4 Good Economic Books I Read in New Zealand

One of the wonderful things about being away from the usual grind for a few months, is that I get to engage in this unusual activity called picking up a book and actually reading it.  What a concept!  It doesn’t happen much in the normal day-to-day life of CAW economist, engaged citizen, and co-parent of two lovelies. But it does happen while I’m on leave (I have a “4-over-5” deferred salary leave plan, where I work for 80% of my pay but get 20% of my time off. It’s wonderful!)

This weekend I’m packing up our apartment in Auckland this weekend to start a month-long circuitous journey back to Canada.  I gathered up the several fine economics books I read while I was down here.  Below are short summaries and my humble opinions on several of them.  The books I cover include Spark by Frank Koller, How Markets Fail by John Cassidy, Economics for the Rest of Us by Moshe Adler, and Economic Democracy by Allan Engler.

Spark, by Frank Koller (New York: Public Affairs Books, 2010), 249 pp.

This extremely readable book has a really long sub-title: How Old-Fashioned Values Drive a Twenty-First Century Corporation: Lessons from Lincoln Electric’s Unique Guaranteed Employment Program. Frank Koller was for many years one of the most thoughtful and fair-minded journalists in Canadian radio.  He covered many beats for the CBC, including running its Washington bureau and more recently following the “workplace” beat, where he assembled some uniquely in-depth features on subjects that most of the media ignore.  Of particular note was his courageous coverage over the years of asbestos hazards, exposing the scandalous impacts on both workers and consumers.  Now he’s used both his journalistic and his story-telling talents to tell the story of Lincoln Electric, a manufacturing company based in Cleveland, Ohio.

Lincoln has been making welding equipment since 1895.  Today it has $2 billion in annual sales, facilities in 18 countries (including a factory in Toronto), and 9000 employees – only one-third of whom are in the U.S.  Lincoln’s big claim to fame, and the motive for Koller’s book, is that since 1958 it’s had an official policy not to lay off long-term employees (defined as anyone who’s been there for 3 years or more). More precisely, the company promises only to “do its best” to avoid laying off these folks for economic reasons.  And it’s lived up to the policy (in fact, there weren’t any layoffs for many years even prior to 1958) – although there are some loopholes.  Lincoln also possesses a participatory, paternalistic, and union-free work culture which has helped it to survive the brutal conditions that have led to the extinction of so many other American manufacturers.

Compensation for production workers is based on piece-work, with big annual bonuses (typically equal to half a year’s base earnings) paid out at the end of each year.

On closer read, the no-layoff clause isn’t quite what it appears.  The company uses a lot of contract and “temporary” workers – and when they’re let go, apparently, it doesn’t count as a layoff.  Employees who haven’t made the 3-year probation period are regularly dismissed (including many during 2009, when sales contracted and the company’s profits fell by three-quarters).  Even those with more than 3 years seniority can be dismissed for failing to meet rigorous annual performance reviews – and there’s no union to protect those who are fired.  The company downsized its global workforce by 10 percent in 2009, including plant closures in several locations.  The core U.S. workforce was protected through this downsizing with voluntary separation incentives, but I doubt that globally the company can truly claim to have avoided layoffs.  As with other companies which have followed similar strategies (like Toyota), the core workforce is protected in part by a buffer of more “disposable” workers on the fringes (both contractually and geographically).  We can’t ignore the pain and insecurity which those workers experience.  Finally, and more positively, the company has implemented alternative mechanisms of reducing labour costs during downturns, such as extensive work-sharing (where everyone’s hours are cut a certain proportion, instead of laying off that proportion of the total workforce).

Koller aptly describes this arrangement not as a nirvana, but as an explicit “bargain.”  Workers accept the trade-off of hard work and uncertain compensation, in return for the realized promise of employment security.  After decades of job stability, they have come to trust management, and they live up to their end of this bargain with tremendous productivity and flexibility.  A notable feature of the Lincoln story is the high degree of flexibility inside the workplace; from the labour side, we have often argued that flexibility would be more easily achieved in an environment in which it didn’t result in layoffs, and Lincoln’s case would seem to support that argument nicely.

Koller does not paint a rose-coloured picture of the company; he interviews plenty of critics, and is carefully independent in his assessment.  Indeed, after reading this book, I would not remotely posit Lincoln as a “model” for better employment practices, despite Koller’s generally positive tone.  Lincoln, like other private firms, is in business to maximize the wealth of its shareholders.  Its managers have adopted an unusually long-term view in carrying out that task, especially in regards to its labour relations practices.  But workers still pay a price for Lincoln’s profit-maximizing strategy, in the form of very intense performance standards, vulnerability to unprotected dismissal, an absence of union representation (there’s a non-union elected workers’ council to give input to executives), and significant fluctuations in income.  (Non-union employers like WestJet learned long ago that a great benefit of profit-sharing as a pillar of compensation practice is that it allows management to automatically and substantially cut labour costs when profits are weak.  That, in essence, is a way of forcing workers to absorb some of the enterprise risk that would normally be shouldered by a company’s owners.)  And despite all this, many Lincoln employees still lose their jobs: temporary workers, those with under 3 years seniority, foreign workers, and those who fail the performance tests.  Last year amidst falling sales and a 10% reduction in headcount, Lincoln’s CEO took in $4.6 million (down fractionally from 2008’s $4.8 million), and the company actually boosted its dividend payout to shareholders.  That’s not exactly equality of sacrifice.

