Tuesday, 24 September 2013

The Nature of Jobs

Back in 2009, Adair Turner, then chairman of the Financial Services Authority, came up with the phrase "socially useless" to describe much of the activity of the City of London in the pre-crash years. This gained a lot of attention, not just because of the honest assessment of the City's predatory relationship with society, but because it reintroduced the ethical dimension to the workplace. Many people agreed with the judgement but also ruefully admitted that the job they did made little or no contribution to the common good either, even if it wasn't as unashamedly parasitical. The dirty little secret of capitalism is that very few people genuinely believe themselves to be wealth-creators, though they will claim the title (and absorb the associated anxiety of being "found out") for fear of being lumped in with the "moochers".

This moral stock-taking coincided with the peak in popularity of "happiness indices" as an alternative to simple GDP growth. You will notice that this has gone out of fashion lately, perhaps because ... house prices are rising again, yippee! (small print: only in London). The idea that happiness was an appropriate matter for public policy never sat well with the right, for whom "the pursuit of happiness" is by definition a personal activity that the state should keep its nose out of, while the centre-left struggled to define happiness beyond the anodyne. Under the covers, the right was uncomfortable exposing its profound belief that the only true happiness is the power that money bestows (and vice versa), while the centre-left was uncomfortable admitting that happiness does not equate to work and that there is much to be said for loafing.

Having (mostly) failed to spot the macroeconomic implications of useless activities before 2008, economists attempted to restore their credibility by providing a more systematic basis for Turner's argument about social worth, distinguishing between "creative" and "distributive" activities, though this merely echoed a critique that dated from the industrial revolution and was described by William Morris in Useful Work versus Useless Toil. Creative activities are incremental in aggregate, i.e. they add to the sum of wealth, while distributive activities are zero-sum, i.e. a gain for one party means a loss for another. A nurse is creative in that reducing hours lost to illness increases productivity and thus GDP. A marketing executive is distributive in that persuading people to buy product A in preference to product B (the "puffery of wares" as Morris puts it) does not increase aggregate demand and thus production.

The problem, as Turner himself pointed out in 2010, is that the proportion of distributive activities increases as a society gets wealthier. This is because ongoing advances in technological productivity mean we need fewer people to do creative activities, even allowing for growth in demand and the profusion of commodities. As Morris noted, this hides much waste as a lot of the creative production of society is geared to the "articles of  folly and luxury" demanded by the rich ("a class which does not even pretend to work") and the middle class ("a class which pretends to work but which produces nothing"), while inequality drives the production of "miserable makeshifts" and "coarse food" for the poor (think Primark t-shirts made in Bangladesh and Tesco horse-burgers made who-knows-where).

The suspicion, that an increasing number of the jobs created by modern capitalism are without merit, if not actively bad for society, has prompted a new essay, On the Phenomenon of Bullshit Jobs, by David Graeber, Professor of Anthropology at the LSE. He outlines the problem as follows: "It’s as if someone were out there making up pointless jobs just for the sake of keeping us all working. And here, precisely, lies the mystery. In capitalism, this is precisely what is not supposed to happen. Sure, in the old inefficient socialist states like the Soviet Union, where employment was considered both a right and a sacred duty, the system made up as many jobs as they had to (this is why in Soviet department stores it took three clerks to sell a piece of meat). But, of course, this is the very sort of problem market competition is supposed to fix."

The comparison with the USSR isn't particularly helpful (he's an anarchist, so this is just him establishing his anti-totalitarian credentials), as deliberately creating enough jobs to ensure full employment is a respectable policy that stretches well beyond the old communist regimes, even if it isn't current orthodoxy. Graeber's analysis is a classic left-libertarian one: "The answer clearly isn’t economic: it’s moral and political. The ruling class has figured out that a happy and productive population with free time on their hands is a mortal danger." In other words, the economic system (or more specifically the 35-hour week) is the product of repression and the defence of privilege, rather than the other way round.

The cart/horse problem requires him to assume the improbability of an intelligent designer to explain the ideology: "If someone had designed a work regime perfectly suited to maintaining the power of finance capital, it’s hard to see how they could have done a better job. Real, productive workers are relentlessly squeezed and exploited. The remainder are divided between a terrorised stratum of the, universally reviled, unemployed and a larger stratum who are basically paid to do nothing, in positions designed to make them identify with the perspectives and sensibilities of the ruling class (managers, administrators, etc) – and particularly its financial avatars – but, at the same time, foster a simmering resentment against anyone whose work has clear and undeniable social value."

This is entertaining stuff, particularly on the psychic damage it does to those compelled to do these jobs, but his argument is circular if he claims the cause of this is moral and political, i.e. the ideology is the product of ideology. The underlying reason has to be economic, or at least involve some economic tradeoff, otherwise businesses would not willingly transfer wealth to these unproductive middle class job-holders in the form of salaries. While some may represent unavoidable rents (corporate lawyers, for example), most are discretionary. Graeber's claim, that capitalists aim to keep the population occupied and quiescent, skips over the question of what the mechanism is that achieves this (the "mystery") - i.e. what makes this happen at the microeconomic level of the individual firm?

An alternative economic explanation for bullshit jobs is that business needs to create a large enough population of consumers willing to spend on the commodities it produces. In other words, disbursements to the middle class (in the form of income rather than dividends or rents that would challenge the ownership of the rich) are a form of investment that preserves and expands the market for commodities, and stimulates innovation and productivity, so growing the overall pie of wealth of which an increasing proportion is appropriated by capitalists (the 0.1% for shorthand). But this faces the same problem as Graeber's political explanation. What is the mechanism that achieves this via the medium of bullshit jobs?

