Money versus worth

This post again returns to the what we do as individuals line of posts, continuing from the earlier post on Races and Head Starts.

I’ve been reading a lot of rhetoric of late regarding the issue of markets, how they function, and how they fail. At one extreme of the spectrum is the Ayn Rand school of thought, which places markets and individual choice as the ideologically correct thing, while at the other end, we have the communists who insist that market mechanisms are inherently exploitative. Then there are the moderates, who say that market mechanisms usually work well but only under certain minimum conditions of stability.

Further, many of them argue that forcing a market mechanism when the infrastructure and rule of law is not strong enough, is as bad as having rigid government controls and quotas. The problem, they argue, is that if the mindset of people is rooted in an era of government control, and if the demand-supply system for prices is not good enough, then suddenly going to a market mode leads to hyperinflation, lack of basic security, unemployment, and many other problems.

Nonetheless, it is generally agreed that the basic principle of the market, which is that individuals make their choices in mutually beneficial ways, is a central tenet to any democratic society.

From the large-scale perspective of the market, let’s move to the small-scale perspective of an individual buyer and seller. Suppose I am offering some service to you. This service could be, for instance, a car or house for rent, a one-hour private tuition, a musical performance, a consultancy. This service makes use of some skills and talents that I have. You gain something from this service (or at least you believe that you will gain something from it). This is the real transaction. The ability for me and you to negotiate the conditions under which I offer you the service is what I mean by the market mechanism at the micro-level.

For instance, I may, in return for providing the service, expect nothing at all. I may, instead, expect a certain amount of monetary payment. I may expect you to provide me similar services without fuss at some later date, or I may ask you to provide me some nice freebie (like an ice-cream or chocolate). Or I may ask you to provide similar service to others who ask for them (the transitivity principle).

You may wish to pay me something for the services, or you may wish to give me a nice gift, or you may want to offer me some similar service in the future.

The point in all these is that it’s completely a matter between you and me. We’ll agree to something that we are both agreed to. Of course, it may happen that I get more out of it than you do. However, these kinds of ordinal comparisons don’t matter so long as each of us is convinced that we are getting a unique and distinctive value from my providing the service.

Further, the money that I charge you and the money that you finally choose to pay me is also a matter between you and me. It’s a matter of the equation between us and the motivations we both have for doing what we want. This money could be taken as one of many indicators of the worth and value of the service I am providing you, in so far as it is somewhat related (other factors being the same, you would be willing to pay more for greater value of service provided).

Economists, when trying to make computations of the production in an economy, typically use the amount of money exchanged as an easy indicator (there are probably several variants of this, but this is the rough idea). Of course, the money exchanged is a poor indicator of th eamount of production or value, because many times the payment may not be monetary but may be based on several other factors. However,it is still some indicator, and the main value of money is that it can be exchanged for a wider range of goods than most things can. Thus, in return for the value I provide you by giving a one-hour private tuition, I can get money which I can use to hire a domestic help, or buy a chocolate, or give to a charitable organization.

In another sense, the very danger of money lies in the fact that it can be used for a wide variety of things. Money thus destroys the localness and closed interdependence of a system by subjecting it to outside pressures and outside influences. Thus, to protect itself against outside influences, a closed system may decide to use its own money (or its own way of rewarding service) that cannot be taken outside the system. This is the idea behind the protectionism that industrially non-advanced countries followed against bombardment by goods from the industrially advanced countries, this is the same philosophy that the anti-globalists preach (use local currency and local goodwill rather than nameless faceless money) and this is the same idea which is followed in most organizations to reward things internally. For instance, within an organization, people may render each other free service in exchange for mutual goodwill; something which they may refrain from doing outside the organization. This is not because they consider their services useless but because the internal reward system is different. They feel that the amount of money one has cannot be a good judge of the amount of service one should receive.

This is the same kind of principle which people in one caste or community use to exclude people from other castes and communities. They say that a person fron so-and-so caste or community cannot avail this service even if he/she pays the full money. Or, equivalently, that people from other castes/communities have to pay more. The idea is simple: design monetary systems so as to encourage people to feel that certain services are for free, but at the same time make sure that those services are available to a sufficiency exclusive section of the people.

