I received an anonymous comment the other day that casts some doubt as to whether a true meritocracy would benefit the middle class because of the vitality function (curve). In essence I have addressed this already on The Middle Class Forum in a post that brought up the Pareto Principle. The Pareto Principle theorizes that 80% of resources are concentrated within 20% of the population. The vitality curve is the same as the Pareto curve, except with a specific implication that executives should manage their workforce accordingly. On a broad scale this would imply that since 80% of the merit in a work force presumably comes from 20% of the workers the compensation should reflect that, which would not bode well for the middle class.
To recap, the Pareto Principle is a theory with more legs than it deserves. There are some natural phenomenon that roughly abides by this principle, I read once the distribution of mass in sand grains on a beach as one example, but most do not. To attribute this “natural” cause to any cultural phenomenon is spurious at best. Ironically, the Pareto Principle was not about nature to begin with, but an observation made about the Italian economy. Since then its adherents have cherry-picked instances where it applies as proof of its natural validity. As a person who gets involved in various community activities I am reminded by people (apparently proud of themselves) how 20% of us volunteers do 80% of the work. The vitality curve, as “validated” by Jack Welch in particular, is but another bit of “proof” offered in support of the Pareto Principle.
The middle class needs to be skeptical of everything, I mean everything, that comes out of the economic field. As a whole economics has been based too much on dogma rather than theory, scholasticism rather than empiricism, deduction rather than induction. Its champion of empiricism, Milton Friedman, was in fact one of the more dogmatic economists in the field, not above ignoring whatever valid experiences got in the way of his “theories.” Fortunately, determining whether one thing is necessary and/or sufficient to cause something else is a straightforward test of valid experiences the middle class can employ to test our skepticism.
The vitality function supposedly validates the natural Pareto Principle because Jack Welch, former CEO of General Electric, used a management approach of greatly compensating the top 20% of employees, and firing the bottom 10%, with great success. If there is more proof than this I am not aware of it, and seldom do economists looking to support their dogma need more than one example as proof regardless. Yet thanks to Karl Popper’s falsification hypothesis, and the relatively simple necessary and sufficient tests for validity, we can quite easily dismiss the vitality function as valid proof that 80% of productive merit is concentrated in 20% of all work forces.
Enron used the vitality function as their management approach, causing top level employees to essentially make up stuff to enhance the appearance of producing. Considering what ultimately happened to Enron, this indicates that the vitality function is not sufficient for getting the best results in a work force. The Japanese got impressive productivity results using a management approach that was basically the complete opposite of Welch’s. This indicates that the vitality function is not necessary for getting the best results in a work force. In fact, we might conclude that Welch himself invalidates the precise curve, the precise ratio that the Pareto Principle is based on. Admittedly I am speculating on this, but I suspect that when you consider stock options and other compensation that goes beyond wages the top 20% of the GE work force received more than 80% of the compensation. Hey! Maybe the Italian economy initially examined by Pareto was too altruistic for our tastes.
This does not invalidate the vitality function as a cultural approach that works well for a certain type of culture. As a natural approach for compensating the natural distribution of productivity, it’s an invalid fraud. First of all, people naturally will work for other reasons besides greed. I offer my career with a conservation nonprofit as one proof of that, along with the Japanese work force. Those motivated by greed will strive to be compensated more for less productivity if they can get away with it, at the general expense of those not motivated by greed. Second, what contributes to the value of the CEO getting a thousand times the compensation of the lowest rung worker is the extra value over productivity that is induced by trade and the government intervention of capital markets. Be aware that capital markets function only with the blessings and oversight of governments, otherwise, the same function would amount to loan-sharking with a huge problem of being able to collect. This added value from trade tends to get concentrated at the top. Eliminate, or at least reduce, the added value of resources from capital-enhanced trade and you get closer to a meritocracy based on production that benefits the middle class.
For my own proof I previously offered not one company’s or nation’s management style but sixty years of economic data. From the forties until the seventies different sectors of our economy grew in sync and wealth disparity decreased. From the seventies to the present the financial sector, the sector that enhances the value of trade apart from productivity, far outpaced the overall economy. During that same period the ratio of housing costs to median family income grew, the ratio of privatized health costs to socialized health costs grew, the ratio of health costs to median family income grew, the ratio of education costs to median family income grew, the ratio of savings to personal income went from around 10% to zero, the ratio of debt to family income grew, bankruptcy laws grew tougher for the little guys, subsidies grew larger for the big guys, corporate media consolidated their reporting of economic news, Jack Welch became the dominant business idol, Milton Friedman became an economic cult figure and dogma such as the Pareto Principle and vitality function grew legs.
Tags: Economic Misinformation, Free Market Merit, Middle Class Economics, Unbalanced Trends
