The Imaginary Economy: a new conception

by Mario Fabbri

  That idea would only be correct if the increase in material well-being was always hampered only by the real difficulty of producing and never by weakness of demand.

  But we know that weakness of demand has always been of great consequence, as often these productivity improvements, rather than increase the quantity of goods produced, have resulted in a huge transfer of workers from factory to office.

  We must then conclude that even the work of the promoters of production efficiency has often been ‘unproductive’ and itself part of the imaginary economy.

  24. The neuroses of big companies

  The imaginary economy has many curious aspects, created by the presence of large numbers of workers serving no real material purpose, but to analyse them extensively would unduly drag out our exposition.

  We will therefore confine ourselves to pointing out only some very visible developments of those we will call the neuroses of big companies.

  From a study focused on this subject, Moral Mazes by Robert Jackall:

  For most managers… future chances in an organisation, after the crucial break points in a career are reached, are seen to depend not on competence, nor on performance as such. Instead managers see success depending principally on meeting social criteria established by the authority and political alignments – that is, by the fealty and alliance structure – and by the ethos and style of the corporation.1

  Here the point has been very well taken by Hayek:

  … as organisations grow larger and more complex, the task of ascertaining the individual’s contribution will become more difficult; and it will become increasingly necessary that, for many, merit in the eyes of the managers rather than the ascertainable value of the contribution should determine the rewards.2

  In assigning grades and rewards, people are always/inevitably evaluated and compared to each other, but in a big company this is primarily done on the basis of the subjective impressions of their bosses-evaluators.

  So, to get ahead, what counts above all is to be able to fit into the environment, to ‘know the ropes’.

  By contrast it’s not enough to be competent because it is easy for the bosses of someone who has achieved excellent material results, but whom they do not like, to find good reasons for denying promotion:

  Sure he is good, but the world abounds with people as good as he and even better. And for the important place that is vacant we need someone who is not only technically skilled but has the right profile too, who knows which buttons to press. And he doesn’t look right from this perspective.

  The owner of a small restaurant, on the other hand, might have it in for the chef, but if he’s very good he’ll hang on to him and perhaps even bump up his pay.

  A lot has been written in the Anglo-Saxon world about workplace politics or office politics, as this form of manoeuvring is called.

  These texts target people working in companies of a certain size in which two factors take on a decisive importance.

  The first is that many find it advantageous to direct their energies not toward benefiting the organisation, but to influencing the judgment of their evaluators: it is a very different objective and leads to spectacularly different behaviours and results.

  The second factor is that for nearly everyone there is a crucial asymmetry between being responsible for a development that is positive and one that is harmful for the company. The rewards for the first outcome are typically much more limited than the penalties for the second.

  The clearest case is in administrative work: a form can be filled in correctly, which brings no prizes, or incorrectly, which may be punished.

  Of course, to function in an orderly fashion any large organisation needs a system of rules for its members, but when both the system and the penalties for those who break the rules acquire major importance, the inefficiencies generated can become really significant.

  Now, an accountant to perform his work has to deal only with internal directives that must be strictly respected, unlike the salesman, who must procure orders from outside parties.

  For those dealing with the outside world, the rules are often not absolute, because when the consequences are positive for the organisation, transgressions are tolerated.

  But this cannot apply to those who only work inside the organisation, and most of the staff, in a big company, find themselves in the situation of operating inside.

  A bureaucratic climate is thus established within the large internal area of big organisations, and compliance with rules and regulations becomes the standard benchmark for employee evaluation.

  And failure to correctly perform the functions for which he is responsible can cost the employee dearly, leaving everyone else to profit.

  The result is the popular social pastime “Who is to blame?”, in which the almost universal strategy for minimising risk is to avoid responsibility as much as possible.

  On this Jackall records the words of a thoughtful manager:

  The basic principles of decision making in this organisation and probably in any organisation are: (1) avoid making any decision, if at all possible; (2) if a decision has to be made, involve as many people as you can, so that, if things go south, you‘re able to point in as many directions as possible.3

  This is absolutely correct but, based on my own observations, I can propose a wider range of available defensive manoeuvres.

  Let’s take a hypothetical situation:

  The CEO of the big company summons the CFO: “Dear colleague, I have been thinking that we must greatly improve the timeliness and accuracy of our reporting and performance evaluation system, primarily in order to feed our internal reward process correctly, especially because we have to pilot the calculation of management bonuses and we cannot afford mistakes. On this issue I obviously rely upon you. You decide how best to proceed. I am sure you will not disappoint me.”

  This puts the CFO in big trouble because in his long work career he has developed a thorough grounding in manoeuvres and intrigues, but has no experience or competence in handling a tricky project like this, and rightly fears exposing himself to a devastating failure.

