Monday, October 7, 2013

Limits of markets - IV

Dan Ariely says that people operate simultaneously in two realms: one where market norms operate and another in which social norms operate. If you mix the signals from the two realms, you will get sub-optimal results. For eg. ,if you give a gift to a friend and say it cost you five hundred rupees, the perceived value of the gift drops. Once such a mistake has been committed, mending a social relationship is difficult.

If a social norm has been replaced by a market norm, it is not necessary that  the social norm will return when the market norm is removed. In the Israeli day care center example, when the fine was removed, the parents'  behaviour did not change. The guilt feeling that had kept them in line many times earlier did not return. Actually,  now that both the social norms and the fine had been removed, there was a slight increase in late pickups.

Companies have tried to establish social relationships with their employees, recognising that this makes them willingly go the extra mile. But when times are tough, they revert to market norms. This has risks. Dan Ariely writes in Predictably Irrational:
In treating their employees - ... - companies must understand their implied long-term commitment. If employees promise to work harder to meet an important deadline (even cancelling family obligations for it), if they are asked to get on an airplane at a moment's notice to attend a meeting, then they must get something similar in return - something like support when they are sick, or a chance to hold on to their jobs when the market threatens to take their jobs away.
Although some companies have been successful in creating social norms with their workers, the current obsession with short-term profits, outsourcing, and draconian cost cutting threatens to undermine it all.In a social exchange, after all, people believe that if something goes awry the other party will be there for them, to protect and help them. These beliefs are not spelled out in a contract, but they are general obligations to provide care and help in times of need. 
Again, companies cannot have it both ways. In particular, I am worried the recent cuts we see in employees' benefits - child care, pensions, flexitime, exercise rooms, the cafeteria, family picnics, etc. - are likely to come at the expense of the social exchange and thus affect workers' productivity. I am particularly worried that cuts and changes in medical benefits are likely to transform much of the employer-employee social relationship into a market relationship. 
If companies want to benefit from the advantages of social norms, they need to do  a better job of cultivating those norms. Medical benefits, and in particular comprehensive medical coverage, are among the best ways a company can express its side of the social exchange. But what are many companies doing? They are demanding high deductibles in their insurance plans, and at the same time are reducing the scope of the benefits. Simply put, they are undermining the social contract between the companies and the employees and replacing it with market norms. As companies tilt the board, and employees slide from social norms to the realm of market norms, can we blame them for jumping ship when a better offer appears ? It's really no surprise that "corporate loyalty", in terms of loyalty of employees to their companies, has become an oxymoron. 
I lived in Jamshedpur till I was nineteen years old since my father was working in TELCO (now Tata Motors). At that time Tatas used to spend a lot on the social sector and employee welfare. I hardly ever heard of anyone wanting to leave. Most of the people I knew as a child were the same people I knew as a teenager. TELCO Colony, where I used to live was a well-maintained township with good amenities and schools. Many of the expenses of the school I studied in was paid by TELCO hence my school fee was low.

I have heard and read since then that Tatas have reduced their social sector spending in order to improve their bottom line. Presumably the salaries have also gone up in the meantime. I wonder how the resultant of these two changes have impacted employee loyalty. And as the example of the Israely day-care center shows,  if loyalty has reduced, it may be difficult to get it back.

Blind application of market principles in every situation is not a panacea for all ills. As one wag put it, 'Socialism is the exploitation of man by man. Capitalism is the reverse.' Both are operated by human beings and so will get corrupted in the long run. Human beings are subject to many influences from the variables in the diversity wheel and are thus victims of many irrationalities and biases, contrary to the assumption of Homo economicus. Market norms generally work well for material goods (see this Radiolab episode on 'emergence' - a lot of units that are individually stupid giving rise to group intelligence) but when social norms are involved, applying market logic often confounds expectations.Economics is about trade-offs and the trade-off between market and social norms is often ignored.

PS:  In the introduction to his course on Human Behavioral Biology, Robert Sapolsky talks of the pitfalls while studying human behavior.


  1. Hi Suresh,
    Excellent blog. WOuld like to know which school did you go to and which year did you graduate. I am from Telco COlony. I write a blog called abhishekteaches.blogspot. Please do let me know your views. Keep blogging

    1. Abhishek,
      Tx for the comment. I passed out from Little Flower School, Telco Colony, in the year 1986.(Std XIIth).

    2. Abhishek,
      Is this the correct ID of your blog?

    3. . sorry for the mistake. Your depth of knowledge and ability to connect it to your experience is mindblowing.

  2. Very well said Kesu. Corporate social responsibility is merely on paper except for the Tatas.