Koller does a great job of explaining the disfunctionality of the knee-jerk layoffs that are the first response to trouble of most CEOs (leading to all kinds of economic and social costs).  Lincoln’s strategy is better in some ways, but still exploitive.

Koller’s book is most useful when approached as an extremely well-written, impeccably documented case study in labour relations – rather than as a manifesto for successful “caring capitalism” (which Lincoln, as I have explained, does not represent).  The Lincoln experience reveals the trade-offs and bargains which permeate work practices under capitalism, the complex mixture of consent and discipline, carrots and sticks.  Lincoln’s approach is different than most (and preferable by some, but not all, criteria), but its goals are the same as other companies.  Reading this story carefully should help unionists and socialists think concretely about ways in which we can extract a more humane bargain from the capitalists who employ us – while also understanding the limits that seem inherent within any labour process governed by the mechanism of profit-maximizing competition.  I recommend Koller’s book highly, both for armchair analysts and (for practitioners and specialists) as a well-document case study in labour management strategy.

How Markets Fail: The Logic of Economic Calamities, by John Cassidy (New York: Farrar, Strauss, and Giroux, 2009), 390 pp.

I bought this book on the advice of Mel Watkins, and I wasn’t disappointed.  John Cassidy is a well-known financial journalist (his most famous gig was for the New Yorker), but he is also a trained economist and possesses a sharp, progressive political analysis.  He even took graduate courses in economic theory at the New School for Social Research of all places (my alma mater).  That’s a unique and deadly combination of skills, and Cassidy uses them to great effect in dissecting the causes of the financial meltdown.

The book is organized into three large segments, which are largely self-sufficient.  The first is a very readable overview of the history of conventional neoclassical economics – what he calls “utopian economics.”  The second and more novel is a very useful summary of recent developments on the edges of mainstream economics: theorists who are pushing the envelope of conventional economics in intriguing and important ways.  He calls this approach “real-world economics,” and he referes to these thinkers to show where the models of the utopian thinkers fall apart.  Part Three is a blow by blow account of the events leading up to the financial crisis of 2008-09, and the failure of government’s response to that crisis.  This discussion goes as far as spring 2009 (at which time the manuscript was presumably sent to the publisher).  It provides more detail than anything else I’ve read on the exact timing and dynamics of the cascading breakdown in confidence that brought the whole system to a halt, and the incredibly arbitrary and makeshift policy improvisations of the Fed and other policy-makers as the crisis unfolded.

In each section, Cassidy writes with a journalist’s flair for telling a good story (including intriguing profiles of some of the major players involved), yet there is very serious economics in his writing, as well.  I learned a great deal about some of the more interesting recent directions in mainstream theorizing (topics like imperfect information, public goods, and herd behaviour).  There is more diversity in mainstream economics than we lefties typically give the profession credit for (this point was made to me forcefully some years ago by Lars Osberg, and he was absolutely right), and Cassidy’s Part Two provides a readable introduction to many of the more fruitful directions – and the far-reaching policy implications that flow from their ideas.

As suggested by his title, Cassidy’s general approach is to argue that certain “flaws” or “imperfections” in the ways markets operate, naturally give rise to problems like those we’ve encountered in the last few years.  If it weren’t for those flaws, he implies (and sometimes explicitly states), markets would do their job, and market-based economics would be accurate.  And in most parts of the economy, he argues, markets do indeed work well.  It’s only in certain areas (like finance) where collective irrationalities and other market failures come into play, and hence where some overriding influence (through regulation or other means) is required to set things right.

I don’t accept this “imperfectionist” approach to understanding the instability and negative human consequences of capitalism (although perhaps Cassidy adopted that tone merely to try to communicate his ideas to a broader audience in his finance-infatuated home town).  I would argue that the seeds of the problem are planted more deeply: in the profit motive, in speculation, in financialization itself (not just in the particularly irrational manifestations which Cassidy documents).  However, a reader with a more structural analysis of the problem can still learn immensely from Cassidy’s exhaustive parable of exactly how this crisis unfolded, and his explanation of why even market-oriented economists should be demanding fundamental changes in regulation and practice.

Economics for the Rest of Us: Debunking the Science that Makes Life Dismal, by Moshe Adler (New York: The New Press, 2010), 217 pp.

This book was recommended to me by Jane Stinson, my former colleague at CUPE Research, but in fact I had already purchased it (on the basis solely of its promising title, not knowing anything about Adler’s work) before leaving Canada.  Adler is a progressive economics professor in New York, a blogger for truthdig, and a community activist.