The point here is that not charging things is often a way of excluding and selecting just as much as charging things. There’s nothing intrinsically holy about not charging — it is just a selfish mechanism for mutual aid that may or may not help the wider interests of the world. However, there’s nothing anti-market about providing free service. It’s just as much an exercise of individual choice and mutual contract as charging for a service.

However, the skew between charging and not charging leads to some interesting results. The main problem is that the same people who may offer each other free services in one sphere still have to pay for the services they require in other spheres. For instance, I may be willing to provide free service to an academic colleague, but the chalk and the boards that we may use in the process of our discussion has to be paid for by somebody. Somebody has to pay for the meals that we have. Somebody has to fund these things.

Of course, we can get grants and scholarships for the purpose (which is how research works). However, many money-phobic communities (particularly research communities) feel uncomfortable actually accepting money for the services they render, because this would mean that their system starts valuing itself by money. But at the same time, they want to have enough money so that a lack of money doesn’t come as a hindrance in their work. So this requires a complex kind of thinking.

For instance, a person who has been called to give a talk in some far-off place may insist on not receiving payment for the talk — at the same time, this person may be reluctant to incur all the expenditure needed to go far away to give the talk. So, the person demands only enough money as a compensation for the time and expense of the travel as long as that money does not serve the personal needs of that person.

The reason why I think this kind of thinking is limiting is that money is not just useful for reimbursing necessary expenses like travel and food. Money is a powerful tool in the hands of any researcher (or social worker or a person in any money-phobic profession) to be channeled towards achieving what he or she needs. This, of course does not mean that money in itself can achieve much, or even anything. But having money in one’s hands enables one to consider options that would earlier have seemed too far-fetched. For instance, one can consider the possibility of setting up a new research lab, the possibility of a new degree of network connectivity to co-author papers with people at the other end of the world, the possibility of a new kind of teaching environment and paradigm. Of course, these things cannot simply be commanded with money. But understanding that money may be required for these things (even if they are currently perceived as luxuries and not as necessities) is an important step in being able to dream freely and fully.

The interesting corollary of the anti-money kind of philosophy that is prevalent among many people (irrespective of how much money they are drawing from their work) is the tendency to view things in a narrow monetary prism, as a kind of “rationing” activity. Thus, for instance, a person as a student may view his/her main job as a kind of rationing activity of managing money with the bare subsistence stipend he/she gets rather than optimizing the quality of learning and research output (this is a very typical response that may be a vestige from days of genuine scarcity). The reason why people can indulge in this kind of money management is that they see the money they get as fixed and not linked to performance. If money was closely and strongly linked to performance then even those ardently keen on money management would work hard to perform well.

If all that I said is confusing enough, I’ll add further to the confusion by making yet another assertion: money can be very empowering, just as many other facilities and resources can be. However, it is not having money alone that counts. Those who know and understand the value of service and of worth, those who can struggle and manage without money, are precisely the same people who will value the money, the free service, when they receive it. Those who think of money as a kind of fixed and static quantity given from God for judicious use will treat it as such even when there are unlimited amounts to claim.

The same is true for almost any resource one can use. Those who can fight for the resources in times of scarcity, who understand the value of the resources and who don’t despise the resources, can flourish in situations when the resources are abundant. Those who treat the resources like some fixed givens by some glorious God for subsistence, fail to make use of the greater availability of resources.

Individuals who recognize the importance of their work and their worth know that their primary goal is to develop themselves to the level where their work is naturally valued by the community enough that they can command a lot for it, they will think in terms of enhancing their personal value, by investing in themselves. By doing so, they naturally create a lot of wealth for themselves (monetary or otherwise) but more importantly, they develop the potential to command greater amounts of wealth.

The daily labourer has a skill which you and I may not have — the skill to persevere for several hours doing a lot of boring and tiring work. However, this skill, while not to be undermined, is far from unique; the time it takes to develop this skill is not much, the number of people having this skill or eager to develop it is very high. Hence,the worth of the individual daily labourer is low. The fact that this worth is low cannot be traced or attributed to exploitative tendencies alone (of course, everybody wants to pay as little as possible) — rather it can be traced to the fact that what the daily labourer provides is not sufficiently unique and differentiating. (This is of course not the daily labourer’s fault, and I’m not trying to assert that life has been fair to the daily labourer — I am simply pointing out that the value proposition that he/she offers is not high enough for the labour hirer to selfishly be willing to pay a huge amount).

