain it, brilliant satirists could (and do) tackle it, economists could take their blinders off and start analyzing the incentives within firms rather than treating firms as singular, profit-driven units, but in the end, the damn picture tells the story, and you already know it’s true if you’ve worked under this system. You probably know it even more acutely if you feel a pang of guilt, recognizing your place in the outer ring.
“Wait, isn’t this Marx’s exploitation theory?! You must adhere to the labor theory of value!” No I don’t, you ass. I subscribe to the hole theory of value, that is, that the value we see in this picture is in the usefulness of that hole to somebody. If no consumer desired that work be done at the bottom of that hole (fixing a pipe or whatever it is) then Herbert is wasting his time and creating no value, no matter how much labor he puts in. Outputs have value, inputs only have cost. As to the exploitation theory, there is a similarity, in that there are some things in this picture which Marx would do away with, but they are not the same ones I would. I would like to sweep away the crowd of useless oversight; Marx’s attention is entirely fixed on that Jackhammer in the bottom left corner. The man who provided THAT monstrosity of private privilege is (in Marx’s view) the exploiter, demanding a share of the customer’s payment in exchange for investing in the tools Herbert is using. Now, Herbert would be better off if he brought his own jackhammer and took home 100% of the payment, and if he did, he’d probably have some hilarious words of his own to say to the crowd of managers. But if he can’t afford a jackhammer, or a factory, or a bulldozer, or whatever capital equipment is in question, then it is to his advantage that the investor’s investment in capital really does reduce the cost of the other inputs (ie labor-saving) and enhance the value of the outputs. The jackhammer is a good thing, and a contribution to the work. Second to Herbert, it is the most useful thing in the picture, and its use rightfully commands compensation on a market basis.
And in fact, Marx didn’t alter the picture above at all. For all I know, this picture was taken in a Socialist country, where every man in the circle isn’t a manager, but a state employee, inspecting the quality of the work or overseeing Herbert’s working conditions. Or a Social Democracy, where every man in the circle is simply a member of Herbert’s Union, which has successfully gotten it set in law that digging this hole is a job for eleven men, so there must be eleven Union members there, drawing wages, for the work to be performed. Or a Communist country, where those ten men are again representatives of the owner of jackhammer, only this time it is The State, which has Herbert’s best interest in mind. You can make the picture suit any prevalent economic system perfectly, merely by altering the labels. The only kind of country we know that this isn’t, just from looking at the picture, is Distributist. The Distributist picture would have a hole, the man digging it, his tools, and perhaps the customer paying him. In other words, we have 100% of the hole (remember the hole theory of value) at a fraction of the cost. And what have we lost? Well, the humor, perhaps.
Actually, what we have lost is ten cushy jobs for friends of friends, or sons of friends, or members of your fraternity, or asskissers. We have lost the opportunity to draw a paycheck without digging a hole, without digging any kind of hole, without providing any value to anybody. The “Capitalist” who owns that jackhammer is a saint of self-sacrifice compared to the manager who advances by nepotism. And while there is legitimate coordination work to be done in a management position, it is inevitably spread over a large number of positions, so that what was (to begin with) a lighter job than Herbert’s, ends by being ten much lighter jobs.
There are more precise and theoretical descriptions of this process available, but management bloat proceeds roughly as follows: At the beginning of a viable firm’s existence there are insufficient hands to do all the immediate, Herbert-type work available at the same time as processing all of the secondary work, things like collecting payments and scheduling future work. Now under our asinine, mixed economy, the amount of secondary work “necessary” is radically increased, through things like permits, tax laws, and general compliance concerns. But at minimum, there is some work that is not immediately visible to the consumer involved in any valuable enterprise, but again, the back offices of small businesses are not bloated with Herbert’s ten managers. Why not? As long as the income of the firm is small enough that it is under pressure not to hire any more hands, there is a tension between the desire to process more work, and the desire to avoid increasing costs by increasing man-hours. This tension keeps the staff small, in a profit-motivated company. The fact that payroll cuts into profits keeps the owners of firms vigilant against ever hiring on the ten managers in the picture; the owner of that jackhammer knows just as well as you and I do that those ten men are getting paid to do nothing, and he certainly cares more than you or I do, because he is paying them.
How does the situation in the picture arise at all then? Well, barring the Socialist etc. scenarios I mentioned earlier, it arises through exactly what every sneering hippie has suggested as the “cure” for Capitalism: “Forget about profits!”
If these men are not employees of a state or members of a state-influencing Union, then they are employees of a massive corporation whose owners are innumerable absentee stockholders, many of whom are themselves corporations or other abstractions. They rule by vote, and a majority of them are interested not in the profits of the company (“earnings”) but in the raw stock price. They are making their money on the expected rise in value of the stock, a rise which will be driven by buyers’ expectation that still other buyers will pay even more for it. Without flying off the rails about absentee ownership here, the people who should care about cutting eleven paychecks to to dig one hole are much, much more worried about the Federal Reserve’s next move, which could net them millions, regardless of the efficiency or inefficiency of their operation. Now, these individuals might take notice if profits fall actually to zero (purely because they think the next buyer might not like it) but as long as things remain on a relatively even keel, stock prices routinely exceed fifteen years of earnings. That’s right, a stock takes longer to pay for itself in earnings than an A/C unit does in energy savings. But that’s because earnings aren’t the point; the point is speculative gains.
