Power models and practice

First insertion on Heterodox Gazette Sam de Wolff: 10 august 2017

E.A. Bakkum is a blogger for the Sociaal Consultatiekantoor. He loves to reflect on the labour movement.

It becomes increasingly common in economics to complement the traditional neoclassical paradign with models of human behaviour, such as power politics. The present column describes two models, where the tournament is combined with rent seeking. They are placed in the context of the revolt theory of J.S. Coleman. Furthermore, tournaments with immaterial (ideological) bonuses are discussed, similar to the proposal by D. Pels and the habit in Leninism.

The theory of rent seeking is quite suited for understanding human behaviour. For, it focuses on the power politics of groups or circles. The stake of this struggle is the height of the rent σ, which one of the circles demands for itself. The initiator of the conflicts wants to redistribute the available wealth in a (for him) favourable manner. The exertion of power requires an effort, but this is not productive. For, the repression by means of power does not add value to the social product. This is the reason, that the practice of rent seeking is seen as negative. In such models, the powers eventually get balanced, so that the situation becomes an equilibrium. The final result is an agreement about the new distribution. Naturally, power is never eternal, and in the future the society can move towards another equilibrium.

In principle, this situation differs from the one, that is described by the models of the tournament. In the tournament an external actor organizes a competition with a first price of Δπ. Now the various circles do not compete for a redistribution, but simply for conquering the promised first price, bonus or premium. The tournament is generally a one-off happening, and not the formation of an equilibrium. The outcome is not determined by power, but by the made effort. Therefore, at least in economic applications the tournaments are ways to incite the individuals and circles to be more productive. The participant of the tournament with the highest effort wins, and therefore the others lose.

However, the definition of the tournament can be stretched somewhat. An interesting extension of the model is, that the premium is partly ideological, that is to say, immaterial. This approaches the definition of rent seeking, which by nature leaves some room for ideological rewards. For instance, it is quite conceivable, that during the tournament the esteem, status and authority of the participants increase. Such a premium emerges as a perhaps unintended side effect of the competition for a material reward. Status and the corresponding power have an intrinsic value, apart from their possible material benefits. Here is must be remarked, that variables such as status and authority are difficult to measure quantitatively, so that the model becomes more abstract by this extension and difficult to verify in practice.

Nevertheless, many researchers prefer to apply the models of rent seeking and the tournament in combination. A popular assumption is, that the various interest groups in a tournament compete for the access to rent. Thus the tournament obviously loses its significance as a productive effort. The tournament does still differ from rent seeking, because the premium is not necessarily the result of a redistribution of income between the competing groups. On the other hand, the organizers of the tournament will commonly pursue the acquisition of a personal profit ψ. The previous column has shown, that the result of the tournament is a total effort Δπ/β. Therefore, for β<1 a positive ψ is feasible. Since this profit and the premium are paid by the losers, here one yet has a redistribution.

Furthermore, the model obtains a more dynamic character, when the tournament has a volatile premium, such as status. A dynamic situation can be modelled as a series of tournaments1. During the tournament the participants can build up power, which they can use effectively in the next tournament. In this way the tournament remains a incentive to perform, also for the losers. The winner can continuously improve his position in a series of tournaments. This is for example the case, when one rises in the hierarchy of an organization by means of successive promotions. And the outcomes of the tournament both inform the manager of the tournament (say, the organizer or the initiator) and the participants themselves with regard to their individual skills. This type of extensions of the tournament model can contribute to the insight in the course of complex transactions, including rent seeking.

Apparently, it is worthwhile to study the relation between tournaments and rent seeking more in detail. First, it is clarifying to again consider the tournament model of the previous column about this theme. Tournaments need an element of chance, because otherwise the participants can not develop a stable strategy for their behaviour. In the mentioned column the chance is caused by the tournament leader, who is not capable to exactly measure the effort. His measurement of the effort e is η = e + ε, where ε is a measurement error. Now note, that this statistical variable ε is not necessarily caused by the measurement method. It can also be caused by the participant himself, for instance his physical condition or mental concentration. Or the environment of the participant can cause a fluctuation ε in the effectiveness of the participant. The models in the present column indeed attribute the factor of chance ε to the participant himself.