On the other hand, when a person develops a sufficiently unique and valued skill, the money takes care of itself. The person need not rely on the generosity and fairness of society after crossing a certain point in developing skills and convincing others of his/her skills. For instance, if you are the only interpreter between people of different languages living together, then your skills are naturally valued — those people will ensure that you survive. Thus, whether or not you charge money for your services, you can command their services because they know they need you.

This is the kind of unique value that makes real long-term sense to develop. Of course, developing a unique value proposition also has to be viewed in the context of the kind of area one wants to work in. However, within every field of endeavour, there is scope for offering unique value propositions — and nobody else loses out for it. And even if there are no unique value propositions at the moment, you can always create one. That is where the scope for real expansion and value creation lies.

I’ll talk more about creating a unique value proposition in a subsequent post.

Need or greed?

I’m writing this blog post with a backdrop of a recent debate on the rather touchy issue of “Should Social workers get paid?” The debate is recorded here. In this debate, I raised a number of issues many of which I managed to obfuscate completely, and others where the numerous dissenting voices managed to muddle up matters pretty thoroughly. So out here in this blog post, I’ll try to put forward my reasons more objectively, see whether they make any sense at all, and explain both to myself and to others why I did what I did.

The first question that I’ll try to address is: how should the right amount to be paid to a worker to be decided? Here are some possible criteria:

1. What the worker demands
2. What the employer is willing to pay
3. what the employer thinks is the value that the work gives him/her, in terms of opportunity costs (costs of not having any worker or of hiring another worker)
4. What other options the worker has.
5. What the worker needs for sustenance
6. How much effort the worker puts in

The first two factors are of course the most direct and local ones. If the worker demands a certain amount and the employer is willing to pay is more than that, they can settle for some in-between amount — both of them feeling that they have gained something.

The third and fourth factors represent the other options that are in front of the worker and the employer. If an employer knows that there are other workers who will do the same job for a far smaller amount, then the employer is unlikely to hire the worker for the given higher amount. For instance, if I demand Rs. 100 for a manual labour job and the going rate is Rs. 75, then the employer is unlikely to hire me unless either getting another person to do the job is too much of a hassle or my work actually offers some differential advantage.

The fourth factor is about the options in front of the worker. If a worker knows that he/she has nothing else to offer that will be paid more, then he/she is willing to accept a lower rate. The “skill” factor may be dependent on local conditions. For instance, in a place where employment opportunities are more for people who know English, a person knowing English knows that he/she has more fallback options even if he/she does not get a given manual labour job. Thus, he/she can quote a higher rate.

Fortunately or unfortunately, these third and fourth factors, which basically represent the flexibility which allowed workers and employers to negotiate, has come under the term exploitation. There are many interesting stands on this. Here’s one. Suppose I am a software coder, and I get paid Rs. 1000 per hour of coding. Now, I hire a maidservant to wash my dishes (a task I could do myself). Washing my dishes takes 30 minutes per day, say. Hence, I am “earning” Rs. 500 per day extra by virtue of this maidservant washing my dishes. If I now pay this maidservant at the going rate of Rs. 10 per day, I am exploiting her by an amount of Rs. 490.

The problem with this exploitation argument is that it ignores the fact that I have other options. It isn’t as if the only option is doing the work myself and hiring the maid. I could probably hire another maid to wash the dishes if this one doesn’t agree.

Another problem is that just because I can make Rs. 500 in that thirty minutes, doesn’t mean that the value of 30 minutes is actually Rs. 500. For one thing, may be if I didn’t hire the maid, I would take out the extra time by cutting in on my evening TV watching (which is worth Rs. 0 to me).

The third and biggest problem is that the monetary contract between me and the maidservant doesn’t just involve me and the maidservant. If we are talking about being fair, we might as well be fair to all the parties involved. Suppose I can pay the maid Rs. 250 with great ease. What about my next-door neighbour who may be earning only Rs. 100 per hour? Will he/she pay the maid one-tenth my amount just because he/she earns one-tenth of that much? Will it be fair to the maid who works with that person to be paid one-tenth the amount because the person she works for earns less?