In this situation, where profits are a distant second in the owner’s mind, they are nowhere in the manager’s mind. From a manager’s perspective, any room in his budget is room to hire somebody to do all his work. And if that includes hiring, you can get a nice little chain of delegation going, where the first manager hires a man to handle everything so that he can sit back with his boots on his desk, and the new man takes so well to his job that he does exactly the same thing, each man keeping some trivial “critical” duties to himself to focus on. This process is perfectly natural in terms of the perverse incentives taken for granted in the modern corporation. In cost-benefit terms, where working hard is the cost (not just hours on hourly or weeks on salary) the manager who delegates all his work is improving his returns by reducing the cost of his fixed paycheck. He now does an easier job to receive the same wages. But this is only possible because his wages were obtusely fixed, without regard for the value of his actual output. He is still Managing Director of Applied Idiocy, whether he is juggling invoices, distracting inspectors, or snorting cocaine off his contract, and that contract says Managing Director is a $120,000.00 per year position.
As I say, this process of delegation is strongly incentivized where owners (stockholders) are unconcerned with the size of payrolls, to the limits of what revenue can support. Only massive revenue streams can support massive delegation, just as the welfare state needs massive revenue streams to support its taxation. In fact, the managerial situation in this country is very close to a redistribution scheme; the income generated by labor and capital is in part consumed by a third group, which contributes nothing to output, or at least is compensated radically in excess of the market value of their contribution. Who would deliberately spend $120,000.00 to have someone to snort cocaine off his contract? A manager, that’s who, somebody who is not spending his own money, but sees room in his budget for another sycophant or college chum. And if he can pawn off some of his managing duties on his new hire, all for the better.
Now, I do not mean to say that this type of activity is the only thing that goes on in a corporate office; as I mentioned, there is legitimate coordination work to be done, and even more of it in the kind of massive organization that can sustain a payroll eleven times higher than it needs to be. Valueless activity is not the only thing managers engage in, but only managers are paid to engage in it. In all the world, only managers receive paychecks for pure idleness, or pure error, or for snorting cocaine, without resorting to threats of violence. That’s more of a public-sector method.
If we take the picture above and say, like a good consumer, “Let’s cut everything I don’t want to pay for,” we might cut everything but Herbert, and leave him alone to dig the hole that we really want. But if we find that by doing so, we have multiplied the time it takes from hours into weeks, we might reconsider paying for a share for the jackhammer. If we find that by cutting down to only Herbert and the jackhammer, the job can be done swiftly but is forgotten because Herbert is scheduling and invoicing in between his actual digging and isn’t handling it well, we might want to throw in a little for office staff. And this increase in the size of Herbert’s operation may go on until every gain to the actual efficiency of the operation is realized; that is, we may continue to pay for an increase in the size of the operation as long as the additional cost more than pays for itself in results. What we know, looking at the picture, is that all those idle hands are the opposite of results. And so we desire to cut them out of the picture and out of our bid for the work.
There are two situations which produce this outcome: Ideal, free-market Capitalism, where Herbert’s employer, bidding against innumerable competitors and keenly conscious of the cost of hiring ten men to idle around the work site, sent Herbert out to dig your hole with only the most cost-effective equipment to do the job, because any other course would have been ruinous to his profits. The other system is Distributism, where you hire any one of the town’s Herberts, who comes out with his own jackhammer to dig your hole and collect 100% of your payment for his own use. I would be in favor of either of these, over our current system. But what I want to point out, to the Capitalist reader who would rule out Distributism, is that there is no harsh efficiency advantage to Capitalism over Distributism in this case. There is nothing in the nature of jackhammers or work trucks that make them unattainable to the small operation compared to the large; the economy of scale stops at exactly one unit. The Distributist operation is exactly like the Capitalist one, except that the Capitalist and the Laborer are the same man, and as a consequence have their interests that much better aligned; Herbert the Capitalist need not fear strikes, Herbert the Laborer need not fear termination. And if Herbert were not actively discouraged by regulation and interference from acting as an independent business, he might well see the profit in this course and pursue it.