The tournament for rent

The present paragraph discusses a tournament model, where the N participants compete for a rent2. A typical hallmark of the present model is that each participant j (j=1, ..., N) has his own valuation π for the rent, which in this case is also the premium. Assume for the sake of convenience, that j values the loss of the tournament by πj, and de winnings by πj + Δπj. Furthermore, assume that the variation ε is completely caused by the participant himself. The individual or circle j can influence that variation, for instance by means of training, coordination or medication. In other words, j is able to choose his own cumulative distribution function Fjj). Finally, assume that e=0 holds. This implies that during the tournament the effective effort ηj depends completely on coincidence and therefore the result of each circle is completely determined by the form of Fjj). One has η=ε. In such a situation it is impossible to derive a best-reaction function.

Let cj(ε) be the symbol for the costs due to the effort ε. Let pjj) be the probability, that the circle j wins the tournament. It is logical that ∂pj/∂εj > 0. The winner j has ηjk for all k≠j, and therefore also εjk. By definition, pj is determined by the form of all Fkk), with k=1, ..., N. For, the distribution functions fix the expected degree of effort for each circle k. Now the utility of the tournament for the participating circle j is given by

(1)     ujj) = πj + pjj) × Δπj − cjj)

The circle j finds its optimal variation from the condition ∂uj/∂εj = 0. That is to say, Δπj × ∂pj/∂εj = ∂cj/∂εj. The present model simply assumes cj = εj, and then one has ∂pj/∂εj = 1/Δπj. Integration yields as the solution pjj) = εj / Δπj + θj, where θj is a yet to be determined integration constant. The value of θj must satisfy the boundary conditions in the domain of allowed εj values. Since pj can not be negative, not even in εj=0, the same holds for θj. Therefore it makes no sense for the circle j to increase εj above Δπj. For such εj values, pj can not be increased further (pj≤1), whereas the costs cj continue to rise with εj. Especially the circle k with the smallest Δπk suffers from the demand εk ≤ Δπk, because a small εk gives little chance to win the tournament. This circle will try to maximize its upper boundary of εk and chooses θk=0. Note, that in the optimum all circles have uj = πj × (1+θj) (substitute pj in the formula 1).

First consider the case of a tournament with two participants (N=2 and j=1, 2). Let the circle j=1 be the one, that attaches most value to winning. That is to say, one has Δπ1 > Δπ2. The cirle j=2 will not increase ε2 above Δπ2, and then the circle 1 wins by raising ε1 infinitesimally above Δπ2. Therefore one must have F2(Δπ2) = 1 and approximately F1(Δπ2) = 1. Now it turns out that it is possible to determine the optimal distribution functions of the two circles. Namely, in the competition one has for the probabilities of winning that p11) = F21) and p22) = F12), because they correspond to respectively ε12 and ε21. Apply these relations to the pj in the optima of both circles. In ε1 = ε2 = Δπ2 this can be rewritten as Δπ2/Δπ11 = 1 and evidently θ2=0. Thus one finds

(2a)     F11) = p2(ε ≤ ε1) = ε1/Δπ2          for ε1 in [0, Δπ2]
(2b)     F22) = p1(ε ≤ ε2) = 1 − Δπ2/Δπ1 + ε2/Δπ1          for ε2 in [0, Δπ2]

Graph of two distribution functions
Figure 1: Distribution functions F1 and F2

The optimization dictates the form of both Fj. Both functions are drawn in the figure 1. Now the Fj are known, and the expected values of various variables can be calculated. For instance, the expected effort is Eεj = ∫0Δπ2 ε × (∂Fj/∂ε) dε (with E of expected). This allows one to simply calculate Eε1 = Δπ2/2 and Eε2 = Δπ2² / (2×Δπ1). The circle 2 will usually make the smallest effort, because it values the premium less, so that the costs soon become insurmountable. As long as Δπ1 is much larger than Δπ2, the paid premium or rent will amply exceed the totally made expected costs Ec(ε). However, when one would (approximately) have Δπ1=Δπ2, then one finds Eε1 = Eε2 = Δπ/2. In other words, the whole premium or rent is spent on paying the costs of the made efforts. Therefore the loser "pays" half of the premium of the winner.

