Tuesday, June 6, 2006

THE MEANING OF BUSINESS LIFE

Australian Institute of Management breakfast briefing
June 6, 2006


When I was asked to talk to you today I spent some time thinking of what I could talk about. I could preach a sermon on the need for more micro-economic reform, or I could urge you all to be more competitive, or argue passionately that the Government should slash the rate of tax we high income-earners pay so as to encourage us to work much harder. Well, you may have been prepared to get out of bed early to listen to me say that sort of thing - especially about how we’re all groaning under the weight of our crushing tax burden - but I wouldn’t have been prepared to get out of bed early to say it. No, the only topic that really attracted me was to say something more reflective about the nature of modern business life. Why are we doing what we’re doing and what do we imagine it proves? What’s it costing us and is it worth it? Remember that everything we do - every choice we make - has an opportunity cost, and sometimes it’s worth thinking about that cost.

We live in a hyper world. There’s nothing much that’s new about the things we do in business, it’s just that it’s all been stepped up. We’re competing a lot harder, working harder, making bigger profits and caring a lot more about the growth in profits. As managers and professionals we’re making a lot more money than we did. But why? Why is business life so much more intense than it was 10 or 20 years ago?

I think a big part of the explanation is micro-economic reform. Business people think the point of micro reform is to make Australian businesses more competitive - better able to meet the competition from imports or in export markets. But that’s not it. The point of micro reform is not so much to make us better able to meet foreign competition as to expose us to more competition in domestic markets. To that end, successive governments have floated the exchange rate, cut away the protection against competition from imports, deregulated many industries, broken up a lot of monopolies among the utilities, sold off a lot of government businesses and decentralised wage-fixing and industrial relations. So the competition is fiercer in many industries and, as a consequence, we’re all having to try harder. Part of the way we’ve felt the effect of greater competitive pressure on us is via the share market. The performance of the managers of public companies is much more closely and critically scrutinised these days by share analysts and fund managers.

But why now? Econocrats had been urging economic rationalist policies on their political masters for decades without much success. Why, starting about 25 years ago, did governments start acting on this advice? The obvious answer is the pressure of globalisation, but I think there’s a further cause. To a greater or lesser extent, all of us are - and always have been - materialist. But I believe the world is going through a period of heightened materialism. And if we look around we can find evidence of this. Consider the evidence from the American Council on Education’s annual survey of over 200,000 newly entering college students. Asked about their reasons for going to college, the proportion agreeing that an important one was ‘to make more money’ rose from half in 1971 to almost three-quarters by 1990. And the proportion believing it ‘very important or essential’ that they become ‘very well-off financially’ rose from 39 per cent in 1970 to 74 per cent in 1990. Over the same period, the proportion who began college hoping to ‘develop a meaningful philosophy of life’ slumped from 76 per cent to 43 per cent. This reversal stayed unchanged throughout the 1990s.

So why has the longstanding wish-list of economists become the dominant ideology of public life? Because it fits perfectly with the current mood of heightened materialism. Now, more than before, both sides of politics see faster economic growth and rising material living standards as the primary objective of government, and there’s no doubting that following the prescriptions of conventional economics will give you a faster rising standard of living. Economic rationalism was made to assist an era of heightened materialism.

You’ve probably noticed that I’ve become a great student of psychology in my old age. The findings of modern social psychology provide a valuable counterpoint to economic orthodoxy and have a lot of light to shed on why we are as we are and why we do as we do. Take, for instance, competition. Conventional economics smiles on competition. It’s a valuable commodity, spurring innovation and fostering productivity and efficiency, which lead to faster rising material living standards. So you can never have enough competition, but the trouble is there is never enough of it. Competition takes effort, and people won’t bother competing very hard unless you make it monetarily worth their while. So we must always be cutting taxes and improving incentives lest we encourage too little competition.

Talk to an evolutionary psychologist, however, and you get a very different perspective. Thanks to natural selection and the survival of the fittest, humans - particularly men - are naturally highly competitive. It’s been bred into us. So why do we compete? Because we can’t help ourselves. We’re a competitive animal. Civilisation tries to contain and channel our competitiveness into exams and sport and even business endeavour, so as to stop us brawling in the streets and fighting rival tribes at the drop of a hat. So whereas the conventional wisdom sees the competitive spirit as a fragile flower to be carefully nurtured, unorthodox economists such as Professor Richard Layard of LSE see it as something we’ve probably got too much of already and should avoid stirring up.

Let me tell you about some research by two female economists at Pittsburgh and Stanford. They used laboratory experiments to demonstrate that men were a lot more competitive than women - no doubt for evolutionary reasons. Given a choice between doing work for a piece rate or competing in a winner-takes-all work tournament, twice as many men as women opted for the tournament. So even if you took away all the discrimination against women in the workforce and compensated for the handicap of being the childbearing sex, you’d probably still find women underrepresented in senior management. Why? Because women are less likely to see the point of giving up so much for the dubious joys of being a boss. But why were the men so much more likely to give up the certainty of income in preference for a contest in which they won everything or nothing? In a word: overconfidence. Neither the men nor the women had any way of knowing how their work performance compared with others’. But three-quarters of men believed they were the best in the group, compared with 43 per cent of women. The thing to note about this is that, while it’s OK for three-quarters of men to be convinced they’d be the winner in the competition before the competition starts, once it’s completed you’re surely looking at a fair bit of disillusionment and dissatisfaction.

