THE FELT-FAIR ECONOMY AND THE FUTURE OF ECONOMIC CONFIDENCE
By Art Kleiner
Introduction
In the 1940s, Elliott Jaques – an eminent and original organizational theorist, and the person who coined the terms “corporate culture” and “midlife crisis” – introduced a management metric he called “felt-fair pay.” He interviewed thousands of employees at hierarchical organizations around the world, such as armies and manufacturing companies, asking not what they earned, but what they thought everyone in their workplace should earn if the pay scales were fair. To his surprise at first, there was close to 95% agreement. People all had the same idea of what they and their colleagues were worth.
“I’ll never forget it,” Jaques said (quoted in an article I wrote about him). “I had this funny feeling up my back. One man would smile knowingly about the $80,000 he got. Somebody else would say, ‘I don’t know what all the fuss is about. I’m getting $60,000 and it feels right.’ And somebody else would plead with me, ‘Doc, you gotta do something for us. We’re getting $48,000 and the company doesn’t see how unfair it is.’”
Jaques found only one factor that correlated with high perceived value: time span –the length of time it took to carry out your longest-running assignment. If youwere a factory floor worker, clocking in every day, you ranked at a 1 in the hierarchy; if you were a manager evaluated every year, it would be 2. Senior executives, promoted every two to five years, might rank 4 or 5. The highest rank–7 in the Jaques schema – was held by CEOs, whose strategic decisions might have impact for decades. Jaques felt only a handful of people around the world qualified for this level.
By the 1980s, Jaques had rearticulated time span to mean cognitive capacity. In the managerial enterprises of the postwar era, what people valued most was the ability to handle complex situations – including people and technology. In other words, the better equipped you were as a meritocratic decision-maker, and the more you could handle muddled chaos and gain consistent results, the greater the objective value others would attribute to you.
Jaques’ ideas have always been controversial in HR circles, but they achieve remarkable results in practice. And when the subject of income inequality comes up – as it has throughout the 2020 election cycle and its insurrectionary aftermath – I think of him. We are living in a felt-fair economy: an economy shaped by the perceptions of human worth and value.
If you could survey people in a town or region about their relative standards of living, you might turn up a similarly high level of agreement. Some would “smile knowingly” about their house and bank accounts. Others would indicate that they had roughly the income and assets they deserved. And a large and growing number would plead, “You gotta do something for us.”
How quickly will the economy recover after the pandemic? And what will it recover to?
About six months ago, I began to look into these questions. I gradually concluded that the most important factor is not capital, inflation, wages, a stimulus, or even a vaccine. It’s confidence: how people feel about their prospects. Like a workplace struggling to reconcile felt-fair pay, the viability of an economy is shaped by its felt-fair dynamics. That, in turn, depends on what Elliott Jaques discovered: the general fit between the perceived worth people have and the reward and agency available to them.
Defining the Felt-Fair Economy
Economic predictions seem foolhardy right now, given the unpredictability of next year’s animal spirits. But there are indications that economic recovery will be faster and more robust than many observers expect. Among those who have recently expressed optimism is Carlota Perez, whose influential theory of technological revolutions and financial capital involves tracking long-wave cycles through the history of industrialization. (I was first introduced to Perez’s work, through references, by Bill Janeway in this newsletter.) In a series of recent blog posts co-authored with Andres Schafer, Perez wrote that the Covid-19 pandemic will probably usher in the “golden age” that readers of her work have been waiting for since at least 2002. (More on this later.)
A felt-fair economy is not an econometric construct. It is a shared mental model, reflecting middle-class values and experience since the dawn of the Industrial Revolution.
This is my take on the elements that a “felt-fair economy” would include:
• Providing basic life necessities (reasonably high-quality food and shelter, energy, communications, mobility, air, and water) for responsible-minded people
• Providing basic protection against the existential challenges of modern life: medical care, support for our aged and infirm, insurance for the unemployed, and reliable and trustworthy crime prevention and protection
• Basic, reasonably high-quality level of education and care for children, and for advanced education as appropriate and reliably affordable
• People earning what they have through their own efforts (as opposed to largesse from other sources), and feeling they deserve what they’ve earned
• People qualifying for this economy regardless of ethnicity, background, or belief – no one feels excluded because of who they are
• In every generation, people feeling that they are doing better than their parents did – not in terms of how much money they make, but how much choice they have over their lives
Some things are not included, because they’re not part of everyone’s mental model. Not everyone cares about “meaningful work,” for example.