The argument that one should pay based on one’s paying capacity and the value one gets out of the product can lead to some amusing corollaries. For instance, suppose I use less soap per day than a certain other person. Let us also assume that the “value” I derive from my use of soap is the same per day. Should soaps then be made more costly for me?

Let us say I can squeeze more value out of one chocolate than my friend. Then should I have to pay more for the chocolate?

Coming out of these moral issues, let’s again look at the spectrum of factors that affect pay rates.

We have so far discussed four factors: two of them directly pertaining to what the two contracting parties set out on the table, the other two based on the other options in front of both contracting parties. The fifth and sixth factors are more moralistic and human: they talk of the worker’s need for sustenance and of the value to the worker’s hours.

In an ideal society, of course, the worker will factor both his/her need and the value of his/her hours when raising the demand for money. However, our society isn’t ideal and workers may not be in a position to raise demands based on their full needs. Or perhaps the situation is such that the alternatives available before the employer are so many that a worker cannot realistically expect to get enough money for all his/her needs.

In such situations, if the State or an institutional set-up feels that the workers should still get enough for their basic needs, they may:

• Provide free things to the workers such as food, water, basic amenities etc.
• Fix minimum wages for the workers.
• Empower workers to organize themselves more effectively and to negotiate better with the management.

This need-based privilege provision, however, is intended only as a supplement and a corrective to an already existing market-based cum merit-based privilege provision system. The fact that a few poor people are being paid minimum wages or provided free food does not mean that everybody should take money if and only if he or she needs it. In fact, most payments in any economic system are done quite independently of need and it is only in the aggregate that the economy ensures that people’s needs are fulfilled.

To remove exploitation and low wage payment, the best solution is to provide people with differentiated and strong skills so that others will want to pay them for their skills — a system where the workers’ skills pay for them rather than some rules set up by philanthropists.

So far, so good.

A next natural question then is: should need come into the picture at all in a negative sense? Saying that a person should be paid so much because he/she is in need of it is one side. Saying that a person should not be paid a certain amount because he/she does not need it, is another side.

How justified are we in denying people things that they have earned and deserved on account of their not needing those things? How justified are we in letting need-related issues enter into merit-based payment systems? How does it help the cause of the needy if people are denied a payment meritoriously due the them on account of not being in need?

A possible way in which one could argue that lack of need should be a criterion:
It is possible that giving money to those who are not in need of the money reduces the monetary resources available for those in need of it. (Exploitation?) This argument does seem to carry some weight, but what if the value that the person is generating through his/her work is far greater than the amount he/she wants to be paid for services? And what if the person refuses to work unless paid that amount?

In fact, it is interesting that many poor people who, theoretically should be champions of need-based payment, actually practise merit-based payment both when paying the rich and the poor. They don’t go around trying to pay more to the poorer provider, they will go for the alternative which is cheapest, or most cost-effective, to them (relative to their desires, financial constraints and understanding of finances). The poor person who makes a phone call to a distant relative is making the payment on merit to the phone call company — not based on their need.

In fact, a lot of the strength of an economic and social system rests on the kind of merit that its people choose to reward through their independent decisions.

Now for why we need need at all in a merit-based system. The problem with a purely merit-based system is that the notion of merit, and the instruments used in its evaluation, may themselves be dubious. Merit may not be the optimal tool because certain people may suffer from severe disadvantages which prevents their merit from being judged properly. This is unfortunate not just because it is unfair but also because it reduces the pool from which the best can be drawn.

But that said, should a system which is trying to help the needy operate solely on the principle of need? Should such a system fail to award merit? Should such a system fail to use the principles of what the worker demands and what the employer is willing to pay, to determine a payment rate?

More interestingly can that happen? Is there generosity in stinging on payments to those who deserve them?

Quoting from the little grain of gold, a poem by Rabindranath Tagore:

The chariot stopped where I stood. Thy glance fell on me and thou camesst down with a smile. I felt that the luck of my life had come at last. Then of a sudden thou didst hold out thy right hand and say “What hast thou to give to me ?”

Ah, what a kindly jest was it to open thy palm to a beggar to beg ! I was confused and stood undecided, and then from my wallet I slowly took out the least little grain of corn and gave it to thee.

But how great my surprise when at the day’s end I emptied my bag on the floor to find a least little grain of gold among tho poor heap. I bitterly wept and wished that I had had the heart to give thee my all.

