Monday, June 15, 2015

Time Based Defined Product - Meritocratic or Egalitarian?

Arnold Kling has several recent posts concerning non marketable outputs, undefined product and the importance of these factors for the organization of firms. While Arnold makes some good points, undefined product is not always the best approach for organizational capacity. Fortunately, it is possible to define time based product at the level of individual activity, so that services formation can be better adapted to individual needs.

While horizontal alignment for services structure is also egalitarian, income "equality" is not a sufficient rationale. Rather, equal monetary compensation for time value (as an economic starting point) serves practical purpose in group based investment structures. Equal time compensation allows individuals to discover how they want to create time value, instead of being compelled to do so according to the skills sets which special interests are most inclined to compensate. Plus, the time arbitrage connection - which leaves no residual balance - allows direct wealth creation and knowledge use which can be defined on personal terms.

Time value as undefined product, works best for organizations whose product is not limited to specific populations, time frames or locations. Tradable goods in particular tend to be outward focused, and these organizations are the ones which often benefit from the productive gains of scale. Divisions of labor which exist as undefined product, usually contribute to productivity in these circumstance. Also, meritocratic executive compensation makes sense for most tradable goods in this context, because the "right" sets of skills can mean tremendous gains in marketplace capacity.

Hence meritocratic compensation is the right approach for most tradable goods organizational structure. As Scott Sumner recently noted - incentive and merit can be vitally important for economic outcomes. However a caveat: meritocratic compensation provides the most benefit for the forms of economic dynamism which exist in broad - often international - context. Organizational capacity for tradable goods continues to improve living standards across the world, and it pays to reimburse CEOs in accordance with their ability to make a difference in that regard. When corporate structure is of a size that it possibly affects the economic equilibrium of nations - as Lars Christensen recently noted - this is not a scenario where egalitarian monetary compensation for CEOs makes much sense.

Why, then, is service formation such a different circumstance? Time based product exists in local and specific context. As a result, time dependent product does not conform to the same marketplace dynamic as product which exists separately from time. For one thing, the "need" for a few individuals to organize the activities of others is not automatic, particularly when economic activity is time based and capable of becoming defined product. When time value is integral to product, labor "saving" mechanisms do not always contribute to product quality.

Time based (defined) product is also a quantitative reality. For instance, few question that the skills of surgeons may be preferable to alternatives. Just the same, the time and skills sets which are specific to surgeons, are limited to a specific subset of any given population, at any given point in time. Thus far, meritocracy has provided the monetary reward (compensation) for the surgeon's time and efforts. Through these means - however - it remains difficult to ascertain what the marketplace actually desires or might otherwise create. Even if budgetary caution were "thrown to the wind", merit based time value still can't generate a quantitative change in the marketplace.

It has proven difficult for nations to embrace free trade and encourage domestic economic activity at the same time. Plenty of confusion exists, regarding time based activity in terms of productivity and the economies of scale which sometimes apply. Among other things: in times of uncertainty, this causes governments to question the same beneficial free trade activities which they previously supported.

Governments need a stronger line of demarcation between organizational capacity for time based product, and product which is readily distinguishable from time value. Otherwise, when too many benefits from scale are used to reward time based product, the process can slowly undermine public support for free trade. Meritocratic compensation is worthwhile, when the result is a broader marketplace for the product in question. However, when meritocratic compensation is not capable of contributing to the marketplace in quantitative terms, egalitarian compensation for time based activity can bring much needed balance to the process.

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