Interesting is yet the situation, where a third circle wants to enter the tournament, with Δπ1 > Δπ2 > Δπ3. The probability that the cirle 3 wins the tournament is p33) = F13) × F23), because then one has ε31 and ε32. Now suppose that the two already present participants do not change their behaviour. Then the application of the formulas 1 and 2a-b shows that the utility u33) of the cirle 3 is the largest, when it does not make an effort ε3 3. This actually means, that the circle 3 will not participate in the tournament. In general, such a tournament is restricted to the two participants with the largest benefits Δπj due to the premium, and they behave as if the other possible participants do not exist4.

Finally, it is useful to again consider the tournament, that is described in the previous column. Now assume, that the spread ε is caused by the participants themselves, and not by the initiator of the tournament. The cumulative distribution function of ε is fixed in advance, so that the participating circles can not optimize it. In that model the circles determine their optimum by making a suitable choice for their effort ej. In this manner a best-reaction curve is constructed, which has the consequence that merely a single equilibrium (e1, e2) is possible. Nonetheless, the outcomes (η1, η2) do have some spread, due to the uncertainty in ε. The winner remains unknown in advance. The premium Δπ is valued equally by both participants. For a cost function c(e) = β×e² one finds an equilibrated total expected effort of Δπ/β. Apparently for the case of β=1 the premium is also here completely spent on the made costs.

Winning the tournament by means of rent seeking

In the previous column about the tournament it has been remarked, that it is a form of incentive, which appeals to the sense of competition, and therefore can cause conflicts, hostilities and sabotage within the system. The participating circles are tempted to influence the judgement of the "arbiter" by means of a lobby, propaganda and other social pressures. In the present paragraph this phenomenon is elaborated for a model, which is applied in the description of the policy of promotions in organizations5. A peculiarity of this model is that the N participating circles compete for L equal premiums Δπ (with obviously L<N; when L=1, then one has the usual tournament). The organizer awards this premium to everybody, who makes an effective effort η = e + ε on top of a previously announced threshold value d. Let again Fj be the cumulative distribution function of εj, then one has by definition p(ej + εj < d) = Fj(d − ej).

In analogy with the formula 1 one finds for the expected utility of j 6

(3)     Euj(ej) = π + (1 − Fj(d − ej)) × Δπ − cj(ej)

For the sake of convenience let c(e) = β×e². The circle j maximizes its utility by the condition Δπ × fj(d − ej) = 2×β × ej. Here fj is the density function, which corresponds to Fj. The solution of the condition is the optimal effort eo,j(Δπ, d, βj). It depends on the form of the distribution function, whether an optimum actually exists. When it is the normal distribution N(0, σ²), with mean μ=0 and variance σ², then there certainly is a solution. And then, for high premiums Δπ, the effort eo,j will significantly exceed d 7.

Since here the effect of rent seeking in the tournament is studied, the behaviour of the organizer ("arbiter") must also be modelled. The leader can control eo,j by appropriately choosing Δπ and d. He must first ascertain, that Euj(eo,j) is larger than the reservation utility Uj of the circle, because in this way the alternatives of the circle are exceeded, so that it will certainly participate in the tournament. For the sake of convenience let U=0. Then the condition for participation is Euj(eo,j) = 0 (larger is evidently allowed!). The organizer expects a profit ψ from the circle j with a size of8

(4)     Eψ = eo,j − (π + Δπ × (1 − Fj(d − eo,j)))

Insertion of the participation condition in the formula 4 leads to Eψ = eo,j − βj×eo,j². Apparently the organizer makes his profit maximal by ascertaining that eo,j = 1/(2×βj). Combine this relation with the optimization condition of the circle j itself, then the result is Δπ × fj(d − eo,j) = 1. Thus eo,j is expressed in terms of Δπ and d. The participation condition yields a second relation for eo,j(Δπ, d). Thus the organizer can calculate his optimal Δπ and d, at least with regard to the circle j. This completes the contract of the tournament, when all circles are equal. When the circles are mutually different, then the organizer will have to take this into account in the choice of his Δπ and d 9.

