کتاب چهارم، فصل سوم: چگونه به‌صورت قانونی مالک فرد دیگری شویم

Book 4: Wolves Among Dogs

Chapter 3 How to Legally Own Another Person

Even the church had its hippies—Coase does not need math—Avoid lawyers during Oktoberfest—The expat life ends one day—People who have been employees are signaling domestication

In its early phase, as the church was starting to get established in Europe, there was a group of itinerant people called the gyrovagues. They were gyrating and roaming monks without any affiliation to any institution. Theirs was a freelance (and ambulatory) variety of monasticism, and their order was sustainable, as the members lived off begging and from the good graces of townsmen who took interest in them. It was a weak form of sustainability, as one can hardly call sustainable a group of a people with vows of celibacy: they cannot grow organically, and would need continuous enrollment. But they managed to survive thanks to help from the population, who provided them with food and temporary shelter.

Until sometime around the fifth century, when they started disappearing—they are now extinct. The gyrovagues were unpopular with the church, banned by the Council of Chalcedon in the fifth century, then banned again by the second Council of Nicaea about three hundred years later. In the West, Saint Benedict of Nursia, their greatest detractor, favored a more institutional brand of monasticism, and ended up prevailing with his rules that codified the activity, with a hierarchy and strong supervision by an abbot. For instance, Benedict’s rules, put together in a sort of instruction manual, stipulate that a monk’s possessions should be in the hands of the abbot (Rule 33), and Rule 70 bans angry monks from hitting other monks.

Why were they banned? They were, simply, totally free. They were financially free, and secure, not because of their means but because of their lack of wants. Ironically, by being beggars, they had the equivalent of f*** you money, which we can more easily get by being at the lowest rung than by joining the income-dependent classes.

Complete freedom is the last thing you want if you have an organized religion to run. Total freedom for your employees is also a very, very bad thing if you have a firm to run, so this chapter is about the question of employees and the nature of the firm and other institutions.

Benedict’s instruction manual aims explicitly at removing any hint of freedom from the monks under the principles of stabilitate sua et conversatione morum suorum et oboedientia—“stability, conversion of manners, and obedience.” And of course monks are put through a probation period of one year to see if they are sufficiently obedient.

In short, every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people? First, by conditioning and psychological manipulation; second, by tweaking them to have some skin in the game, forcing them to have something significant to lose if they disobey authority—something hard to do with gyrovague beggars who flout their scorn for material possessions. In the orders of the mafia, things are simple: made men (that is, ordained) can be whacked if the capo suspects a lack of allegiance, with a transitory stay in the trunk of a car—and a guaranteed presence of the boss at their funerals. For other professions, skin in the game comes in more subtle forms.

TO OWN A PILOT

Let us say that you own a small airline company. You are a very modern person; having attended many conferences and spoken to consultants, you believe that the traditional company is a thing of the past: everything can be organized through a web of contractors. It is more efficient to do so, you are certain.

Bob is a pilot with whom you have entered into a specific contract, in a well-defined drawn-out legal agreement, for precise flights, commitments made a long time in advance, which includes a penalty for nonperformance. Bob supplies the co-pilot and an alternative pilot in case someone is sick. Tomorrow evening you will be operating a scheduled flight to Munich as part of an Oktoberfest special. The flight is full with motivated budget passengers, some of whom went on a preparatory diet; they have been waiting a whole year for this Gargantuan episode of beer, pretzels, and sausage in laughter-filled hangars.

Bob calls you at five P.M. to let you know that he and the copilot, well, they love you…but, you know, they will not fly the plane tomorrow. You know, they had an offer from a Saudi Arabian Sheikh, a devout man who wants to take a special party to Las Vegas, and needs Bob and his team to run the flight. The Sheikh and his retinue were impressed with Bob’s manners, the fact that Bob had never had a drop of alcohol in his life, his expertise in fermented yoghurt drinks, and told him that money was no object. The offer is so generous that it covers whatever penalty there is for a breach of a competing contract by Bob.

