Freeman

THE CALLING

What "Undercover Boss" Could Be

An economist looks at the TV show.

DECEMBER 16, 2010 by STEVEN HORWITZ

Filed Under : Knowledge Problem, F. A. Hayek

Recently I stumbled across the TV show Undercover Boss.  A CEO poses as a new employee at one of his firm’s factories or stores in order to see how the company really runs.  In the episode I watched, the CEO of the Johnny Rocket’s restaurant chain spent time working in a couple of stores.

For an economist this is a fascinating idea for a show; I’ll explain why shortly.  However, I was disappointed because the episode I saw turned into a typically maudlin “reality show” where the boss is humanized by the remarkable cast of characters who work in the stores.  For example, the CEO, unsurprisingly, was unable to cook a good burger or make the ketchup smiley face for the fries, which led to much teasing from the employees. Viewers got to see the great CEO brought down to earth.  And, of course, each of the featured employees had his or her own complex and often troubled life.  At the end the CEO provided goodies (including a college fund for one woman’s kids and a year’s worth of rent for another) to the faithful employees as a way of recognizing their problems and hard work.  He tells his assembled workers he has been humbled and changed by the experience.

This might make for good TV, but it’s pretty uninteresting as economics.  Looked at from the vantage point of Austrian economics, there’s a potentially better show lurking beneath the smiles and tears.

Markets as Ecosystems

One of the most fundamental contributions of Austrian economics is the identification of markets as ecosystems of knowledge.  Ludwig von Mises and F. A. Hayek both emphasized that a complex, advanced economy requires private property, exchange, markets, and prices to calculate value and determine the efficacy of one’s production activities.  Profits and losses, too, are key to providing feedback to firms.  The argument, particularly in the hands of Hayek and later Austrians, is that knowledge is too often dispersed, contextual, and/or inarticulate to be communicated and centralized.  This is the core of the Austrian argument against socialist planning.

As it turns out, the same issues arise within firms.  Large firms need ways of taking advantage of the fact that their scattered employees also have knowledge that cannot easily be communicated through the usual formal means that firms offer.  CEOs and other leaders might be utterly unaware of important information available on the shop floor unless they have processes by which that information can be communicated.  Employees may not even know they are doing something or know something that could be of great value to the firm as a whole.

The idea of an “undercover boss” would be a fun and interesting way to approach these problems.  The “undercover” part might be necessary to avoid employee self-consciousness or fear, which could undermine communication. But perhaps  not.  If more CEOs spent more time on the front lines, they might well find out some things they would otherwise miss.

Even in the disappointing episode I saw, there were two small examples of what  an undercover boss might discover.  First, one employee had invented a new dish (French fries and grilled mushrooms covered with cheese) that customers at his store loved.  The CEO thought it was great, and his “goody” for the employee was a promise to test it at several restaurants.  In another case a female employee who used dancing in her routine with customers caught his eye and he thought that might be fun if more employees did it too. So he asked the woman to become part of the training group.

A really interesting version of the show, at least to an economist, would be one that recognized the ignorance of those at the top and had the boss going undercover to improve the firm by learning from employees how best to serve customers.  Rather than making bosses look incompetent for not knowing how things work, make them and the employees look smart by showing what can be gained by observing frontline operations.

In a world where more and more work takes the form of services and creative jobs in which strict routines make little sense, frontline workers will continue to have more independence and responsibility.  Being observed by the boss is one possibly effective way for employees to transmit what they know up the chain of command so the knowledge can be effectively used by others.

ABOUT

STEVEN HORWITZ

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

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