Patching the Hole

 

Alexander Liss

 

03/09/2009

 

 

     There is a serious deficiency in the way a market mechanism is deployed. This deficiency is a cause of many conflicts in market-based societies, and sometimes, it causes flipping of free market-based societies into despotic societies based on strictly enforced ideologies-religions.

     Sides in negotiation for “the use of skills and time” of specialists in the market are unequal. This distorts prices and makes functioning of the market inefficient and the market itself unstable.

It is obvious in times of economic downturn.

     There is a large group of market participants who cannot afford to be without work for any prolonged period of time. This forces them to accept payment for “the use of skills and time”, which is lower, than it is healthy for the market.

     Trade unions emerged in market-based societies to compensate for this deficiency. Their emergence improved pricing for “the use of skills and time” and caused growth of overall wealth of the society. Unfortunately, they also brought monopoly, which tilted this pricing to the opposite extreme, caused inflexibility in “the use of skills and time”, and slowed down the rate of improvement of skills. This became a drag on the growth of the wealth of the society and caused major instability in the market and in the society.

     In the time, when huge new work force of developing countries is coming to global market, inflexibility of trade unions prevent sufficiently fast adjustment of the market to new circumstances and this causes dangerous economic and social imbalances.

     Hence, a new way to patch this market deficiency is needed.

One might think that simple measures could suffice.

People could have some fall-back “business”, where they could return at hard times. This does not work – any “business” requires full-time attention and in hard times such fall-back “business” is uncompetitive. Current situation in China shows this – young people, who went to work in cities from rural areas, cannot find place for themselves back at home in time of downturn.

The government could provide indefinite support for people, who cannot find work. This does not work also. Such system creates a new sector of society, where people rely on government support without even trying to move to normal market activities. Eventually, this sector acquires social and political structures built around it and perpetuates itself. In the USA, the welfare system grew in this direction and it took huge efforts of the government to arrest this development.

There are serious “side effects” of this deficiency of the market mechanisms.

One is obvious; the society pays a psychological price for it.

People on the disadvantaged side of the divide acquire fears, disbelief in possibility of social advances, detachment from political life, etc. This causes social instability in a democratic society.

People on the other side of the divide develop parasitic tendencies, where they try to improve their life at expense of others and to justify such approach to life they develop delusions that they are somehow better than those exploited others.

Thus, this deficiency of market mechanisms creates internal rift in the society, which makes it difficult to fix it.

The society, which expects one part of it to be forced to work, develops mechanisms to force people to seek the work.

For example, in the USA, when a person has work, the person could find the way to live comfortably. If it is a low paying job, one cannot afford any excesses, but one has a roof over the head, decent clothes and food on the table. However, the majority of people cannot save money. This is because the living quarters, transportation and food, appropriate for ones social standing, eat up all the income. This is the consequence of the social setting, where one is forced to work. Now, when women are a major part of the workforce of the society, both a husband and the wife are forced to work. Usually, work of one person cannot provide decent living for a family.

In the USA, there is practically no niche, where one has the possibility to live without excesses working only lightly.

In such environment, it is meaningful to set goals to “create jobs” during a market downturn, to “protect jobs” from moving capital oversees, where workforce is less expensive, etc. This became such a commonplace that people even do not see how bizarre it is in a market-based society. In a market-based society, one should think about increasing income, increasing savings, protecting against life eventualities, one should not think in terms of “getting the job” or “keeping the job”. In a free market-based society one should think in terms of own growth, expansion, in terms of new desires and new opportunities not in terms of surviving.

     This rift decreases market efficiency. For example, for many years and in many places, management tries to reduce the role of software developers to the usual role of workers mindlessly executing orders of managers. This does not work, because any meaningful software development requires very high rate of innovation. Management does not learn this lesson, because of the dominant impression in the society of inferior mental status of those, who belong to disadvantaged side in the negotiation for “the use of skills and time”.

     Management in many large companies failed to reduce software developers to the status of mindless workers and decided to “outsource” software development to developing countries with relatively low cost of workforce. This works even less. Company specific knowledge does not accrue. Disconnect between those who use software and those who develop it leads to delays, increased cost and delivery of software, which is not useful.

     Hence, the price for this internal rift in the market-based society caused by the deficiency of the market mechanism is huge. It causes inefficiency and instability of the market, and dissatisfaction, social conflict and instability of the society.

     This is a hole, which has to be patched, and currently used patch is not working well.

     In the same time, the seeds of the solution are already growing.

     Firms, to which large companies outsource software development, often provide workforce to work on the site of their clients. They cannot find qualified workers in their countries and hire workers in the countries, where their clients are located. This sounds bizarre, but this works, more or less.

     The client – a large company in the USA or in Europe, rarely saves much in such arrangement, but it gains flexibility of setting short term projects, which require different sets of skills.

     Also, there are a few companies in the USA, which provide skillful contractors to work on projects in other companies. Companies, which use these contractors pay well, but they save on hiring, where they have to pay “brokers”, who facilitate finding needed specialists, and they do not incur labor related cost.

     This works with skillful specialists, this hardly can work with workers, who do not have high level of skills, because there are too many of them, especially in the times of market downturn.

     However, it seems that fewer jobs will be available for people without skills, especially in developed countries, because they cannot compete with workers in developing countries, who are ready to work for much lower compensation. This kind of jobs is disappearing due to automation or transfer of production of service to the developing countries. This is a trend of global economy.

     Hence, in developed countries, people will need to acquire skills to be employed, and they will need to improve their skills perpetually. This seems to be a trend in global economy.

     In such situation, trade unions are too rigid to improve specialists’ chances in negotiation for “the use of skills and time”. However, specialists will have better chances, because they will have difficult to find skills.

     In such situation, experience of software developers becomes quite relevant.

     This experience shows that not trade unions, but special companies providing specialists to other companies are needed. When these special companies have no monopoly on a particular set of skills, the competition between them should lead to discovery of market prices for “the use of skills and time”. Perpetual improvement of skills accordingly to needs of the market should keep these prices sufficiently high to support decent quality of life of specialists and allow accumulation of savings sufficient to survive without employment during market downturn.

     This should patch this hole in market-based societies.