You kick yourself. There are plenty of lawyers on these Oktoberfest flights, and, worse, retired lawyers without hobbies who love to sue as a way to kill time, regardless of outcome. Consider the chain reaction: if your plane doesn’t take off, you will not have the equipment to bring the beer-fattened passengers back from Munich—and you will most certainly miss many round trips. Rerouting passengers is costly and not guaranteed.

You make a few phone calls and it turns out that it is easier to find an academic economist with common sense than find another pilot—that is, an event of probability zero. You have all this equity in a firm that is now under severe financial threat. You are certain that you will go bust.

You start thinking: well, you know, if Bob were a slave, someone you own, you know, these kind of things would not be possible. Slave? But wait…what Bob just did isn’t something that employees who are in the business of being employees do! People who are employees for a living don’t behave so opportunistically. Contractors are exceedingly free; as risk-takers, they fear mostly the law. But employees have a reputation to protect. And they can be fired.

People you find in employment love the regularity of the payroll, with that special envelop on their desk the last day of the month, and without which they would act as a baby deprived of mother’s milk. You realize that had Bob been an employee rather than something that appeared to be cheaper, that contractor thing, then you wouldn’t be having so much trouble.

But employees are expensive. You have to pay them even when you’ve got nothing for them to do. You lose your flexibility. Talent for talent, they cost a lot more. Lovers of paychecks are lazy…but they would never let you down at times like these.

So employees exist because they have significant skin in the game—and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time. You are buying dependability.

And dependability is a driver behind many transactions. People of some means have a country house—which is inefficient compared to hotels or rentals—because they want to make sure it is available if they decide they want to use it on a whim. There is a trader’s expression: “Never buy when you can rent the three Fs: what you Float, what you Fly, and what you…(that something else).” Yet many people own boats and planes, and end up stuck with that something else.

True, a contractor has downside, a financial penalty that can be built into the contract, in addition to reputational costs. But consider that an employee will always have more risk. And conditional on someone being an employee, such a person will be risk averse. By being employees they signal a certain type of domestication.

Someone who has been employed for a while is giving you strong evidence of submission.

Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for nine hours every day, his ritualistic and punctual arrival at an office, his denying himself his own schedule, and his not having beaten up anyone on the way back home after a bad day. He is an obedient, housebroken dog.

FROM THE COMPANY MAN TO THE COMPANIES PERSON

Even when an employee ceases to be an employee, he will remain diligent. The longer the person stays with a company, the more emotional investment they will have in staying, and, when leaving, are guaranteed in making an “honorable exit.”

The academic tenure system is meant to give people the security to express their opinions freely. However, tenure is given (in the ideological disciplines, such as the “humanities” and social science) to the submissive ones who play the game and have shown proofs of such domestication. It’s not working.

If employees lower your tail risk, you lower theirs as well. Or at least, that’s what they think you do.

At the time of writing, firms stay in the top league by size (the so-called S&P 500) for only about between ten and fifteen years. Companies exit the S&P 500 through mergers or by shrinking their business, both conditions leading to layoffs. Throughout the twentieth century, however, expected duration was more than sixty years. Longevity for large firms was greater; people stayed with large firms for their entire lives. There was such a thing as a company man (restricting the gender here is appropriate, as company men were almost all men).

The company man is best defined as someone whose identity is impregnated with the stamp his firm wants to give him. He dresses the part, even uses the language the company expects. His social life is so invested in the company that leaving it inflicts a huge penalty, like banishment from Athens under the Ostrakon. Saturday nights, he goes out with other company men and spouses, sharing company jokes. IBM required its employees to wear white shirts—not light blue, not with discreet stripes, but plain white. And a dark blue suit. Nothing was allowed to be fancy, or invested with the tiniest amount of idiosyncratic attribute. You were a part of IBM.

Our definition:

A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man—that is, he has skin in the game.

