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Thursday, May 1, 1986

A Reviewers Notebook: Choosing the Right Pond

Robert H. Frank’s Choosing the Right Pond (Oxford, 306 pp., $22.95) is, paragraph by paragraph, often a delight to read, but in addressing one-thousand-and-one topics in no particular sequential order it leaves one with the impression of a most confusing eclecticism.

Frank believes in What he calls a “libertarian welfare state,” which in itself is a contradiction in any meaningful terms. He thinks we have an adaptive society and can have most anything. “Ours,” he says, “for the taking is a society that is not only more efficient, but also more equitable and less restrictive than the one we have today.” He hints that we could get it by taxing consumption instead of income.

Frank believes, very roughly, in marginal utility economics, but he has an incurable itch to qualify all state ments. It is quickly apparent that he thinks people can be paid in many other things than money. People work for cash incomes, yes. But they also work for status, which can take many forms. The mixture plays hob with any theory of collective or individual bargaining.

The question of whether a worker is paid the economic value of his contribution might, says Frank, “have been settled long ago if there existed simple, unequivocal measures of the economic value of what people produce.” Unfortunately, most modern production is done by teams. This makes it difficult to define, much less measure, what one worker contributes to what the team as a whole produces.

The fact that the output of the team as a whole can be measured, where the individual contribution cannot, means that guesswork will tend to equalize individual wage rates. The quest for status muddies all the waters. Individuals may actually prefer working for less productive teams as a means of escaping what they regard as a demeaning treadmill.

The anti-rat-race proclivities of individual workers have a general effect on all wages. “There occurs,” says Frank, “a reduction in the reward workers receive for making extra contributions to their group’s output.” There is thus a “flattening” of the “slopes” of incentive pay schedules, which may account for much of the American productivity decline of recent years.

The quest for status means that many individuals will be content with titles. Being vice president of a company used to mean being next in line for the presidency. But Frank knows about a large advertising agency in New York City that has 150 vice presidents and, above these, eleven executive vice presidents. Firms with multiple vice presidents will pay these executives less, and their lower staffs more.

Within the framework of traditional marginal productivity wage theory Frank finds lots of things that are “completely incoherent.” There is a large literature that “discusses the widespread practice, in both union and non-union firms, by which workers impose strong sanctions against their co-workers who exceed informal production quotas. Instances are even reported in which firms themselves take steps to limit the amount workers produce. McKersie, for example, reports the case of a General Electric plant that abandoned an incentive pay experiment despite its strong effect on productivity, because it caused some production workers to earn more than their superiors.”

In the oil business a good geologist may be able to indicate fields and methods of extraction that pay huge dividends to the lucky company for which he works. The problem here is that the geologist may be worth more to the company than its chief executive officer. The only way to handle such a situation is to pay the geologist fees outside the company. In many industries the practice of paying high consultant fees enables companies to avoid embarrassing comparisons.

The disconcerting thing about Frank’s book is his tendency to take things back. He likes Milton Friedman’s voucher plan for education. Vouchers offer greater possibilities for diversification than is now possible under state-provided education. The incentives for schools to recruit and retain the best possible teachers would be stronger under a voucher system. But Frank suggests that “an educational rat race of unprecedented proportions might be unleashed if we were to switch to the voucher method of financing education.” The current system, says Frank, “provides substantial insulation from . . . pressures for most middle- and low-income parents.” After reading five pages of Frank’s seesaw discussion of the Friedman voucher proposal I am at a loss to know just where we come out.

I have the same sort of trouble with Frank’s supposedly clinching chapter of the “Libertarian Welfare State.” After reading Frank’s fascinating analyses on how the quest for status modifies the quest for contract, with “flattened” incentive pay slopes resulting, what is one to make of the Frank statement that “firms do in fact compete vigorously with one another, both in product and in labor markets”? Is Frank taking his whole book back? No, for Frank has a final reiterative switch to make. “The wage structure we see within private firms,” he says, “is not one in which workers are paid the value of their marginal products. Nor are the goods and services we buy in open markets the ones that best service the needs of our communities.”

Frank reconciles the disparity between his statements about competition by saying that the “products we buy and the terms under which we work are at least in rough harmony with the demands we express as individuals.” The “rough harmony” he speaks of goes with his theory of tensions. The Libertarian welfare state, he says, is “riddled with tension and trade-offs” that “come with the territory.” He expects that the “haves” will naturally be for lower taxes while the “have-nots” will struggle for greater benefits. Some will want “greater standardization of the labor contract, while others will push for greater latitude to negotiate on an individual basis.”

So it’s a matter of pushing and hauling. Does this mean that Frank is willing to settle for the status quo? Not quite. “The great trade-offs between liberty, efficiency, and equality will again confront us in the future,” he says, “but for now we can have more of all of these things.” I don’t know What he means by italicizing the word “all.” Does he mean there is no need for trade-offs in the present?

Frank illustrates his book with cartoons, many of which are taken from The New Yorker. The cartoons play up anomalies and are a lot of fun. They are quite in spirit with the Frank text. But the fun does not make for coherence. A book that sees there are three sides to every question is no book at all.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.