CHAPTER 8 POLICY IMPLICATIONS POLICY IMPLICATIONS If effort affects economic performance, and the amount of effort varies 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 would be to give special incentives selectively to those persons or groups that seem to need energizing. Such special incentives will almost surely lead to perverse distortions in the economy, and will induce people to search for subsidy situations instead of productive economic opportunities-- which will be far worse than the conditions one hopes to correct. The corollary is to reduce the regulations and barriers that 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 forming a space satellite firm, 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 must encourage rather than discourage such people by making the game worth the candle, and by freeing them up to be able to take the main chance. This is the sound economics of the human spirit, and the workable theory of economic development. One of the necessary freedoms from constraint is the freedom to make a deal with whomever you like, anyplace in the world; this follows upon 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 means no tariff walls, no protection for infant industries, and no social opprobrium for buying abroad. The Drive-Effort hypothesis suggests that income inequalities have advantages in addition to their bad side, because they imply both lower wealth and higher opportunity for some than would equality. So if one nation forges ahead for awhile, there is a positive effect on effort by the laggards through the Drive-Effort mechanism, as well as from the technology gap that the backward nations can exploit. Increased immigration would seem to be implied by the Drive-Effort hypothesis, because economic immigrants are likely to have less wealth than natives of the country of immigration, and hence will undertake opportunities that natives will not, in addition to their other desirable characteristics. 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, which is also the view of a wide variety of economists who are not all found in Austria or Chicago or the London School of Economics. It also adds up to an open society in the spirit of the Scottish and English moralists, 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 (proximate) 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, suggests 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 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 seem to be many situations, however, where 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; hence, no tautology. But others may not be convinced on this point. 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 and information by Schultz, and by Hayek and Stigler respectively, 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 with 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 necessity, a treatment of effort seems to me to be necessary to understand 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: l. 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. 2. 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 reasonably systematic data from 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 consultant is not suggesting that productivity automatically rises when wages go up, but rather that workers will make more effort and therefore produce more if they find that they must do so in order to obtain higher wages or continued employment. This quotation is particularly relevant because it makes clear that the increase in productivity arises from greater intensity 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. 3. 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. 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. 4. 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.4 (_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. 5. 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 entirely in accord with the Drive-Effort hypothesis that when people's sense of wealth should decline due to depression, they should then be more willing to exert the effort to start new businesses. 6. 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). 7. 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., which treats up to 2,000 patients a day, 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.) D/l36A,#6 effort8 10/9/85