In return, the firm is bound by a pact to keep the company man on the books as long as feasible, that is, until mandatory retirement, after which he would go play golf with a comfortable pension, with former coworkers as partners. The system worked when large corporations survived a long time and were perceived to be longer lasting than nation-states.

By the 1990s, however, people started to realize that working as a company man was safe…provided the company stayed around. But the technological revolution that took place in Silicon valley put traditional companies under financial threat. For instance, after the rise of Microsoft and the personal computer, IBM, which was the main farm for company men, had to lay off a proportion of its “lifers,” who then realized that the low-risk profile of their position wasn’t so low risk. These people couldn’t find a job elsewhere; they were of no use to anyone outside IBM. Even their sense of humor failed outside of the corporate culture.

If the company man is, sort of, gone, he has been replaced by the companies person. For people are no longer owned by a company but by something worse: the idea that they need to be employable. The employable person is embedded in an industry, with fear of upsetting not just their employer, but other potential employers.

In some countries, executives and mid-level managers are given perks such as a car (in the disguise of a tax subsidy), which are things on which the employee would not spend his money had he been given cash (odds are he may save the funds); they make the employee even more dependent.

COASE’S THEORY OF THE FIRM

Perhaps, by definition, an employable person is the one you will never find in a history book, because these people are designed to never leave their mark on the course of events. They are, by design, uninteresting to historians. But let us now see how this fits the theory of the firm and the ideas of Ronald Coase.

An employee is—by design—more valuable inside a firm than outside of it; that is, more valuable to the employer than the marketplace.

Coase was a remarkable modern economist in that he was independent thinking, rigorous, and creative, with ideas that are applicable and explain the world around us—in other words, the real thing. His style is so rigorous that he is known for the Coase Theorem (about how markets are very smart about allocating resources and nuisances such as pollution), an idea that he posited without a single word of mathematics, but which is as fundamental as many things written in mathematics.

Aside from his theorem, Coase was the first to shed light on why firms exist. For him, contracts can be too costly to negotiate due to transaction costs; the solution is to incorporate your business and hire employees with clear job descriptions because you can’t afford legal and organizational bills for every transaction. A free market is a place where forces act to determine specialization, and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring. So market forces will cause the firm to aim for the optimal ratio of employees and outside contractors.

As we can see, Coase stopped one or two inches short of the notion of skin in the game. He never thought in risk terms to realize that an employee is also a risk-management strategy.

Had economists, Coase or Shmoase, had any interest in the ancients, they would have discovered the risk-management strategy relied upon by Roman families who customarily had a slave for treasurer, the person responsible for the finances of the household and the estate. Why? Because you can inflict a much higher punishment on a slave than a free person or a freedman—and you do not need to rely on the mechanism of the law for that. You can be bankrupted by an irresponsible or dishonest steward who can divert your estate’s funds to Bithynia. A slave has more downside.

COMPLEXITY

Welcome to the modern world. In a world in which products are increasingly made by subcontractors with increasing degrees of specialization, employees are even more necessary than before for some specific, delicate tasks. If you miss one step in a process, often the entire business shuts down—which explains why today, in a supposedly more efficient world with lower inventories and more subcontractors, things appear to run smoothly and efficiently, but errors are costlier and delays are considerably longer than in the past. One single delay in the chain can stop the entire process.

A CURIOUS FORM OF SLAVE OWNERSHIP

Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status. Multinational companies created the expat category, a sort of diplomat with a higher standard of living who represents the firm far away and runs its business there. All large corporations had (and some still have) employees with expat status and, in spite of its costs, it is an extremely effective strategy. Why? Because the further from headquarters an employee is located, the more autonomous his unit, the more you want him to be a slave so he does nothing strange on his own.