Redistribution is not on the table in this context. Specifics like daycare, rent control, or religion will vary from one locale to the next. In this scenario, a safety net exists, but it is felt to be fair, not lavish. When people are doing better financially than others, both they and others perceive that this is because of their own efforts.
Of course, this is an ideal – reflecting aggregate attitudes. Why then does it matter? Because it determines economic confidence. When an economy doesn’t measure up to this minimum standard, life is perceived as a series of constraints over which people have little or no control. Stress builds up accordingly, and decline becomes a self-reinforcing spiral. Even many of us with some economic training, when push comes to shove, base our responses on how things feel: at least for ourselves, our families, and the people we care about. We look at the data, but fall back to how we feel.
There’s one important difference from Elliot Jaques’ concept of felt-fair pay. Jaques’ concept, which applies only to hierarchical organizations, conflates status and reward with cognitive complexity. It disproportionately rewards skilled knowledge workers. But a broader economy can’t do that, because there are too many other ways in which people make economic contributions in real-life: through common sense, mechanical facility, the ability to care for others, and so on.
The emphasis on cognitive complexity, as measured by performance in higher education and then in the workplace, has contributed to the felt-unfairness of the economy today.
When I was editing strategy+business, I regularly received article submissions from business leaders promoting some form of begrudging egalitarianism –because otherwise, there might be a “populist revolution.” But the movement toward a felt-fair economy is not leftist or rightist; it’s not really revolutionary. It’s aspirational. People sense that it’s possible to design and create an economy in which, like an Elliot Jaques–designed hierarchy, they can be rewarded and recognized in line with their efforts and abilities – in an economy where everyone has a place to fit.
Reframing Economic Growth
Though the term “felt-fair economy” is not in wide use (a Google search turns up only one hit, from an Engineering News article published in 1912), there are many theories about how to create one.
French economist Thomas Piketty, for instance, argues that, in any particular economy, growth should be higher than the overall rate of return on investment. Otherwise, “the concentration of capital will attain extremely high levels – levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.”
Carlota Perez, who has tracked five long waves of technological growth and decline, says that the periods of stable, non-speculative growth (or “golden ages,” as she calls them) always occur when government and business leaders are driven to work together in the wake of a crisis. Then they consciously forge a path forward that promotes equitable growth, as they did just after World War II. Conservative writer Christopher Caldwell (in his book The Age of Entitlement) says that growth is held back – in the US, at least – by the expense of maintaining two social orders at once. One is rooted in practices from before the Great Society, and the other was shaped by the Civil Rights movement. The conflict between them may be nearly impossible to resolve, but it is too costly for one government to cover both.
Liz Sweigart, a writer and behavioral economist exploring the intersection between financial practices and social well-being, believes that people need not just better salaries, but also easier and more prevalent opportunities to build equity for themselves. Otherwise, they’ll never have money that “works while they sleep.” Bridgewater Associates chair Ray Dalio has written that leaders must bring down the cost of societal investment by writing off today’s massive debt without evoking moral hazard.
As I explored all these arguments and more, the one that made the most sense to me – at least in terms of predictive, rather than prescriptive, power – was a forgotten theory that could be called “balancing three kinds of economic growth.”
It was put forth in the early 1980s by management consultant Edouard Parker and futurist Ted Newland, a leader of Royal Dutch / Shell’s renowned Group Planning team (known for scenarios that anticipated the oil price shocks of the 1970s and 1980s). Along with Anglo American executive Clem Sunter and Shell’s eminent scenario team leader, Pierre Wack, they were leading exponents of the “high road” concept: the idea that when business, government, and social leaders think clearly together, they can accomplish remarkable changes. Sunter’s bestselling 1987 book The World and South Africa in the 1990s helped convince South Africa’s white population that a proactive, peaceful transition from apartheid was not just possible, but necessary, for the country’s survival.
In a book proposal that Parker and Newland showed me in the early 1990s (the book, sadly, was never picked up by a publisher), they described a similar high-road approach to global poverty. They knew Argentina, Brazil, Nigeria, and the Sudan first-hand (Newland was Anglo-Argentine and had managed a Shell operation in Nigeria), and they had seen how the promise of development could be derailed. They said a high-road approach, bringing each country to prosperity, would take at least a decade of annual 10% economic growth – like the still relatively new examples of South Korea and Taiwan.
The authors said that this high level of growth was needed because there were three separate constituencies for it, all of whom needed their due. One-third would be spent on economic fundamentals, including the service of existing debt – literally and figuratively keeping the trains running. “We have already seen that 3% growth per year will allow a country only to keep up with its expanding population,” they wrote.