Like Cassidy’s book, this one is divided into rather separable, stand-alone sections: in this case, two halves.  In these two halves, Adler takes on what he believes to be the fundamental tenets of neoclassical theory: the theory of welfare maximization, and the theory of wage determination.  The choice of these two particular axes to grind strikes me as somewhat arbitrary – and focusing on these two particular subjects does not quite live up to the promise of a more all-encompassing critique that was hinted in the title.  Nevertheless, within those two areas I learned a great deal from Adler’s dissection of orthodox economics.  Armed with plenty of real-world examples (from rent controlled apartments to the production process in fast-food restaurants), Adler shows exactly where neoclassical theory goes wrong – and how activists can marshal economic ideas on our side, for a change.

I must confess that Adler’s critique of welfare economics highlighted a gap in my own graduate economics education: I had never encountered many of the theorems he was intending to disprove.  (I guess I wasn’t paying enough attention in those advanced micro courses … or maybe they just didn’t bother teaching this nonsense at the New School!)  For example, if welfare is commonly defined as the sum of the areas under all the consumer demand curves (reflecting, in theory, the fact that some consumers get something for less than they would be willing to pay for it), then there is an immediate and enormous distributional issue raised.  Since rich people have more money, they are willing to pay more money for almost anything – which means they get more “welfare” from any purchase than the rest of us.  Thus the welfare gain calculations underpinning CGE models of trade agreements and Walrasian models of the “deadweight” cost of taxes are all probably contingent on this implicit assumption that a dollar to Conrad Black is going to produce more welfare than a dollar to an average bloke.  (Okay, Conrad Black is probably a bad example, since he’s in jail and can’t spend it anyway.  But you get the point.)  I’d never thought of it this way before.

Adler’s discussion in Part I is quite technical in places, which will undermine its usefulness as a critical economics primer for activists.  Nevertheless, he very effectively puts across his core message.  When economists claim that a particular arrangement is “efficient,” they are speaking of an arcane, other-worldly concept (Pareto-efficiency) which bears no relationship to how the term “efficiency” would be defined in popular usage (namely, as the effective use of resources to produce a useful output).  Pareto-efficiency takes for granted the existing (precariously polarized) distribution of wealth; it then celebrates the truly marginal changes in welfare that occur from exchange within the constraints of that initial distribution (Harberger’s tiny triangles), while ruling out of bounds any notion of doing something really useful (like taking it away from the rich bastards outright).  People do not understand how perverse the assumptions of neoclassical welfare analysis truly are (myself included, it seems), and Adler’s book will spur some badly-needed critical awareness.

Part II of the book will be more immediately useful for activists in the labour movement and other social campaigns.  He reviews the origins (including the ideological motivations) of the neoclassical theory of wages, and then demolishes the fundamental policy conclusions of that model – namely, that wages somehow reflect “productivity,” that minimum wages create unemployment, and that wage inequality is both expected and beneficial.

Adler’s writing style is refreshingly personable, even humble.  His book makes a very valuable addition to the bookshelf of anyone working to challenge the received wisdom that keeps so many people poor.

Economic Democracy: The Working-Class Alternative to Capitalism, by Allan Engler (Halifax: Fernwood, 2010), 111 pp.

This little book deserves notice simply because it comes right from the trenches, authored by a life-long trade unionist who has also taken the time and effort to research and write a significant contribution to our portfolio of economic and political alternatives.  Al Engler has been active for decades with the longshore union in Vancouver (one of Canada’s most progressive unions) and the Vancouver Labour Council.  This well-researched book is a fine example of the sort of worker-friendly political-economy education for trade unionists that our labour movement needs a lot more of.

Engler’s book is divided into three parts, although this time there’s a stronger story line that links them.  Part I provides a critical review of capitalism.  Part II describes Engler’s posited alternative, which he calls “Economic Democracy.”  Finally, Part III discusses political strategy (namely, how to get there).  In each case the discussion is well-documented, including both references to historical thinkers, and modern real-world examples (many of them Canadian).

Engler’s critique of capitalism emphasizes its democratic failings – presumably to better contrast it with the more democratic features of his preferred alternative.  The systemic failings which he catalogues are familiar ground to most of us, yet compiling them in one place, and conveying them with an honest sense of righteous outrage, is valuable.

Part II is the core of the book.  Here Engler sketches out the features of a society in which conscious, collective oversight of the economy replaces the effective economic dictatorship which prevails in a business-dominated system.  Engler sketches out a system of worker democracy in individual enterprises, along with community economic ownership and decentralized planning.  In this regard his work is quite complementary to other work on “participatory economics” (Michael Albert et al.) or the “solidarity” economy.  Because Engler is painting a picture of the ideal world he would like to see, this section reads as quite utopian.

However, Engler addresses the crucial question of how we build this idealized world in his final part.  He reviews the failings of both statist and social-democratic strategies.  He concludes, rightly, that we will build economic democracy by fighting many little pragmatic battles – but also by keeping our eyes on a farther-off horizon which promises something bigger.

Engler’s book will stimulate more questions for many readers than it answers, particularly regarding some of the economic details of his vision of economic democracy (such as precisely how firms would be governed in this system, to ensure both economic efficiency and popular accountability).  But that’s just fine: anything that gets labour activists thinking structurally about the system we live in, and how we want to change it, is a step in the right direction.  Economic Democracy is a fine introduction, written in clear but passionate language, to the failings of capitalism, and the elements of a better alternative.