CHAPTER 9 SUMMARY, POLICY IMPLICATIONS, AND DISCUSSION SUMMARY Necessity and opportunity evoke those aspects of economic behavior that require effort, drive, time, and sacrifice. This book analyzes the carrot of opportunity together with the stick of the lack of wealth. Economists have done well in analyzing the carrot but poorly with analysis of the stick. And economics has not tried at all to analyze their joint effect when presented in combination -- as they always are. Hopefully this book advances that cause. Straightforward net-present-value profit-maximization analysis suffices for the study of the behavior of firms under most conditions. Becker's theory of time allocation supplements profit maximization for the study of individuals' behavior. But the expenditure of time in work, with the consequent loss of leisure, is not the only personal good expended in order to obtain purchasing power. Other goods expended include the absorption of pain due to fatigue, loss of reputation and honor, and foregone serenity. For the purposes of the analysis offered in this book, these and other related factors are classed together and referred to as Effort, and the impulse to expend them is here referred to as Drive. The analysis postulates that the strength of Drive experienced, and the amount of Effort expended, may be modeled as the difference between opportunity and wealth, relative to wealth. This Drive-Effort function may be seen as a close intellectual relative (even as the transformation) of the logarithmic (Benthamic) marginal utility function, and the Weber-Fechner law of psychophysics. The Drive-Effort Measure as defined here is offered as a precise and unambiguous definition of the concept of incentive, a concept which is used in economics frequently but without clear specification. After the introduction in Chapter l, Chapters 2 - 4 set the topic in the context of previous thinking, state the Drive-Effort (DrEf) concept formally, and discuss how it may be measured. Data that cast light upon the relationship of individual effort to wealth are presented in Chapter 5; they mostly confirm the inverse function hypothesized. Tests of the hypothesis are also suggested in Chapter 5. There then follows an extended analysis in Chapter 6 of the difference in effort to be expected in duopoly versus monopoly, based on the Drive-Effort hypothesis. Applications of this analysis to such diverse macro-phenomena as the rise and decline of nations, and the origin of economic development in the temperate climes rather than in the tropics or arctic regions, are presented in Chapter 7. Micro applications, such as the individual's decision about whether to accept overtime work, are discussed in Chapter 8. POLICY IMPLICATIONS If effort affects economic performance, and the amount of effort depends upon the circumstances--as defined by the Drive- Effort Measure--one naturally wonders: What can policymakers and economists do to increase effort? The first principle would seem to be: Above all, do no harm. The likeliest cause of well-intended harm is selectively giving special incentives to those persons or groups that seem to need energizing. Such special incentives will almost surely lead to perverse twists in the economy, and will induce people to search for subsidy situations instead of for productive economic opportunities, an outcome which will be far worse than the conditions one hopes to correct. The corollary of the first principle is that society should reduce the regulations and barriers which constrain potential creators of enterprises and innovations. If one must get permission from a wide variety of agencies, and file a long series of complex environmental impact statements, and worry that after building a plant and hiring workers the plant cannot be closed and the workers let go if conditions require, and on and on and on, then potential entrepreneurs will be less likely to take big risks in putting a satellite in space, or mining the sea, or building a nuclear fusion plant. Instead, individuals and entrepreneurial firms will turn to financial adventuring such as selling tax shelters and fighting to take over existing firms. Already few enough are the persons with sufficient stars in their eyes and iron in their souls to dream big dreams of accomplishing what people never before have done. The society should encourage rather than discourage such people by making the game worth the candle, and by freeing them up to be able to reach for the main chance. Such advancement of freedom is the sound economics of the human spirit, and the workable theory of economic development. The liberty to make a deal with whomever you like, anyplace in the world, is a key aspect of freedom; this conclusion follows from the discussion on page 000 about the relationship of the size of the market to opportunity. The other side of the same coin is that firms should not be protected against the competition of domestic or foreign competitors who want to make deals. This conclusion implies that there should be no tariff walls, no protection for infant industries, and no social opprobrium for buying abroad. The Drive-Effort hypothesis suggests that in addition to their bad side, income inequalities have advantages because they imply both lower wealth and higher opportunity for some individuals or groups than would the same total amount of income divided equally. So if, for example, one nation forges ahead technologically for awhile, there is a positive effect on effort by the laggard countries through the Drive-Effort mechanism, in addition to the new technology which the backward nations can exploit. Increased immigration into advanced countries is shown to have a beneficial effect by way of the