Another third was needed for raising the fortunes of the disadvantaged: financing business startups and the infrastructure needed for prosperity, including better healthcare and higher environmental quality.
The final third would be devoted to the current leaders of the economy – the effendi, as Parker and Newland called them – who ran government agencies and business corporations in emerging economies. (The name came from Turkish bureaucracy; the word effendia means “one who knows.”) I doubt that they had heard of Elliot Jaques, but they described these meritocrats like Jaques described his high-level hierarchical leaders – as people who were recognized as having value because of their cognitive capabilities. “Most growth comes from improved productivity,” wrote Parker and Newland, “and improved productivity by definition benefits the income of people who already have some means of production: employers, artisans, landowners” who can “rapidly put machinery in the hands of everyone.”
There was also a Machiavellian aspect to their scheme. No reforms could take place without the enthusiastic support of the effendi. They were highly placed, and would end up not only approving every change, but also embracing them – or they wouldn’t happen. Like many people, most of these leaders saw themselves as more generous than they actually were. They would not embrace reform if it required sacrifices, unless they felt good about making those sacrifices.
Our own felt-fair economy in today’s industrialized world is facing a similar dilemma. The habits and values of our “effendi” – the leaders of business and government, particularly in the most innovative companies – are a major influential economic force. Populists who criticize them call them the “elites,” or the “meritocracy,” but there are too many to put aside.
The solution is a robust-enough level of growth to cover all three groups. That doesn’t necessarily mean an annual 10%. As Piketty has noticed, even 1-2% growth per year can feel like a dramatic increase in quality of life after a couple of decades. But it does probably mean aiming for a level of growth that is three times what is needed to maintain current standards of living.
For whatever the level of growth becomes (and I think there’s reason to be optimistic about it), the balance between these three constituencies is critical. One-third must go to maintaining and improving the functions of trade, investment, mobility, and infrastructure. One-third must be spent in a way that keeps the existing business and government leaders, the effendi, on board. And then the final third must raise the fortunes of those at the bottom of the pyramid, including those at the bottom of the pyramid in industrial countries such as the US, where many communities are declining.
Everywhere, people must feel like they are making this happen; that it’s not being “done to” them out of pity. A felt-fair economy is one in which no one is treated as “deplorable,” and the only way to accomplish this is not through money, but through agency. People must feel they have some form of control over what happens to them economically; only then can empathy for others become widespread. Some will always do better than others, but there’s a quality to a felt-fair economy, based on a basic appropriate fit between work, risk, and reward, that makes people generally feel that there is no reason for resentment, that most everyone is in it together.
That may sound impossible, but I don’t think it is. For one thing, there is a lot more experience with hierarchies, innovative startups, and managing human capability than there was in the past. Economic society, though it is more polarized, is also more transparent. Options such as local manufacturing and crowd-sourced fundraising are almost taken for granted.
This isn’t only a report about what should happen. It’s a report about what plausibly could happen. There are many discernable headwinds that could hold back progress toward a felt-fair economy. But there are also tailwinds that could provide surprising momentum. I’ll focus on the United States, since public life is so raw here right now, but there are similar headwinds and tailwinds elsewhere.
Headwinds and Skepticism
The headwinds are familiar. Growth is too slow. Productivity is (according to some) too weak. Interests are too entrenched. And the deterioration in some parts of the country is too far gone. As Blair Sheppard, PwC head of strategy and leadership, put it in his book Ten Years to Midnight:
Huge chunks of America [look] like the third world … with rampant drug addiction, dead factory towns, closed hospitals, terrible nutrition, and phenomena like “maternity care deserts,” i.e. swaths of the country with
no access to birthing centers. Before 2016 we saw the first headlines about declining life expectancy among white Americans.…
If a felt-fair economy requires prevalent, high-paying jobs for high-school graduates, then the technological change of the digital economy is also daunting.
Again, from Blair Sheppard: “In 1967, AT&T had about one million employees. In 2017, Alphabet had only 98,000.” It takes a leap of faith to believe that upskilling, installing solar panels, and home care for septuagenarians with Alzheimer’s will make up the difference. Other obstacles include the carrying capacity of the Earth, which can only stand so much more of today’s style of economic growth. The theft of intellectual property leaves some of the most well-intentioned companies without the wherewithal to survive. And the continued growth of mercantile capitalism treats the felt-fair economy as something to exploit.
