The Agent Problem

It’s been a long time since I’ve last blogged, and I know I still owe a continuation of the surplus co-op post, but I’m going to take a sidetrack to talk about the agent problem

http://en.wikipedia.org/wiki/Principal-agent_problem

It’s one of the oft heard mantras of capitalist apologists that in capitalism you are spending your own money on something for yourself so you are motivated to spend your money wisely, while the government is spending someone else’s money on someone else so there’s no motivation to spend it wisely.

But most of the time you aren’t actually directly doing something for yourself, instead you are paying someone else to do something for you. This gives rise to the agent problem where the person you are paying is not really motivated to do what’s best for you.

If you remember my post from a long time ago about a problem I had with an electrician doing a bad job. The electrician wasn’t motivated to do a good job. He was just motivated to get paid. He was perfectly happy to do a quick and sloppy job and still get paid because I didn’t have the knowledge to tell whether he did a good job. I spent my money on something for myself and didn’t get what was best for me because of the agent problem.

In fact, the agent problem is the reason behind the corporate capitalist structure itself. When a company gets too big for the owners to personally supervise all employees they have to add layers of managers, and more layers to supervise the managers. You wind up with a bloated organization where many people are there just to look over other people’s shoulders.

The agency problem is a big efficiency problem for corporate capitalism. The reason Dilbert is so funny is because it rings so true. You really do find all kinds of crazy behavior in a corporate bureaucracy because the people there do not have a strong motivation to accomplish the organizations goals.

Incidentally, that’s why I’m not scared of government health care. Any government health care system will be a giant bloated inefficient bureaucracy. But so what, our health care system is already run by a giant bloated inefficient bureaucracy. It just happens to be a corporate bureaucracy, but that doesn’t give me any warm fuzzies. The agent problem is fundamental to any bureaucracy whether government or corporate.

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