A bank in New York sends a married employee with his family to a foreign location, say, a tropical country with cheap labor, with perks and privileges such as country club membership, a driver, a nice company villa with a gardener, a yearly trip back home with the family in first class, and keeps him there for a few years, enough to be addicted. He earns much more than the “locals,” in a hierarchy reminiscent of colonial days. He builds a social life with other expats. He progressively wants to stay in the location longer, but he is far from headquarters and has no idea of his minute-to-minute standing in the firm except through signals. Eventually, like a diplomat, he begs for another location when time comes for a reshuffle. Returning to the home office means loss of perks, having to revert to his base salary—a return to lower-middle-class life in the suburbs of New York City, taking the commuter train, perhaps, or, God forbid, a bus, and eating a sandwich for lunch! The person is terrified when the big boss snubs him. Ninety-five percent of the employee’s mind will be on company politics…which is exactly what the company wants. The big boss in the board room will have a supporter in the event of some intrigue.

FREEDOM IS NEVER FREE

In the famous tale by Ahiqar, later picked up by Aesop (then again by La Fontaine), the dog boasts to the wolf all the contraptions of comfort and luxury he has, almost prompting the wolf to enlist. Until the wolf asks the dog about his collar and is terrified when he understands its use. “Of all your meals, I want nothing.” He ran away and is still running. The question is: what would you like to be, a dog or a wolf?

The original Aramaic version had a wild ass, instead of a wolf, showing off his freedom. But the wild ass ends up eaten by the lion. Freedom entails risks—real skin in the game. Freedom is never free.

Whatever you do, just don’t be a dog claiming to be a wolf. In Harris’s sparrows, males develop secondary traits that correlate with their fighting ability. Darker color is associated with dominance. However, experimental darkening of lighter males does not raise their status, because their behavior is not altered. In fact these darker birds get killed—as the researcher Terry Burnham once told me: “birds know that you need to walk the walk.” Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, as we saw in the IBM story, cannot bounce back.

WOLVES AMONG THE DOGS

There is a category of employees who aren’t slaves, but these represent a very small proportion of the pool. You can identify them as follows: they don’t give a f*** about their reputation, at least not their corporate reputation.

After business school, I spent a year in a banking training program—by some accident, as the bank was confused about my background and aims and wanted me to become an international banker. There, I was surrounded by highly employable persons (my most unpleasant experience in life), until I switched to trading (with another firm) and discovered that there were some wolves among the dogs.

One type was the salesperson whose resignation could cause a loss of business, or, what’s worse, could benefit a competitor by bringing clients there. Salespeople had tension with the firm as the firm tried to dissociate accounts from them by depersonalizing the relationships with clients, usually unsuccessfully: people like people, and they drop business when they get some generic and polite person on the phone in place of their warm and often exuberant salesperson-friend. The other type was the trader about whom only one thing mattered: the profits and losses, or P and L. Firms had a love-hate relationship with these two types as they were unruly—traders and salespeople were only manageable when they were unprofitable, in which case they weren’t wanted.

Traders who made money, I realized, could get so disruptive that they needed to be kept away from the rest of the employees. That’s the price you pay for turning individuals into profit centers, meaning no other criterion mattered. I recall once threatening a trader who was abusing the terrified accountant with impunity, telling him such things as “I am busy earning money to pay your salary” (intimating that accounting did not add to the bottom line of the firm). But no problem; the people you meet when riding high are also those you meet when riding low, and I saw the fellow getting some (more subtle) abuse from the same accountant before he got fired, as he eventually ran out of luck. You are free—but only as free as your last trade. As we saw with Ahiqar’s wild ass, freedom is never free.

When I switched firms away from the proto-company man, I was explicitly told that my employment would terminate the minute I ceased to meet the P and L target. I had my back to the wall, but I took the gamble, which forced me to engage in arbitrage, low-risk transactions with small downsides that were possible at the time because the sophistication of operators in the financial markets was very low.

I recall being asked why I didn’t wear a tie, which at the time was the equivalent of walking down Fifth Avenue naked. “One part arrogance, one part aesthetics, one part convenience,” was my usual answer. If you were profitable you could give managers all the crap you wanted and they ate it because they needed you and were afraid of losing their own jobs. Risk takers can be socially unpredictable people. Freedom is always associated with risk taking, whether it leads to it or comes from it. You take risks, you feel part of history. And risk takers take risks because it is in their nature to be wild animals.