The key issue for any theory, whether posited on a political or an economic explanation, is the free-rider problem, i.e. what would prevent some capitalists avoiding having to subsidise supernumerary roles and thus gaining a competitive advantage? This is a real issue given that free-riding undoubtedly exists, and not just among small capitalists who despise "backoffice" functions as much as they do the public sector.

A possible explanation is provided by the work of Ronald Coase (who died recently), the author of The Nature of the Firm. Coase sought to explain (in the 1930s) why firms grew to a particular shape and size. He believed the key determinant was transaction costs, i.e. the cost of doing business. In a perfect market, where an entrepreneur could contract-out every piece of work at an optimum price, there would be no need to directly employ anyone. The reason a firm is created is because the overhead cost of these contractual transactions is too high. In other words, it is often cheaper to employ your own specialists, even if they are not always productively occupied, than to contingently contract independent suppliers.

Coase's theory suggests that the issue is not black and white, that many jobs may be useful (from the firm's perspective) at some times and useless at others. In this context, the useful/useless dichotomy becomes a separate dimension to the creative/distributive dichotomy: a role can be both distributive and useful to a firm (having a marketing bod who wins you market share), even if this is useless at the aggregate level of society (a psychic burden borne by the marketing bod, not by the firm's owners).

The implication is that small capitalists pay a premium, either through periodic outsourcing at a higher price (and greater risk due to lack of employee insight/loyalty), or through the lack of a critical skill at a key juncture that would otherwise grow revenue. This partly explains the difference in productivity and profitability between small and big capitalists - i.e. it isn't purely down to economies of scale. Free-riding means you are more likely to stay a small capitalist, while big capitalists who free-ride are more likely to limit their opportunities for expansion. A related suspicion is that many big capitalist firms who do not free-ride are operating some way short of their optimum point, in terms of the balance between internal and external resources, due to innate caution, which is perhaps supported by the evidence of the as-yet underwhelming impact of online outsourcing and the recent evidence of job-hoarding during the recession.

But while transactions costs do provide a plausible explanation as to why firms may accept some structural inefficiencies among non-productive roles (i.e. like advertising, they know that 50% of their managerial and administrative overhead is wasted, but don't know which 50%), it doesn't explain why the number of these roles should grow over time, not so much as a relative proportion of the firm (which can be explained by technology and automation) but as an absolute number. The gradual shift from the exploitation of labour value to intellectual property and capital assets could explain the growth in legal and financial roles, but it doesn't explain the growth in HR; while the bete noire of regulation and red tape only excuses so much: you are not obliged to employ management accountants, internal auditors, or CSR managers, let alone someone to manage your Twitter account.

Empire-building (to justify inflated executive pay - i.e. the principal-agent problem) and defence in depth (employing enough people beneath you to act as a fire-break come the periodic redundancy programme) probably play a part, while the Peter Principle should not be underestimated as a feeder into the limbo of "special projects", but I think the chief cause is simply that supernumerary roles tend to create work to pad out those periods when their skills are not required by the firm. This is essentially Parkinson's Law, and more precisely the observation that these roles tend to "make work for each other". As technological advance reduces the number of productive roles in the firm, the touch-points for the distributive roles are increasingly with each other, which increases the likelihood of further role creation and grade inflation.

Does this imply the reductio ad absurdum of a firm with only overhead roles and therefore no real purpose beyond a self-referential mission statement? In one sense, such firms are already closer to reality. The impact of containerisation and ICT over the last 50 years (in reducing transaction costs) has allowed some businesses to strip down to their "core competence" (usually managing a balance sheet) through outsourcing and offshoring. Though these often tend to start their "unencumbered" phase with legacy overhead roles, these quickly fall away as the business leaders realise they will never need the skills again, or at least not sufficiently frequently to justify the expense of an inhouse resource. These are not just modern variations on the holding company, but genuinely approach the "ideal" of Coase's theory, i.e. a small team of contract managers. The overhead roles don't wholly disappear; some merely step down the food chain to suppliers or go freelance, which means (for most) lower wages and worse terms.

The emblematic form of the modern firm increasingly looks like a hedge fund or a software house. The evidence suggests that technological change, particularly since 2000, has allowed firms to both start and stay smaller. As already noted, technological change also means that it's more likely that new firms will be distributive rather than creative (in passing, it's worth noting that a "creative" in modern parlance is often someone engaged in distributive activities who's in denial about their social worth, e.g. "marketing creatives"). While these firms have some supernumerary roles, they are often just corporate adornments that function as status symbols externally, e.g. "Executive Chef", or as ideological exemplars internally, e.g. "Guru". The assumption that a mature firm needs a substantial backoffice no longer holds.

Though it may not feel like it to the "squeezed middle", today's labour-hoarding and wage restraint among large and medium-sized businesses may well mark the end of the golden age for supernumerary middle class careers. The debate on the value of a degree, and the related angst over graduates struggling to move beyond non-professional jobs, may be the canary in the coalmine. Though recovery (however weak) is assumed to herald happier days for the jobs market, the paradox is that layoffs are now more likely as businesses have the confidence (and access to capital, if interest rates stay low and funds aren't monopolised by mortgages) to invest in automation and further outsourcing/offshoring.

Though this will restrain growth in aggregate demand, it will make sense at the level of the individual firm where overheads continue to grow as a percentage of the cost-base and external transaction costs continue to fall, in both cases due to technological advance. In the face of this pincer movement, the decline in bullshit jobs seems likely and thus Graeber's essay takes on the air of a lament for a soon-to-disappear world, not unlike the typing-pools and reprographic offices of yore.

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