Another challenge is the perception that any more investment, especially if it involves government debt, will be inflationary. I spent some time exploring this, and concluded that we are not in an inflationary economy right now, not even a hidden one, and probably won’t be for some years to come. The historian David Hackett Fischer, tracking four long waves of pricing changes in Europe going back to the 12th century in his book The Great Wave, found that they all correlated with demographic change. Similar waves occurred in China, Africa, India, and the Inca Empire.
“Inflation rises with human population,” wrote Fischer. “It has through history.” And after long waves of inflation, in which food and energy prices tend to have the most debilitating effect, there are long periods of stability. Based on pricing and demographic data, he concluded that the current phase of equilibrium started in the mid-1980s. “The length this will last is unpredictable,” he told a C-SPAN interviewer in 2004. “Previous such equilibriums have lasted from 70 to 160 years. But it’s likely to be with us for a while.”
Equilibrium doesn’t mean completely stable prices, and three well-known inflationary elements remain, confounding progress toward a felt-fair economy: healthcare, housing, and education. The costs of all three have risen dramatically during the last three decades; innovations designed to cut costs (including much of the Affordable Care Act) have not had that effect.
Healthcare, housing, and education have several facets in common that make them particularly resistant to cost reforms. First, they are deeply relevant to everyone, but their prices affect people in different ways, in part based on expectations. The average size of a new house, according to economic columnist and podcaster Ben Carlson, is 70% larger than it was in 1971; when you account for this, use monthly payments as your metric, and ignore the disproportionate prices in desirable locations, the cost of a house hasn’t risen that much at all. Meanwhile, one reason for the rise in healthcare prices is that new, expensive, leading-edge treatments continue to become more available, and there is always someone willing to pay for them.
In other domains, we’ve grown accustomed to the cost savings that come from larger scale. But you can’t get your surgery or your house remodeling embedded in an app. Even education turns out to be difficult to scale, because true learning and credentialing depends on 1:1 mentorship, and you can’t mentor more people on Zoom than you can in person. As one business academic recently told me, he spends more time writing letters of recommendation, which have to be personally tailored for each student, than he does teaching.
These three economic elements are also inflationary because of the emotions linked to them. People expect to make some sacrifices for their health, housing, and education (or their children’s education). There has thus been a greater tolerance of delay, and of prices and costs that build up slowly over time, than there would be with, say, automobiles. Education is also resistant to reform because it is so closely linked with peoples’ aspirations for themselves and their children, and thus with their fears and habits. Carry-along computers (iPads and small laptops, as first described in SNS) make a difference, but they do not affect two of the primary factors at play: the spark in a genuinely mentoring relationship between student and teacher, which is crucial for the individual student; and the self-sealing human resources system, rating and ranking people all the way from kindergarten to college to the 360-degree appraisal. Habitual, grade-based education is still the path of least resistance for becoming a member of the effendi: for establishing a career based on proving your mastery of cognitive complexity.
In short, there is every reason to believe that prices for healthcare, housing, and education will continue to rise – until the moment when they no longer can. And then, as Herbert Stein might have said, they will stop.
Prospects for a Felt-Fair Economy
If we were truly moving toward a felt-fair economy, we’d see some trends at play. We’d see the decentralization of human habitat, with more people who operate in the knowledge economy moving to less expensive places, filling out the formerly empty middle of flyover regions and finding or building vibrant communities there. We’d see lower-cost forms of health insurance becoming available, along with lower-cost universities and more alternative forms of apprenticeship and training gaining acceptance. Major enterprises would take advantage of the flexibility of digital platforms to give people much more autonomy in their work and reward them accordingly. We would see upgradeable houses emerge, based on materials that allow modular construction and deconstruction as families changed; and we might see quality-of-life–enabling technologies like batteries and wind machines get easier to construct and less expensive.
We’d see rapid middle-class growth in places like India, Indonesia, and Sub-Saharan Africa, especially if they found ways to inhibit the spread of Covid-19. Companies like Catalyte would thrive, using success in online surveys, augmented by predictive analytics, to find and elevate potential software engineers from marginalized neighborhoods who would perform more effectively than those with computer science degrees. New platforms for managing intellectual property would emerge, like Phase One in the music industry, allowing creative artists to broker their complex co-ownership arrangements and borrow against their work.
Overall, there would be a greater level of transparency about economic activity, especially on the management side: about when business (and government) leaders did things well and did them poorly. The feedback loop between efforts and results would be shorter and more obvious.