This model of the tournament is interesting, because the organizer becomes relevant. The participating circles can try to win the tournament by targeting the organizer with a lobby, instead of making the effective effort ηj. It is known from the theory of rent seeking, that the lobby consists of mobilizing the power γj of j. Thanks to the lobby the arbiter is willing to interpret ej + εj + γj as the effective effort ηj. In other words, the arbiter is willing to somewhat exaggerate the true effort of the circle j. Naturally the lobby is also a burden for the circle. Let the costs be kjj) = κj×γj². Due to this rent seeking the formula 3 changes into

(5)     Euj(ej, γj) = π + (1 − Fj(d − ej − γj)) × Δπ − cj(ej) − kjj)

Now the circle must not only maximize its utility for ej, but also for γj. This yields two conditions, namely Δπ × fj(d − ej − γj) = 2×βj × ej = 2×κj × γj. Apparently in the optimum ej and γj are simply coupled via γo,j = eo,j × βjj.

Next consider the captivated arbiter. His profit function remains identical to the formula 4, but now with the distribution function Fj(d − eo,j − γo,j), that is to say, with Fj(d − eo,j × (1 + βjj)). In the same manner as before one finds Eψ = eo,j − cj(eo,j) − kjo,j) = eo,j − eo,j² × βj × (1 +βjj). Apparently the organizer and arbiter maximizes his profit by ascertaining that eo,j = ½ / (βj × (1 + βjj)) and γo,j = ½ / (βj + κj). The rent seeking has the consequence, that the effort eo,j is smaller than in the case without rent seeking (namely ½/βj). And now γj is evidently larger than 0. The rent seeking has hurt the productivity of the tournament. In the same manner as before the arbiter will choose his Δπ and d in such a way, that the new optimum eo,j is realized, and therefore γo,j as well. The reader sees how in this model the tournament and the rent seeking seamlessly merge.

In conclusion, it makes sense to compare this model with the two previous tournament models. In the present model the participating circles fight the threshold d, which is put up by the organizer of the tournament. Thus the circles are merely indirectly each others competitors. It may be hoped, that thus the mutual hostility is tempered somewhat. It seems, as though for L=1 and N=2 the tournament returns in its familiar form. Then it is expected that there is a winner and a loser. But also in this situation Δπ and d remain the actual control variables for the organizer. Due to the statistical uncertainty ε one could have two winners or two losers.

A sociological theory of conflict

The previous column about theories of power has clearly shown, that rent seeking assumes a social conflict. An interest group believes, that it is underpaid by the existing order. It begins a struggle in order to realize a distribution, which is more just in her eyes. The present column has shown, that the tournament is closely related to attempts of rent seeking. Since rent seeking implies a redistribution, it is immediately clear, that the interest group is dissatisfied with the status quo. This all raises the question what social conditions are at the origin of this discontent.

Sam de Wolff, the namegiver of the Gazette, shows his deep insight in this respect. Namely, he concludes on the basis of statistical data, that the interest groups emerge especially in times of economic prosperity10. The increasing richess incites the various social circles to mobilize their power in an optimal manner. The collective labour conflicts abound precisely during the economic hausse11. In the other hand, in times of depression and economic stagnation there is disorganization, distrust and chaos, which create a revolutionary atmosphere. There is much support for a total destruction of the ruling order. In fact here De Wolff enters the field of sociology and social psychology.

Graph of reality and expectation
Figure 2: Reality and expectation

More recently, another icon of the Gazette, the sociologist J.S. Coleman, has also made an interesting theoretical and empirical analysis of social discontent12. His approach is purely sociological. Just like De Wolff, Coleman concludes, that the social conflicts emerge mainy in times of a relative economic prosperity. However, he presents his analysis as a revolution theory, and tests it with among others the English Revolutions of 1642 and 1688 and the French Revolution of 1789. Nonetheless, your columnist feels justified to also apply the model to peaceful reforms. Incidentally, Coleman himself does this, via applications to the unrest by the New Left in 1968, the Iranian change of power in 1979, and the riots in South-Korea in the eighties of the last century. He calls this revolts, but the expression social action is equally to the point.