Free-Market Distributism of this stripe really aims at policy goals almost identical to those of Free-Market Capitalism, because a free market is a prerequisite for self-determination. The key difference is that policies that support scale, in the name of supporting productivity, get no hearing with Distributists. The economic arguments for public support for the interstate highway system or the railroads might be opposed by an Austrian Capitalist, but are frequently admitted as necessary by milder types, because of the long-run average costs curve. The Distributist argues that the costs calculated on that curve must include the full cost of the interstate highway system or the railroad itself, including opportunity costs for the resources that were rerouted away from the market and into the government mandate. Does a transcontinental railroad in the nineteenth century, spreading factory goods from a concentrated manufacturing cartel, really substitute in a positive way for the innumerable small manufacturing centers that could have been built in response to demand rather than mandate throughout the country, for the same investment? In aggregate, it’s hard to say, but it is certain that the course of publicly-supported railroads was worth enormous millions to certain, politically-influential men. The large-scale economy is said to be efficient on its own merits, and this is put forth as a reason for its support by the taxpayer. If there is any policy about which I would differ with a rigorous Austrian, it is probably the sequence of dismantling: The first thing to get the axe must be the regulatory protections, subsidies, and tax advantages of the giant cartels. Then we’ll see how efficient they are.
There are serious advantage to small-scale too, but I shouldn’t have to argue about them. Real efficiency advantages show themselves in the market when it’s free, and so for policy, I only ask the official to leave off trampling the entrepreneur and coddling the cartel, not that he do any of the reverse. But in case you wonder why a Free-Market guy even desires small-scale, let me offer this explanation: I hate Socialism. I hate the resemblance of the internals of a corporation to a Socialist state, where mandates, not incentives and relative prices determine the priority and allocation of resources. I hate the obtuse resistance of executives to flexible, meaningful prices and their attempts to displace costs they incur from one department to another or from monetary to other forms, thus blinding themselves to the information the market is providing them as guidance. I have so many times stood before a manager, trying to get the fact through to him that if the cost of two projects is radically different, we shouldn’t ask identical prices for them, because we’ll end up winning the bid on all the awful jobs and losing it on the profitable ones. I’ve spent my working life watching barriers defend incompetence, watching a hundred corporate bureaucrats hang onto the coattails of one skilled worker, then blindly refuse him a raise and collapse revenues when he quits. And I’ve watched the stockholders look the other way, as the CEO’s calming words overcame the mechanically reliable $0.00 earnings reports, and the stock continued to rise.
That one skilled worker should be out on his own, free of hangers-on, exchanging his services for money directly from customers, the full price, undiminished by salaries for gatekeepers, either corporate or state. And if he needs to take in investment to grow his business, those wise enough to invest in him and not some bloated collection of clockwatchers and paperchasers should be rewarded. If he partners with someone in a corporate scheme for a vast capital investment, let them too be rewarded. Let contributions that advance the work be compensated by the payment for the work, and exclusively. When Herbert quits that organization, nobody should stand in his way as he destroys it as a competitor, since obviously his Human Resources costs are one tenth that of his rival.
And aside from this, I hate literal, frank Socialism. I hate having imposed on me the redistributive tax scheme that allays the Leftist’s guilt about all the opportunities and wealth he’s destroyed, though I was on the receiving end of this destruction too. I hate the protections of the regulatory state, protections that make sure Herbert will end up on welfare if he ever dares go out as an independent hole-digger. I hate having officials tell me that I can’t satisfy an innocent consumer want in exchange for money, because they have some sort of mystical authority over commerce, while I am a merely a greedy profiteer. And all these things are consequences of concentration-heavy Capitalism. “Manchester Capitalism” is the historical reality that made Marx’s fables seem true. We only have a powerful intellectual enemy, intent on the destruction of economic freedom, because of what was done under its banner, and what is still defended in retrospect. If the world Dickens rightly abused had not been identified under the title of Capitalism, there would be no popular sympathy for the destruction of Liberty, and the economists who today declare that markets cannot clear would be shouting into the whirlwind. Today it is we who shout into the whirlwind, and it is a whirlwind sewn by concentration of capital.
Now, between Free-Market minds, there is a really valid dispute about the extent to which the conditions Dickens reviled were A) The partially-mitigated consequence of a population explosion that narrowly missed being an outright Malthusian Doom, which was only avoided through the massive increase in production that saved the population from an even worse fate, B) A relative improvement over the absolute poverty of the agrarian life of the masses previously, which explains the apparently voluntary migration into the squalid cities, C) The continuation of the use of political power to secure economic power by the existing aristocracy, through property violations and legal coercions for the benefit of political favorites. In other words, causes that have nothing to do with economic freedom, and which could not be mitigated by any economic shackles. But to the Leftist and to the public, this is the smoking gun; forever afterwards “Liberty = Starvation,” would be met not with laughter but with concern. The erroneous theory gained its foothold in the collective consciousness, and it became possible to argue what the Leftist always argues: That the greatest spending administration in all of history didn’t spend enough.
The Distributist repudiates Manchester, and if the Capitalist had repudiated it and resisted it from the beginning, he might never have ended up with its name branded on him. If he had resisted it soon enough, it may never have become what it was. And if it, and all the other massive concentrations under which all the embarrassments of Capitalism have occurred, had been prevented by Free-Market resistance that perceived the property violations, political privilege, and special interest involved, Marx would have found a barren field for his message. And that would have been a greater service to the Free Market than any intellectual has ever done.