Drive-Effort hypothesis, because economic immigrants are likely to have less wealth than do natives of the country of immigration; hence the immigrants will undertake opportunities that natives will not. This effect goes in the same direction as the net of other effects of immigrants; see Simon, forthcoming). All this adds up to a relatively open economy of course, in accord with the view of Adam Smith and the other Scottish and English classical economists; it is also the view of a wide variety of economists who are not all found in Chicago or "Austria" or the London School of Economics. It also adds up to an open society in the spirit of the classical liberals from the time at least of Mandeville, on down to Popper and Hayek. Implicit in many schemes for reforming societies and for making them less "aggressive" or "savage" or "competitive" is the idea that individuals can be motivated to work hard by ideals "higher" than the immediate urge to acquire purchasing power. No logical argument disproves this idea. And under some circumstances -- usually emergencies such as war -- the idea may be sound. But data presented in Chapter 5, together with recent experiences in China and other socialist countries, suggest that these schemes will not be successful in the long run. This being so, the DrEf Measure takes on added importance as a useful way of thinking about the motivation of economic activity. DISCUSSION 1. Too much explanatory power should not be claimed for the DrEf hypothesis, of course. For example, the DrEf hypothesis may explain why Venice and Genoa -- unlike other cities -- exerted the enormous efforts that they did to become the leading trade cities that they were; they had the geographic opportunity. But that Venice won and Genoa lost in the struggle for preeminence between them surely happened because of other historical and chance factors rather than because of their relative opportunities and wealth.1 *** 2. One may wonder, in light of the variety of illustrations offered here in support of the Drive-Effort hypothesis: Is the central proposition so broad that it can be made to fit _a_n_y human situation? If so, the hypothesis would be worthless because of being tautologous. There are many situations, however, to which the Drive-Effort hypothesis does _n_o_t apply -- the Arab-Israeli wars, most behavior of parents toward children and vice versa, gazing in rapture at a sunset. This suggests that the hypothesis is not tautologous. 3. The aim of the Drive-Effort analysis is _n_o_t to reconceptualize standard economics. Rather, the aim is to bring a key economic variable into the ambit of standard theory. The closest analogy is Hicks and then Becker bringing time within that ambit along with physical inputs to the production process. The bringing-in of education by Schultz, and of information by Hayek and Stigler, also are analogous. I emphasize this point because there may be a tendency to wonder whether the Drive-Effort hypothesis is simply a matter of organizing well-established entities in new ways; it is not. One might also wonder whether it is necessary or useful to bother enlarging the framework for this purpose, or whether economics has done well enough without it in the past and therefore can continue to do without it. As to such an analysis being necessary, a treatment of effort seems needed for understanding the workings of business and other economic institutions, because effort is well-recognized in the workplace as being crucial. One only need read a newspaper for a few days with an eye open to this factor to find plenty of examples of the operation of effort and its related elements. Here are a few recent examples to add to the many given earlier: (a) A business journalist who was fired from his job gives the following advice to others who are fired: Be eager to relocate. Don't be so provincial as to think the world revolves around New York, Los Angeles, Chicago or your home town. The work and the living can be excellent almost anywhere, if you go with the right attitude. Most of all, don't give up. Keep trying. Stay motivated, no matter what. Remember that many of us have gone through the hell you are going through. Keep plugging and in time the light at the end of the tunnel will be not that of an oncoming train but of a new opportunity (Henney, 1982). "Don't give up. Keep trying. Stay motivated." All are synonyms for continuing to exert effort. Effort is a variable, he is saying, and the amount of effort exerted matters. (b) A consultant advises that a wage increase may elicit an increase in productivity that will more than pay for the wage increase, citing not only the legendary five-dollar-a-day Ford example but also recent industrial experience. Consider a program at the Muskegon Piston Ring Co., largest manufacturer of piston rings in the world. In l975 the automotive original equipment division at the Muskegon plant was losing $l million a year and operating at 40% of capacity. With the cooperation of the union, the company decided to raise both the base pay and the production requirements for employees. The company reversed its financial position from a $l million annual profit. Plant equipment was operating at 80%, and take-home pay rose by 70 cents an hour. Or consider Eclipse, Inc., a Rockford, Ill.