Strength lies in giving, investing in that which yields returns, in that which can graciously accept, not in hitting dead ends. Paying and investing in that which can respond and appreciate is what has led to our individual and collective growth so far.

There are some other interesting points when it comes to the question of whether volunteers for social work should be paid. It seems to me that many people somehow feel that if a person is paid for some work, then money becomes the sole motivation for his/her work. There are some people who feel uncomfortable at the idea that doing social work can offer any remuneration at all — they feel it offends the goodness of their heart.

I find this idea very strange, for a number of reasons:

• Just because money is offered and taken does not make money the sole motivation for doing something. As long as there are multiple ways of making the same amount of money, money cannot serve as the sole motivation for doing something.
• Even if there are people who are drawn to social work just for the lure of money, the good-hearted people can continue doing the social work for its own sake without letting the money angle affect them (they may accept the money and yet remain immune to its charms).
• Even if other people are getting drawn to the social work for the sake of money, this need not be a minus point as long as these people are maintaining the standards and providing value and worth that exceeds the money they are taking.
• If in fact one can have a sustainable system whereby people can actually make money (or get other forms of remuneration) from social service, then that means that social service can start managing itself as it relies on people’s need for money, a far more basic and intrinsic need (for most people) than the need to help the needy.

The principled objections raised by Spark with regard to the payment issue actually go a bit further. Some Spark members (though fortunately (?) not all) seem to not only object to getting paid, but also to object to having any performance-oriented jargon thrust at them. The typical response to this is that Spark is being commercialized or that we’ll be down to the level of a profit-making organization. For instance, there is distinct apathy and discomfort when I use jargon like “marketing ourselves to our potential customer segments” and “providing value for time to our customers” and so on.

These may lead to the following conclusions about the attitudes of certain member about Spark (of course, these conclusions, I hope, are wrong, but I am still tempted to draw them):

• Spark members want to feel that they are doing something good.
• They want to feel that their good wells out from the bottom of their heart and not from any extrinsic motivation.
• They feel threatened if external motivations are offered to them because that may open up the possibility that their good work is motivated by the possibility of external remuneration.
• Thus, they also don’t want to be reliable or answerable to anybody else for their performance except their inner conscience (which they seem to think is the best judge of all).
• In the selfless work they are doing, the selfless component is more important than the work component.

What would these conclusions imply? This time, I threatened (rather childishly, I must admit) to resign if my payment demand was not heeded. Spark urged me not to resign, citing the value of my work, and agreed that as far as merit was concerned, the 20 rupees was very much mine. But its members took up strong and deep ideological positions which effectively said that even if they make a payment to me, it would be more under duress and that Spark’s general policy would be to expect volunteers not to expect payment.

Tomorrow, suppose there is a service that can profoundly affect the lives of the children being helped by Spark, and the person offering the service charges a (more decent) amount, say something like Rs. 500 per month for coming and teaching the kids some really valuable skills once a week. Does Spark refuse this person? If yes, isn’t Spark sacrificing the quality of the children’s lives for its own principles? If no, then why should different standards apply to Spark insiders and to Spark outsiders?

This seems to be like the father who will refuse to let his son be operated in a critical condition because he doesn’t believe in modern medicinal practices? Who will not allow a critical intravenous injection because he believes that all injection should only be through the mouth?

To summarize, here are my points:

1. When it comes to determining payments, there are two direct factors: what the worker demands and what the employer (or payer) is willing to pay. Other factors that affect more indirectly are the other options available to the worker and the payer.
2. Humanistic criteria, such as how much the worker needs, may be used in determining the wage rates, and could be used to either determine minimum wages and offer free facilities. However, they should not be used to provide upper caps on wages.
3. A person or organization should be able to invest in that which asks and promises to return, that which asks a reasonable amount for the value offered. Persons or organizations who fail to appreciate and reward the wishes of its value-providers are bound to lose those value-providers.
4. An organization that has any goal (whether social or asocial) should decide whether achieving its goal is more important or maintaining its ideological rigidity. If an organization is rigid about maintaining ideological stands under all circumstances, much cannot be expected from it in terms of seizing opportunities towards achieving the goals. Ideologies slow down just as much as (or perhaps far more than) bureaucracy and laziness.