  But the one art in which he is very competent is dumping responsibility on to others. And he has more methods available. Let’s look at four of them.

  The first, and most risky, is dumping responsibility upward: he could get back to the CEO and ask for more detailed instructions about what he wants done, trying to take on the role of mere executor of decisions from above.

  However, even if the CEO allowed himself to get involved in giving detailed directives on what to do, in the event of failure he is not forced to accept the CFO’s defence that it is not his fault because he has just faithfully performed what he was requested to do.

  He may decide that any responsibility still lies with the CFO who, being the expert in the matter, should obviously have informed him of the problems that would occur.

  The second method is dumping responsibility downward and can work well only in a certain type of corporate culture.

  The CFO summons or hires an up-and-coming whiz kid and solemnly entrusts him with the task of carrying the project forward:

  “It is a very important and intriguing project, but unfortunately I cannot take care of it because of all my other commitments. You know: I am always in meetings… But you go ahead, see, do. I have the utmost confidence in your abilities and give you full authority over everything that you may find necessary. I am sure you will not disappoint me.”

  So the whiz kid throws himself energetically into the task, sticking his neck out fearlessly, and when the project crashes to the ground, is declared to be the person responsible for the failure.

  This technique, however, can work only in ‘aristocratic-type’, non–Anglo-Saxon corporate cultures where, with the support of top management, the directors live, immune to criticism,
in an élite Olympus separate from the world of run-of-the-mill employees who are never quite up to the task.

  In these exclusive environments, ambitious up-and-comers quickly burn out, and new posts in Olympus are mainly occupied by high divinities brought in from outside.

  The third method is dumping responsibility on to all, and is the one reported by Jackall. The CFO might say to colleagues:

  “I know that I could decide everything myself. It would be easy but I do not think it is the right thing to do. Instead we need to debate the new system among ourselves, and everybody should speak out. This might seem to be taking more time, but as every aspect will be considered and – in the Japanese way – we will all be agreed, then the new system will become operational quickly and will work much better.”

  In this way, the CFO not only greatly dilutes his own responsibilities, but also introduces the attractive possibility that, by stretching things out and complicating the process, the project might run aground and die without ever arriving at the dangerous stage of going live.

  The fault for the failure to complete the course will be the deplorable obstacles created by those people in the company who resist change.4

  A fourth method usable in big companies is dumping responsibility on to the exterior. But to use it requires hiring a prestigious consulting firm.

  Given the importance of the project for the future of the company, the CFO obtains the CEO’s authorisation to spend the amount necessary to enlist the help of “the best there is on the market”.

  The renowned consulting company arrives and immediately undertakes a “detailed analysis” of the existing situation, which allows it to bill many junior consultants’ work days, and produce a very bulky description of how the company now works.

  Luckily no one is actually required to read it.

  Then it organises courses, seminars, brainstorming sessions and other social activities which, in addition to being attractive for managers and employees in search of some time off, offers an opportunity to pick up ideas and requests conducive to inflating the initial assignment.

  But, after this promising start, the outcome of the entire project often turns out to be very disappointing: “Who would have thought that such well-known and expensive consultants could make such obvious mistakes?” they murmur in the company in tones that are a mix of indignation and amusement.

  But what matters is that the blame for the failure clearly does not fall on the CFO but on the renowned consulting company.

  And it should now be clear why it must be prestigious: otherwise it would be the CFO’s fault, for having recruited novices for such a demanding project.

  The renowned consulting company is fired, but they are old hands and for them it is no big deal: they charged a hefty fee and can always go and work somewhere else. Perhaps in another big company that has experienced similar disappointment with one of their competitors but continues its stubborn search for the dream consultant.

  In this kind of neurotic behaviour large companies stand apart from small ones, just as they do in the case of production inefficiencies.

  Some readers might be wondering if we are not just indulging here in gossip for gossip’s sake. But verifying the enormous spread of these ‘neurotic logics’ in the working world provides a further significant confirmation of our analysis.

  The idea of a capitalist system frenziedly geared to efficiency and profit is incompatible with the presence in companies of the enormous quantities of energy consumed in evolutions like those we have just described.

  But if we recognise the existence of the imaginary economy, the fact that so much energy is available in the working world is just confirmation that it was already present but just not engaged in productive activities.

  And business neuroses stand alongside technical inefficiencies in pointing to the huge area occupied by unproductive activities in the economic system.

