Inmates Running the Asylum?

Rad Geek quotes Richard Posner on the late difficulties of Harvard President Lawrence Summers. Posner takes the recent victory of uppity faculty over a university administration as the segue to a general denunciation of worker cooperatives:

To appreciate the sheer strangeness of the situation, imagine the reaction of the CEO of a business firm, and his board of directors, if after the CEO criticized one of the firm’s executives for absenteeism, ascribed the underrepresentation of women in the firm’s executive ranks to preferences rather than discrimination, dealt in peremptory fashion with the firm’s employees, and refused to share decision-making powers with them, was threatened with a vote of no confidence by the employees. He and his board would tell them to go jump in the lake. But of course there would be no danger that the employees would stage a vote of no confidence, because every employee would take for granted that a CEO can be brusque, can chew out underperforming employees, can delegate as much or as little authority to his subordinates as he deems good for the firm, and can deny accusations of discrimination.

If, however, for employees we substitute shareholders, the situation changes drastically. The shareholders are the owners, the principals; the CEO is their agent. He is deferential to them. Evidently the members of the Harvard faculty consider themselves the owners of the institution.

They should not be the owners. The economic literature on worker cooperatives identifies decisive objections to that form of organization that are fully applicable to university governance. The workers have a shorter horizon than the institution. Their interest is in getting as much from the institution as they can before they retire; what happens afterwards has no direct effect on them unless their pensions are dependent on the institution’s continued prosperity. That consideration aside (it has no application to most professors’ pensions), their incentive is to play a short-run game, to the disadvantage of the institution—and for the further reason that while the faculty as a group might be able to destroy the institution and if so hurt themselves, an individual professor who slacks off or otherwise acts against the best interests of the institution is unlikely to have much effect on the institution.

Uh, yeah. I've seen the amazingly long time horizons of senior management at some of the places I've worked. "Who cares if the ship goes down, as long as the worker bees locked in steerage drown first and we're sittin' pretty on the observation deck!" "Let's burn the place to the ground and sell it for charcoal to inflate the quarterly earnings report, and then cash in our stock! Woo hoo!"

Rad Geek comments:

Posner’s right that when it comes to operations like Harvard, workers generally have a shorter horizon of interest than the institution that they work for. There’s nothing wrong with pointing out the temptations that this creates. There is something wrong with passing this off as a problem that’s unique to workers (industrial, professional, or otherwise), or claiming that this kind of organizational problem is somehow solved by ditching co-operative models in favor of an organizational hierarchy.

When institutions are hundreds of years old and designed to last into the indefinite future, everyone has horizons shorter than those of the institution. This is not just true of workers; it’s true of shareholders, trustees, clients, executives, and all other mortal human beings.

Roderick Long also observed in the comments that

the separation between labour and management creates knowledge problems and incentive problems. Sure, there will no doubt be cases where such separation works better, and market competition will help identify such cases, but traditional management structures need to face more competition from the bottom-up alternative.

As I commented myself on that thread, Posner confuses cause and effect. Workers have a short time horizon because they have no say over how things are run. They deal with the consequences of other people’s stupidity (namely, those above them) and don’t fully internalize the benefits if they work harder or find ways to make the process more productive.

I suspect the European serf and the southern slave also had “short time horizons.” Imagine that.

But when workers do have a reason to be interested in improving the work process, they usually have a far better idea of what needs to be done than management does. Posner should read Hayek on what he called "distributed idiosyncratic knowledge."

Barry Stein (Size, Efficiency, and Community Enterprise) had some important things to say about the unique competence of those actually engaged in the production process. Most innovation, he wrote, is the cumulative effect of lots of incremental process improvements. And the people most qualified to identify opportunities for such improvements are, obviously, those involved in the process. In the hierarchical corporation, those most aware of what would improve efficiency have the least power to do anything about it. And, frankly, they also have very little incentive, since any productivity increases resulting from their improvements will surely be followed by layoffs, soaring stock prices, and senior management awarding itself a huge bonus for “cutting costs.” What worker in his right mind would do something to help his worst enemy?

By the way: as Paul Goodman pointed out in The Community of Scholars, many universities of the High Middle Ages arose as cooperative institutions controlled either by the faculty or the students. The latter model, as it developed at Bologna, was described by Roderick Long in "A University Built by the Invisible Hand."