The core of the theory of Coleman is shown in the figure 2. Originally the society is in a stable state. But then a period of economic growth or increasing political freedom starts. In this dynamic situation the various social groups and circles have expectations of a personal progress. Some groups will be disappointed by the actual development, or in other words, a gap emerges between their expectations and reality. See the figure 2. The disappointed groups form an interest organization, which propagates a redistribution of income or rights in their favour. Here the rent seeking behaviour can be observed. Coleman calls this analysis a frustration theory of revolts13.

Coleman sums up several causes, which can lead to the formation of a gap:

The survey gives at least an impression of the causes, which can lead to discontent. It is striking that in all cases the personal situation is tested with a reference point, in the personal environment or in the future14. Unfortunately the frustration theory does not describe how the revolt emerges. For that purpose, Coleman introduces the power theory. According to this theory revolts are simply caused by shifting power relations. The new powerful groups form an interest organization, which challenges the existing order. This model has a striking resemblance with the theory of rent seeking. The frustration is merely the lever, which incites to establish the organization. Besides, only a fraction of the interested actors will join the organization and become active. Coleman makes an extensive analysis of the personal motives to become active. Due to the costs k(γ) free riding is attractive.

Coleman believes that utopian ideologies, such as protestantism or marxism, give an extra force to the interest organization. They are stated with a claim of the absolute truth, and therefore contribute to the cohesion of the organization. In a close circle the membership obtains its own psychical value, irrespective of the professed goals. The members become devoted to their circle, and internalize some of its norms. Moreover, the utopia can be a source of new confidence, in situations where the ruling order loses its legitimacy. This representation of reality must naturally not be taken too literally. For, it is precisely the social pluralism, which creates the conflicting interests, and therefore generates interest groups. And often the revolt is pushed ahead by a temporary coalition of interest groups15.

The analysis of Coleman adds value to the models of rent seeking, because they place these in a sociological context. Coleman also shows, that the rent σ and the premiums Δπ can have a significant immaterial component. Those who want, can interpret this as the influence of value rationality. A model of power must take this into account. The models of rent seeking and of the tournament are capable of doing this, but only on a high level of abstraction. For, psychical benefits are difficult to quantity and make measurable.

Immaterial rent and premiums

Although the mathematical models in this column and its predecessors are formulated in general terms, yet it is usually assumed implicitly, that they relate to material interests. The present column is an attempt to make the importance of ideological factors visible. Thus protestantism predicts the arrival of the Kingdom of God, and similarly marxism refers to socialism as the highest form of society. The utopian ideology predicts the emergence of the new man. In this respect marxism is so similar to christianity, that Marx has probably used it as a prototype, which he has converted to his own model of the ideal state. Forms of rent seeking and the tournament can be found in both protestantism and marxism, as well as in the Leninist variant of it.

The economy of honour

The mainstream of protestantism has always strived for the aristo-democracy. See for instance the ideology of the CHU. However, protestantism itself is so diverse, that it is difficult to present its view on rent seeking and the tournament in a coherent and convincing model16. In any case, protestantism in general stresses the personal responsibility, that is to say, individual morals which are insensitive to materialism. This ethical ideal opposes the mass man of modernism. It is also called personalism. The same ideal is propagated by the sociologist Dick Pels, among others in his book De economie van de eer (in short Ee)17. The present paragraph summarizes the ideas in Ee.

Photo of GDR flag
Figure 3: GDR flag

Pels wants to defend the social meritocracy in De economie van de eer (p.10 in Ee). He rejects the material tournament as a method to stimulate the workers. Large differences in income lead to unequal chances for personal unfolding, and that is unfair and hurts society (p.28). Moreover, the large incomes are often obtained by means of power and patronage, so that they are simply a rent (44). The rent is not accompanied by extra efforts, which is among others proved by the rewards for failure (44, 71)18. For the same reason Pels opposes the celebrity culture, where personalities are made famous in an artificial manner (p.78 and further). Fame, which is constructed in commercial media campaigns, is not the same as public honour. Richess and fame must be decoupled (96). Here the protestant motive of servitude can be recognized.