  1 JACKALL, Moral Mazes, p. 45.

  2 HAYEK, The Constitution of Liberty, p. 99.

  3 JACKALL, Moral Mazes, p. 78.

  4 Among those ‘not trained to act’, who fear the risks of change, the art of finding difficulties that justify inaction is, logically enough, very popular. The same syndrome leads politicians trained/selected by nothing else but the art of speaking well, to find reasons why certain unpleasant new phenomena must not be opposed: either for ethical-legal reasons or because they are, indeed, positive.

  25. Why the price of bread moves away from the price of wheat

  We have noted how difficult it is to classify a specific activity as productive or unproductive, endeavouring to unravel the often counterintuitive connections among the complex economic systems of today.

  We can, however, obtain an excellent overall indication of the size of the imaginary compared to the real economy by examining the structure of product costs.

  Today, for example, the producer of agricultural commodities receives a much lower compensation than the price paid by the final consumer, and this disparity has grown a lot in recent decades. From a 2003 newspaper:

  … the farmer takes 15.7 cents per kilo of wheat, and the bread made with this wheat costs more than 3 euros. Twenty times as much…[Once] the farmer paid for a whole year’s bread with wheat, on an almost kilo for kilo basis. Now flour… represents 15 percent of the total cost. A worker, including extra pay for nights… costs 2500 Cf. PIERO SRAFFA, Introduction to RICARDO, Principles of Political Economy, p. lx.uros a month (with 10 years’ seniority, all inclusive) and then there are taxes, quality control and security consultants, accounting.1

  This growing divergence between what the first producer gets and what is paid by the end consumer is only partially justified by overheads related to transport, warehousing and other concrete operations in the chain of distribution.

  The bulk corresponds to the income of workers in the imaginary economy or of unproductive consumers whose income comes out of taxes: white–collars and managers, consultants, auditors, inspectors, suppliers of services of imaginary utility, or various categories of people employed or assisted by the State.

  The income of all these people has got to come from somewhere!

  Let us then take an example of the factors that contribute to distancing the price of bread from that of wheat without moving too far away from big company neuroses:

  The CEO of a large food multinational receives a telephone call from the company’s founder and still sole owner:

  “I told Professor Foggy not to worry about his tribulations with the university, because I absolutely want him to come to work full time with us. And I have told him that you would find the best way to bring this to pass. Before meeting him personally I read his book and understood that he is an exceptional man, with extraordinary intuitions. I am sure that exploiting these will give us a decisive competitive edge.

  Don’t miss this chance.”

  The professor arrives and, after an hour of elegant discussion, the CEO weighs him up and realises that there is no top position he could be slotted into without creating resentment and problems.

  So he opts for a radical solution:

  “Dear Prof. Foggy, it was such a pleasure to meet you. Now my ideas are clearer and I think I’ve found how you could really help us.

  You could repair a weakness of ours that I have been aware of for a long time but haven’t been able to deal with till now. In this company we tend to focus only on the here and now: on what lies right in front of our noses.

  This tunnel vision gives us excellent economic results today, but lays us open to serious risks too, because we are losing sight of the structural changes going on in the world around us.

  We risk finding ourselves in trouble one day because the old approaches no longer work and we have failed to prepare ourselves.

  I think you could take charge of a new unit committed to drafting a
comprehensive report, let’s say, every six months, on the sweeping changes that might upset our current business model: you will choose the specific topic yourself.

  I want to be the first to read it, but of course all our top managers will receive a copy.”

  And so a studies office makes its appearance in the company. Its budget is large but almost invisible in the multinational company’s giant income statement where some of the revenues derive – not to deviate from the theme of the bread price – from a chain of company-run Bread and Flour Products departments in hypermarkets.

  Prof. Foggy hires five or six analysts, choosing them primarily from his assistants at the university where all his former colleagues are consumed with envy.

  The feather in the cap of the new unit is the powerful database-server, equipped with sophisticated statistical analysis tools, where the professor has gathered mountains of demographic, economic and market data.

  Some was freely available, some was acquired from specialised companies and some was obtained, not without difficulty, from the company’s own historical computer archives.

  Now, every six months, Prof. Foggy knocks on the CEO’s door accompanied by his trustiest assistant, and delivers a small, perfectly printed booklet, bound in red leather with gold lettering.

  And the CEO is always very pleased: “What do you bring me this time, professor?

  An analysis of the difference between the way the marketing office of our division currently segments the market and new socio-economic divisions that are taking shape and will become the new benchmark in the next twenty or thirty years…

  Good, good, it was just the issue that I was discussing yesterday, very superficially of course, with our sales manager. The next time we debate the matter, I will be able to put one over on him…”

  After which the professor and his assistant say goodbye and the CEO puts the booklet next to the previous ones on the big mahogany shelf behind his desk.