Note the linguistic dimension—and why, in addition to sartorial considerations, traders needed to be kept away from the rest of nonfree, non-risk-taking people. In my day, nobody cursed in public except for gang members and those who wanted to signal that they were not slaves: traders cursed like sailors, and I have kept the habit of strategic foul language, used only outside of my writings and family life.

I can’t resist this story. I once received a letter from a person from the finance industry with the following request: “Dear Mr. Taleb, I am a close follower of your work, but I feel compelled to give you a piece of advice. An intellectual like you would greatly gain in influence if he avoided using foul language.” My answer was very short: “f*** off.”

Those who use foul language on social networks (such as Twitter) are sending an expensive signal that they are free—and, ironically, competent. You don’t signal competence if you don’t take risks for it—there are few such low-risk strategies. So cursing today is a status symbol, just as oligarchs in Moscow wear blue jeans at special events to signal their power. Even in banks, traders were shown to customers on tours of the firm as if they were animals in a zoo, and the sight of a trader cursing on a phone while in a shouting match with a broker was part of the scenery.

So while cursing and bad language can be a sign of doglike status and total ignorance—the “canaille,” which etymologically relates these people to dogs. Ironically the highest status, that of a free man, is usually indicated by voluntarily adopting the mores of the lowest class.

My friend Rory Sutherland (the same Rory) explained that some more intelligent corporate representatives had the strategy of cursing while talking to journalists in a way to signal that they were conveying the truth, not reciting some company mantra.

It is no different from Diogenes (the one with the barrel) insulting Alexander the Great by asking him to stand out of his sun, just for signaling (legend, of course). Consider that English “manners” were imposed on the middle class as a way of domesticating them, along with instilling in them the fear of breaking rules and violating social norms.

LOSS AVERSION

Take for now the following:

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.

The more you have to lose, the more fragile you are. Ironically, in my debates, I’ve seen numerous winners of the so-called Nobel in Economics (the Riksbank Prize in Honor of Alfred Nobel) concerned about losing an argument. I noticed years ago that four of them were actually concerned that I, a nonperson and trader, publicly called them frauds. Why did they care? Well, the higher you go in that business, the more insecure you get, as losing an argument to a lesser person exposes you more than if you lose to some hotshot.

Being higher up in life only works under some conditions. You would think that the head of the CIA would be the most powerful person in America, but it turned out that the venerated David Petraeus was more vulnerable than a truck driver. The fellow couldn’t even have an extramarital relationship. You can risk people’s lives, but you remain a slave. The entire structure of the civil service is organized that way.

WAITING FOR CONSTANTINOPLE

The exact obverse of the public-hotshot as slave is the autocrat.

As I am writing these lines, we are witnessing a nascent confrontation between several parties, which includes the current “heads” of state of members of the North Atlantic Treaty Organization (modern states don’t quite have heads, just people who talk big) and the Russian Vladimir Putin. Clearly, except for Putin, all the others need to be elected, can come under fire by their party, and have to calibrate every single statement with how it could be misinterpreted the least by the press. On the other hand, Putin has the equivalent of f***you money, projecting a visible “I don’t care,” which in turn brings him more followers and more support. In such a confrontation Putin looks and acts as a free citizen confronting slaves who need committees, approval, and who of course feel like they have to fit their decisions to an immediate rating.

Putin’s attitude mesmerizes his followers, particularly the Christians in the Levant—especially those Orthodox Christians who remember when Catherine the Great’s fleet came to allow the tolling of the bells of the Saint George Cathedral in Beirut. Catherine the Great was “the last czar with balls,” and she is the one who took the Crimea from the Ottomans. Before that, the Sunni Ottomans had banned Christians in the coastal cities under their control from ringing church bells—only inaccessible mountain villages allowed themselves such freedom. These Christians lost the active protection of the Russian czar in 1917 and now are hoping that Byzantium is coming back about a hundred years later. It is much easier to do business with the owner of the business than some employee who is likely to lose his job next year; likewise it is easier to trust the word of an autocrat than a fragile elected official.