Another bit of light we can get from psychology is its reminder that humans are a social animal. Conventional economics assumes we’re rugged individualists. We do our own thing according to our personal and firmly fixed tastes and preferences, largely unaffected by the choices being made by people around us. In truth, however, we’re heavily influenced by the choices our friends and workmates make. Being animals that evolved to live and work in small bands of hunter-gatherers, we have a great desire to fit in and do what our peers are doing. We care deeply about what other people think of us and we’re always comparing ourselves with the people around us. We can see this in our children, but we can also see it in ourselves. We’re heavily influenced by fashions, we confirm to group norms of behaviour, our idea of what’s ethical is largely determined by what we believe ‘everybody’s doing’. We evolved to live in hierarchical groups, which leaves us terribly preoccupied - more preoccupied than we care to admit to ourselves - with our social status. With where we stand in our reference group. One important thing this means is that materialism is catching. If the people around us at work are getting in for their chop, we want ours. If the people we compare ourselves with are working long hours so they can afford a flash house in a well-regarded suburb, a late model imported car and private schools for the kids, we want to match them.

Economists believe in something called ‘revealed preference’ - they you find out what people really want by looking at what they do, not what they say. And no one - certainly no government - can know what I want better than I know myself. That’s because they assume me to be rational in all my decisions. But psychology demonstrates that our decisions are heavily influenced by emotional factors - often to a far greater extent than we’re conscious of. And studies by psychologists and behavioural economists show we’re often quite bad at predicting what will bring us utility -what we’ll ultimately find satisfying and be glad we chose to do. We often keep doing things we don’t actually find satisfying. Part of the reason for this is that our brains seem to have two separate systems for desire: one for wanting stuff, but a different one for actually enjoying stuff. What this means is that some of the stuff we really want and spend a lot of time pursuing, when we get it, it doesn’t give us as much satisfaction as we thought it would.

I suspect that a lot of us who are caught up in the business whirl have come to wonder about whether it’s all we imagined it to be when we started out. If not, let me give you some things to think about. First, are we doing it just for the money? Is so, is the money buying us much real satisfaction? We’ve got lots of fancy possessions, but do they bring us or our families much lasting satisfaction once the novelty wears off? How much satisfaction is there in owning a flash boat we have little time to use? Sounds like a poor consolation to me.

Are we becoming workaholics? I’ve got nothing against hard work; I do a lot myself and, contrary to the assumption of the simple economic model, the work itself can be far more satisfying than the stuff you buy with the money. I think the test is why you’re working so hard. If it’s because you love the work for its own sake, that’s fine. But if you’re doing it just for the money, or just for promotion, or you’re afraid of some sort of kick in the backside, or you’re getting away from life at home, you’ve got a problem. If we don’t like our work, but aren’t willing to shift to something we’d find more satisfying because of the lower pay or loss of status, we’ve got a problem. We’re trapped not by ‘the system’ but by our own materialism.

One qualification to the idea that long hours are OK if we love our work is that we have to take account of the implications for our spouse and family. All of us know that, at the end of the day - or even just in retirement - it’s our relations with our family that matter to us above all else. We know it, but in practice we’re always letting the urgent take priority over the important. How many of us have unhappy husbands or wives? Many of us - if only we could be honest with ourselves - are risking ending up in the divorce court. Does this sound a cheap price to pay for a successful corporate career? Then there’s our kids. They can’t divorce us, but they can reproach us when we’re old and need them more than they need us. How many of our extra hours could at least be done at home rather than the office? There’s evidence that a lot of young kids say they’d rather have their father’s company than his money.

Another thing that worries me about modern business life is the way we’re encouraged to neglect rest and recreation. Too many people don’t take all their annual leave and maybe don’t even get enough sleep. Apart from living narrow, unsatisfying lives, they’re heading for burnout. And again, money - in the form of being able to afford quickie visits to luxury resorts - is a poor substitute for time. Leisure is something we were intended to do, not buy. The idea of encouraging employees to cash out up to half their annual leave is pernicious. What people need in their lives is balance: hard work combined with satisfying play.

But do we have any choice? Is the only choice to play the competitive game full tilt or ‘downshift’ to Nimbin? Economics teaches us that life’s not about all-or-nothing choices but about finding the best trade-off between equally attractive but conflicting objectives. Many of us may feel we’ve neither the desire nor the possibility to take the seachange option. But I believe all of us have some degree of control over our lives and jobs, and there are plenty of changes we could make at the margin which would add up to a better, more balanced lifestyle. We could loosen up a bit here and a bit there - particularly if we take the amazingly liberating step of stopping worrying about our next promotion and caring less about our status and keeping up with the neighbours.

We fall into the habit of imagining that history moves in straight lines, that the trends we see happening now will keep rolling on forever. In truth, history moves like a pendulum: it keeps running one way until it gets to an extreme point, where there’s a reaction against it and it starts heading back towards the other extreme. I believe that our present era of hyper-materialism - with all its overwork, intense competition, stress and ever-quickening pace - can’t go on forever, just as double-digit profit growth can’t go on forever. Sooner or later there’ll be a reaction against it. Why? Because people will see it’s not as good as we imagined it would be.

That reaction will start not when some new radical government gets elected, but when enough individuals in the system begin modifying their own lives in small ways to make them less intense and more liveable. More relaxed and comfortable. That’s when the business world will start calming down. And a calming down is all I’d like to see - something that took us back to being no more materialist than we were in the 60s and 70s.

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