Old, beardy revolutionaries wielding spreadsheets

If you were aiming to model global, 21st-century capitalism, the obvious place to start would not be with a model of the firm based on mid-Victorian Lancashire textile manufacturing companies.   Firstly, the textile industry developed in Lancashire in the 18th century because only here (and almost nowhere else) was the climate sufficiently conducive for the then leading-edge technology to operate successfully.  (The air needed sufficient dampness, but not heat, for the cotton fibres not to be broken by the early textile machines.)   Technology in most industries has progressed so much in the two centuries since that very few industries are now tied to specific climates.     So industries are mostly not tied to place any more.
Secondly, large swathes of  work – even most work undertaken in companies described as manufacturers – is not anything a Victorian economist would recognize as manufacturing.  Rather it would be better described as symbol analysis and manipulation.  A relative of mine recently embarked on training as a surface-materials mixer for a road-building company – a great job, all done inside in an airconditioned office, mixing different ingredients and assessing the results, achieved by moving graphic objects around on a computer screen.  Of course, some person still has to be outside moving and switching on the automated machinery which actually lays the road surface once it has been created, so not every task is symbol processing.     But mixing is no longer done by eye, by a man using using a shovel in front of a furnace.  The relevant attribute of symbol manipulation – unlike, say the operation of a loom – is that this too is something no longer tied to place, thanks to our global telecommunications infrastructure and to digitisation.  Thus, the processing of US insurance claims can move from Hoboken, New Jersey, to Bangalore and Mauritius, and then maybe back again, if circumstances so dictate.
Thirdly, for companies whose sole business involves symbol manipulation – eg, banks, investment firms, graphics designers, media companies, software developers, consultancy companies, etc – the economics of traditional manufacturing industry no longer applies.  Information is a product whose value increases as more people use it, and whose marginal costs of production can decline to zero with multiple users.  It costs Microsoft  between US$1 and $2 billion to develop the first copy of each new generation of its Windows operating system, but less than $1 each for the second and subsequent copies;  the cost of producing these subsequent copies comprises only the cost of the media used to store the product (a DVD or a filestore).   (Of course, I am not including the cost of marketing and distribution in this statement of the cost of production.)  Similarly, a well-crafted, well-timed IPO and financial plan may raise (to cite the case of one IPO whose writing we led) US$5 billion on the world’s capital markets if successful, and nothing at all if less-well crafted or placed at a different time.  These information-economy attributes also apply to those parts of so-called manufacturing companies which undertake symbol manipulation:  the design team of Mazda cars for example, which relocated from Japan to the UK because London is a world-centre of art, design and marketing, or the 2-man in-house forex-trading desk which two decades ago first enriched and then almost bankrupted Australia’s largest defence electronics firm, AWA.
So, although I do not share the sentiment, I think it fine for someone to express a personal dislike of an alleged bonus culture in our banks and financial sector companies, as Alex Goodall has done.  But to argue against this feature of our modern world using a micro-economic model based on mid-Victorian manufacturing would seem inappropriate.   Much as I admire Karl Marx for his startling and still-interesting contributions to the 250-year-old conversation that is economic theory, for his insightful criticisms of the world he knew, and for his desire to make that world better for all, his model of the firm describes almost nothing about the world of 21st-century business that I know.