-based manufacturer of industrial heating equipment, with some 650 employees. In l978 employee turnover was 95% per year, daily absenteeism was running at about l0% and there had been a five-year slide in earnings. The company decided to offer wage incentives based on individual and overall company performance, and scheduled merit reviews of all employees, including supervisors. Wages rose by 34% over three years, employee turnover was reduced to 20% per year and ab- senteeism to less than 3%. Meanwhile shipping volume per employee rose 65% and company profits have jumped 600%. In l960, Patrick Cudahy Inc., the packing firm, broke off negotiations with the Amalgamated Meat Cutters & Butchers Union over a l7-cent per hour increase, and announced it was closing its plant because of continued high losses. The union later accepted a management offer for a 37-cent per hour base rate increase, coupled with higher requirements for employee output and other changes in work methods. The company afterward realized the highest profit in its history (Patton, 1982). The writer is not suggesting that productivity automatically rises when wages go up, but rather that workers will make more effort and therefore produce more output if they find that they must do so in order to obtain higher wages or continued employment. This latter quotation is particularly relevant because it makes clear that the increase in productivity arises from greater intensity of effort within the same number of work hours, rather than from an increase in work time which might be dealt with by recourse to Becker's allocation-of-time analysis or some extension of it. (c) The hard times (e.g., reduced wealth) in the late 1970's and the early 1980's affected labor's willingness to exert more effort (called "productivity" here): Ten--even five--years ago, anyone who mentioned "capital formation" or "productivity" to a labor leader was dismissed as a "tool of the bosses." At best such matters were considered none of the union's business and "what management is being paid for." By now, few inside or outside union ranks would deny that the worker's welfare depends on capital formation and productivity--even in the very short run. The two largely determine how many jobs there can be, how secure they can be and how well paid they can be (Drucker, 1982). Drucker argues that this development reduces the importance of unions, certainly an important matter for effort analysis to help explain. (d) Hard times also increase the Drive of business executives to exert the Effort to carry out painful decisions such as shutting down plants. In l979, General Tire & Rubber Co. decided that its big plant in Akron, a multistory opera- tion for manufacturing bias-ply truck tires, was obsolete. The company, however, promised to try to replace it with a modern plant if workers would make concessions to cut labor costs. The employees' union agreed. But last March, in what M. G. O'Neil, chairman and president, called "the most difficult and painful announcement I have ever made," the company said it would close the 67-year-old plant. (_W_a_l_l_ _S_t_r_e_e_t_ _J_o_u_r_n_a_l, October l5, l982, p. 29) The terms "trying," and "difficult and painful," in the second and last sentences in the quotation refer to Drive-Effort. (e) In conventional analysis, it seems out of joint with the times when a person starts a business during a recession. But recession apparently raises the rate of new business starts in some fields. Dun and Bradstreet reported that in the depressed second quarter of l982, "there was a rise of almost 7% in new services, including increases for laundries, advertising agencies and data-processing companies though entry into construction and mining fell" (_W_a_l_l_ _S_t_r_e_e_t_ _J_o_u_r_n_a_l, September 30, l982, p. l). Entrepreneurship requires effort to a high degree, including *** battling against fearful uncertainty and frightening personal risk. It is in accord with the Drive-Effort hypothesis that when people's sense of wealth declines due to economic downturn, they should then be more willing to exert the effort to start new businesses. (f) Avoiding waste and using inputs efficiently requires effort. And the Drive-Effort hypothesis suggests that those who are poorer in a resource will exert more effort to conserve it. It is to be expected that with respect to oil and energy, "the country that has adjusted the most is Japan, which began from the most energy-spare base. In l973, Japan used 57 percent as much energy for every unit of G.N.P. as the United States. By l980, it used only 43 percent" (Yergin, 1982). (g) Decreased wealth due to increased competition can spur wholly-new effort-intensive activities. The medical profession is a recent case in point. Here is an example: Reports indicate that many doctors are paying more attention to pleasing their patients. The busy Mayo Clinic in Rochester, Minn. ... has placed a "patient's representative" in its lobby to hear complaints. One reason, says Mark Brataas, a clinic administrator, is the need for doctors to "market" themselves in the face of today's growing competition from increasing numbers of health plans and doctors. (Victor Cohn, "Sometimes, They Listen," The Washington Post, January 23, 1985, Medical Section, p. 8.) One can deny the need for theoretical attention to variations in effort only if one dismisses anecdotal and introspective reports of effort variation as being too "soft" to be entered into evidence in the discourse of economic theory. In my view, to simply dismiss such reports as being unsystematic, without developing a superior replacement, is simply sticking one's head in the sand for the sake of "convenience," that is, for the sake of avoiding the very sort of effort that this essay is about. D/l36A,#6 Effort9 1/29/86 FOOTNOTES 1"Over the long run, the outcome of Venetian-Genoese rivalry was notto depend on superiority in seamanship or naval operations; after 1270, Venice had no such superiority. It was decided by their relative skill in arts of another order -- those of social organization, in which the Genoese and the Venetians had very different talents." (Lane, 1973, pp. 84-85)