The road to hell is paved with…what again?

The Wall Street Journal gave us a timely reminder last week of Friedrich A. Hayek’s legendary Nobel acceptance speech.

An ungated version of the entire speech can be found here.

Here’s a portion of what the WSJ quoted:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights.

But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.

Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.

The whole thing is worth a read.

Progressive tax rates

A few weeks ago a family member explained the simple and appealing logic of progressive tax rates — or tax rates that get progressively higher on higher incomes.

Someone who makes $10,000, pays 10% to the government only has $9,000 left.  Someone who makes $1 million pays 50% still has $500 thousand left — a lot more even though they pay a higher rate.

I’m looking for a simple and appealing argument against it.  I don’t think I’ve found it yet.  But I think some good reasons against it are in the following sources.

In St. Augustine Anticipates H.L. Mencken and Walter Williams, Don Boudreaux quotes from St. Augustine’s City of God.  The quote equates the use of force to take from folks via the state with robbery.

I explained another good reason in my post, The political power machine.  Giving government officials the power to set different tax rates for different people doesn’t do much except give those in government the power to extract economic rent.

But both of those arguments may not be necessary if F.A. Hayek is correct.  In the comment section of Don Boudreaux’s post, commenter DG Lesvic quotes from Hayek’s The Constitution of Liberty (p. 306).  Hayek claims the only argument needed against government redistribution is the economic argument that redistribution increases inequality.  All other social, political and moral arguments leaves the door open for the economic argument that it decreases inequality.

Hayek might be onto something.  Folks seeing progressive taxes as a means of decreasing income inequality may be why the simple logic that my family member articulated is so appealing.

If Hayek is correct, then we need to know how redistribution increases inequality and be able to articulate that in a way that is as intuitive and simple as the two sentences from my family member.

Does anyone have any ideas on how to do that?

How do you know?

Bad mental models held by management is a root cause of bad business performance.

The “not invented here” syndrome is an example of a bad mental model in business.  This syndrome  prevents management from adopting the practices of outside competitors because they don’t want to copy success, they want to create their own.  The fallacy here is that competitors can have good ideas.

Not my idea syndrome is a sub-variant of the “not invented here” syndrome. This is when managers will only support their own pet projects and give no credence to ideas that come from others in their organization.  The flaw here is that others can have good ideas.

The manager’s job is to try the best ideas, not just his or her ideas.

Credentialing syndrome is when managers hire, promote and reward folks based on  college degrees from certain institutions, or have specific degrees, certifications or licenses.  A great example of this is K-12 teachers.  School districts often pay their teachers based on the certifications they receive.  The fundamental flaw here is that there’s usually not a great deal of relation between effectiveness and certification level.  Not as much as there is between prior results and effectiveness.

Input management syndrome occurs when managers hire, promote and reward based on how people carry out their work, rather than the results they produce.  The fundamental flaw here is in managing the inputs rather than outputs.  This is also called micromanaging.  My father-in-law was a capable foreman for his crew and produced good results.  But, he said one of his bosses would always tell him that he was too easy on his men.  That boss didn’t look at the results.

The manager’s job is to hire and reward the people who produce the best results.  It’s not to get the people who have best credentials or do things a specific way.

The fatal conceit syndrome, inspired by F.A. Hayek, is when managers believe their job is to control how things are done in far flung organizations.   Rather than hiring people who can produce good results, they hire people who do what they are told to do.  Two fundamental flaws exist in this bad mental model.  First, managers rarely have the information they need to control things effectively in far flung organizations, aka the knowledge problem.  Second, innovation is suppressed and limited to few ideas of the managers and they are soon overrun by the many ideas of their competitors.

The manager’s job is to develop an organization that can function.

I’ll explore more bad mental models in the future.

Unfortunately, bad mental models are tough to change.  I’ve seen many leaders go down with the ship and get fired for producing bad results without giving consideration that they may be wrong. I’ve seen them take their bad mental models to other organizations and eventually get fired from them as well.

But, one way I like to plant the seed of doubt is to simply ask what evidence folks have that their way of doing things is right.  They usually haven’t tested that evidence as well as they think they have.