4 Responses to “Old, beardy revolutionaries wielding spreadsheets”

  • Thanks again for your thoughtful reply, Peter, but I think you might have slightly misrepresented what I was arguing. At no point did I say that Marxist analysis of the nineteenth century was correct, even in the case of the nineteenth century, let alone for today. In fact, I specifically stated that his analysis led to predictions that were false (especially in terms of a growing proletariat, an alienated proletariat, and a worldwide revolution). To paraphrase Marx himself, though to different purposes, “I am not a Marxist.” (Except perhaps in the Groucho sense…)
    The point I was trying to make (though as usual probably not as clearly as I’d have liked to; if so, my usual apologies!) was that Marx’s critique of capitalism nicely highlights the perennial disjuncture between a market definition of value and other definitions that are not reliant entirely upon a belief in the benevolent wisdom of the hidden hand. I used this to argue that the bonus culture of today is illustrative of how socially destructive that discrepancy can at times become.
    I hope I’m not misrepresenting you, but as far as I can tell in your post you are still fundamentally defining value in terms of the price which the market commands for a product. You state: “Information is a product whose value increases as more people use it.” To me, this is problematic. Well, does the true value of a great work of literature cease to grow once the copyright period ends? And if not, then one must accept that the market is failing adequately to reward information in accordance with its value. Arguably, all that is increasing is an organization’s ability to leverage copyright rules that restrain the flow of information in order to make continuing profits.
    By contrast, Marx defined value in terms of the labour put into something. Of course this definition inevitably raises the question of what value one places on different types of labour. Does a bored data-entry person who makes twenty mistakes per hour produce value at the same rate as a super-efficient worker who busts a gut to do the best job possible? Of course not: so that model doesn’t work either.
    But if I don’t accept a labour-value theory, neither do I (nor, I believe, most people) accept the principle that a market definition of value makes sense, either. What we persistently see in the marketplace is that people charge the price for a product that they can get away with charging, and if they occupy a powerful position in the marketplace or society at large, that allows them to gain returns that, to most people, stop making sense. Market value is a product of power relations.
    Moreover, this pattern often accords quite well with the basic framework laid down by Marx, whereby people ‘at the top’ are able to cadge a little margin from each transaction in which they participate, making relatively little difference to most people most of the time, but allowing them to make themselves incredibly rich in the process. I don’t pay a fortune to estate agents because of some fantastic service they provide: every single one I’ve had to do business with has been incompetent. I pay a fortune because I don’t have any choice but to do so, given their strategic position in the marketplace in which I must, through the necessity of having shelter, participate. Of course, at the same time, entirely rational people manage to convince themselves that they entirely merit the salary they’re earning, whether its $200,000 or $200 million, and get outraged when senators, the press, or the members of the public inform them that their wealth amounts to ill-gotten gains. In the end, though, the reason why people are so up in arms about this issue today is precisely because the market definition of value has come to differ so enormously from the experience of most people’s everyday lives.
    So, once again, let me say that I wasn’t trying to be prescriptive in my post. I was certainly not trying to say that Marx provides a model for the 21st century. Generally, I try quite hard to raise questions but not provide clear answers in my posts, since I don’t feel I have them!
    All I was trying to say is that the bonus culture today is a classic example of how surplus value is taken by people at the top because they can, not because they merit it; and, secondarily, that the breakdown of a realistic definition of value in the housing sector due to the failure of the marketplace was a primary contributor to the current mess we’re in.
    I’ve worked in both the public and private sectors, and like to think that I’m willing to fair dues to both. Each has strengths and weaknesses. But my personal experience, time and again, is that across both sectors, the value placed on a product or service by the market and the rewards accruing to the producers offer at most a very, very loose correlation with a different (though hard to define) sense of value that most people hold. In business, I was perpetually amazed at the price we could command for services in the city, simply because the companies we worked for had too much money and because we occupied a key strategic position in the marketplace. Similarly, I remain perpetually amazed how much work is done by people at the lower rungs (in both the private and public sectors) for relatively little reward, and how many people end up ‘coasting’ when they reach the top, as the structure of power allows them to trade off the hard work of others.

  • Thanks for your response, Alex. Although my post doesn’t say it, I think it a mistake to assume that products, services or activities have any intrinsic values. One of Marx’s failings was to try to determine how such an intrinsic value may be determined. The mistake is repeated by those economists, most of them opponents of Marx’s theories, who think that markets determine some intrinsic value of things.
    But intrinsic value doesn’t exist, so it can’t be determined. The best one can say, IMHO, is that products, services and activities have external attributes which are primarily socially constructed, perhaps by the social construction mechanisms known as markets, or perhaps by tradition or custom or religion, perhaps otherwise. They have no intrinsic or essential value, whether mutable or immutable. My claims here deserve a longer presentation to support them, so I will put together another post in a day or so.

  • I’m totally with you on this. That’s why my first post, and my reply to yours were particularly useless when it came to saying what another type of value might be if we reject the market or labour value approach!
    I look forward to reading your next post…

  • In violent agreement we are! How can dialog continue?!

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