Watching Putin made me realize that domesticated (and sterilized) animals don’t stand a chance against a wild predator. Not a single one. Fughedabout military capabilities: it is the trigger that counts.

Universal suffrage did not change the story by much: until recently, the pool of elected people in so-called democracies was limited to a club of upper class people who cared much, much less about the press. But with more social mobility, ironically, more people could access the pool of politicians—and lose their jobs. And progressively, as with corporations, you start gathering people with minimal courage—and selected because they don’t have courage, as with a regular corporation.

Historically, the autocrat was both freer and—as in the special case of traditional monarchs in small principalities—in some cases had skin in the game in improving the place, more so than an elected official whose objective function is to show paper gains. This is not the case in modern times, as dictators, aware that their time might be limited, indulge in pillaging the place and transferring assets to their Swiss bank accounts—as in the case of the Saudi Royal family.

DO NOT ROCK BUREAUCRISTAN

More generally:

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.

Although employees are reliable by design, it remains the case that they cannot be trusted in making decisions, hard decisions, anything that entails serious tradeoffs. Nor can they face emergencies unless they are in the emergency business, say, firefighters. The employee has a very simple objective function: fulfill the tasks that his or her supervisor deems necessary, or satisfy some gameable metric. If the employee when coming to work in the morning discovers the potential for huge opportunities, say selling anti-diabetes products to prediabetic Saudi Arabian visitors, he cannot stop and start exploiting it if he is officially in the light fixtures business, selling chandeliers to old-fashioned Park Avenue widows.

So although an employee is here to prevent an emergency, should there be a change of plan, the employee is stuck. While this paralysis can arise because the distribution of responsibilities causes a serious dilution, there is another problem of scale.

We saw the effect with the Vietnam War. Most people (sort of) believed that certain courses of action were absurd, but it was easier to continue than to stop—particularly since one can always spin a story explaining why continuing is better than stopping (the backfitting story of sour grapes now known as cognitive dissonance). We have been witnessing the same problem in the U.S. attitude toward Saudi Arabia. It is clear since the attack on the World Trade Center (in which most of the attackers were Saudi citizens) that someone in that nonpartying kingdom had a hand—somehow—in the matter. But no bureaucrat, fearful of oil disruptions, made the right decision—instead, the absurd invasion of Iraq was endorsed because it appeared to be simpler.

Since 2001 the policy for fighting Islamic terrorists has been, to put it politely, missing the elephant in the room, sort of like treating symptoms and completely missing the disease. Policymakers and slow-thinking bureaucrats stupidly let terrorism grow by ignoring its roots—because that was not a course that was optimal for their jobs, even if optimal for the country. So we lost a generation: someone who went to grammar school in Saudi Arabia (our “ally”) after September 11 is now an adult, indoctrinated into believing and supporting Salafi violence, hence encouraged to finance it. Even worse, the Wahhabis have accelerated their brainwashing of East and West Asians with their madrassas, thanks to high oil revenues. Instead of invading Iraq or blowing up “Jihadi John” and other individual terrorists, thus causing a multiplication of these agents, it would have been better to focus on the source of the problems: Wahhabi/Salafi education and the promotion of intolerant beliefs according to which a Shiite or an Ezidi or a Christian are deviant people. But, to repeat, this is not a decision that can be made by a collection of bureaucrats with a job description.

The same thing happened in 2009 with the banks. I said in Prologue 1 that the Obama administration was complicit with the Bob Rubin trade. We have plenty of evidence that they were afraid of rocking the boat and contradicting the cronies.

Now compare these policies to ones in which decision makers have skin in the game as a substitute for their annual “job assessment,” and you will picture a different world.

NEXT

Next, let’s talk about the Achilles’ heel of the free who is not so free.

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