And, of course, all this is already happening. Liz Sweigart argues that a major shift came in July 2013, when the OECD announced that it would create a new set of international tax standards related to transfer pricing. This is the way in which multinational companies structure and price transactions between their affiliates.
The OECD’s stated intent was to reverse the long-standing approach for allocating income and expense between economic actors within global corporations. Whereas in the past, extraordinary returns or losses belonged to the parties that put capital at risk or owned valuable intellectual property, the new guidance shifted the reward toward those who perform the work. The resulting system seems to reflect something like the Newland-Parker concept: roughly one-third of revenues in a typical company might go to reinvestment (keeping everything running), another third to shareholders (playing the role of the effendi), and a third to employees and other constituents (the under-recognized), perhaps through employee stock-ownership plans. This model, if it works, tends to attract more capable and committed employees, because they recognize that they are now working in a felt-fair financial system.
Animal Spirits on the Rebound
Many things of this sort seem to be gathering critical mass – far too many to keep up with. I cherry-picked this list based on projects I know about personally. If I looked a bit further afield – for example, to the projects associated with SNS or with Paul Hawken’s Drawdown project – I could easily triple the list. Some innovations have been pending for so long (e.g., game-changing batteries and nano-materials) that it’s hard to believe that they will actually have much impact. But they will.
Carlota Perez and Andres Schafer suggest that the global pandemic may have triggered this inflection point. The examples of new activity that have emerged naturally during the pandemic have shown, in the midst of tragedy, what kinds of collaborative efforts are possible.
They write that the Golden Age requires leaving behind the old postwar way of life, toward a new direction they call “smart, green, fair and healthy global growth.” Most people are familiar with this rhetoric; but it’s not specific enough, because the specifics emerge in practice.
Meanwhile, statements of this sort made by business leaders and investors seem more engaged, and less perfunctory, than they did five years ago. Based purely on my own anecdotal experience, I think next year’s animal spirits are fairly high. I make my living as an editorial consultant, and I’m getting calls from business leaders who seem enthusiastic. They have insights about changes they want to make, oriented toward broadening the prosperity around them, and they want to take those babies out for a spin and see what they can do.
A passage by Parker and Newland resonates with me:
The High Road scenario reflects a commitment to a set of ideas that cannot be proven, but that most people might hope to be true: that planet Earth was created as a garden, not a concentration camp. That science and economic progress can be oriented to beneficial ends, rather than destructive. That world population can be limited through enrichment, rather than through war, famine, epidemic or abortion dictatorship. The tools for the high road are not economic: they are cultural. They require recasting and redeveloping a culture for the context of the third millennium.
When they wrote this, South Africa was still under apartheid, and the Soviet Union had not yet fallen. The World Trade Center was standing. Things have gotten much worse since then, but maybe we’re not fully recognizing the ways in which they’ve improved, and could improve more still.
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Thank you for conversations that influenced this piece: Napier Collyns, Chris Crewes, Lee Hall, Bill Isaacs, Chris McKenna, Juliette Powell, Michael Rosenbaum, Peter Senge, Martijn Sjoorda, and Liz Sweigart.
About Art Kleiner
Art Kleiner is a writer and editor. His published books include The Age of Heretics: A History of the Radical Thinkers Who Reinvented Corporate Management (Wiley, 2008) and Who Really Matters: The Core Group Theory of Power, Privilege, and Success (Doubleday, 2003), which Marc Andreesen called “perhaps the best underappreciated business book ever written.” Kleiner's most recent book, coauthored with research psychiatrist Jeffrey Schwartz and
executive coach Josie Thomson, is The Wise Advocate: The Inner Voice of Strategic Leadership (Columbia University Press, 2019).
Between 2005 and 2020, Art was the editor-in-chief of Strategy+Business, the award-winning management magazine currently published by PwC. He was also the editorial director of the best-selling Fifth Discipline Fieldbook series with Peter Senge and an editor at the Whole Earth Catalog and Whole Earth Review (where he oversaw the computer and business coverage). His Whole Earth article “Better Than the Next Best Thing to Being There,” published in 1979, was the first consumer guide to what would eventually become the world wide web.
Art is a faculty member at New York University’s Interactive Telecommunications Program, where he teaches scenario planning. He is also a principal in two businesses: Wise Advocate Enterprises (leadership development based on research into neuroscience and values) and Kleiner Powell International (editorial consultation). He lives in Connecticut.
Connect with Art Kleiner via Wise Advocate Enterprises.