On the other hand the social competition is indispensable for encouraging innovation, quality and creativity (37). Pels believes, that competition addresses the personal vanity and ambition, which are powerful motivators (98). Science, politics and arts only flourish in an atmosphere of competition (102). The personalism requires individuals, who esteem their authenticity and sense of duty more than collective approval (117)19. Pels wants a rule by "the best", where money is irrelevant (122). He tries to find the solution in the distribution of immaterial rents and premiums, such as distinctions and homages (38). Honour is the bridge between the personal and general interest. The performances are valued in an open democratical discussion (39). Here the reader recognizes the tournament, which appeals to feeling of honour.

Besides, the neutral organizations, such as the media, form a countervailing power against the lobby of the old boys networks. Naming and shaming in the media and the public debate discourage perverse rents, because they make its acquisition more costly (60). In other words, the activity of praising and condemning must be organized by the civil society (108). This takes on the role of "arbiter" in the tournament itself. The reward must be determined by the moral-political judgement, which weighs values and utilities, which define the "good life" (130).

According to Pels the social character of the meritocracy is guaranteed by the radical equality of chances (153). He want to equilibrate competition and cooperation by encouraging the former in the elite and the latter in the common people (156). Routine-like activities such as care, education and maintenance require different morals than excellent performances such as innovation and creativity. The elite prospers in the tournament, which is characterized by differentiation and selection (160). Precisely for this reason, Pels propagates the aristo-democracy. For, the economy of honour requires, that the value of excellent people must be acknowledged (158). This can result in differentiations in higher education, with centres of excellence (161). The order is determined by peer, expert and public review (168). However, the list must not lead to large differences in income.

The question rises, whether the model of Pels is compatible with the human nature. Since the model differs from the present order, or at least significantly wants to shift the priorities, the danger is that people become alienated in his system. One knows what one has, but not what one gets! In this respect it is naturally an ominous sign, that the reward by means of homages does not develop spontaneously in the present system! In any case your columnist doubts that he would feel comfortable in the presented society model of Pels20. Now it is interesting, that a similar system of immaterial rewards has been applied extensively in the former Leninist states of Eastern Europe. The ideology of Leninism is the theme of the remaining text.

Tournaments in Leninism

The Leninist planned economy differs fundamentally from capitalism. Those who want to inform themselves, can consult the series of columns in the Gazette. The present text is restricted to the wage structure and the accompanying Leninist morals21. According to Leninism, the social relations are determined by labour, because it is the productive and creative force, which forms all what is. Therefore it uses the morals of labour. Leninism rejects the political pluralism, because the interests of the workers are satisfactorily served by the Leninist party (the SED in the former GDR). Only one ideology can be objectively right22. Thanks to the shared morals, egoism is prevented. The democracy is restricted to labour, and is simply "helping to plan".

Namely, the production is embedded in the planned economy. Therefore the central planning agency depends on the stream of information from the enterprises. The plan, which controls all efforts, is formulated in an interaction between the national top and the basis. In this manner the plan reconciles all interests. The realization of the plan is stimulated via material and moral incentives23. In Leninism all production factors are owned by the state, which itself is subjected to the Leninist party. Thanks to this construction each worker is also an owner. The power of the construction is, that it realizes the reconciliation of the personal and general interest. The participation of the worker in his own enterprise is organized by the Leninist trade union movement (the FDGB in the former GDR). The trade union movement is indeed an important factor in the democracy.

Each individual can develop into a complete personality, thanks to his combined role as worker and owner. Thus Leninism propagates individual morals of disciplin, responsibility, accountability, plan obligation, creativity, and (according to some) self-sacrifice. The mass initiative is consciously stimulated. The Leninists acknowledge, that creativity and accountability require a mutual orientation of competition. Contrary to Pels, they have a universal image of man, where the spirit of competition is promoted for all, irrespective of their social position. The competition is institutionalized during the sixties of the last century, when a transition is made from extensive to intensive growth. Competition furthers the productivity, the effectiveness and confronts the workers with their plan targets. The plan dictates production targets, and gives normatives.

The plan targets are presented as a personal challenge. The trade union movement itself encourages competition, and asks its cadres to promote it. For instance, it organizes elections for internal worker's controllers in the enterprises, who inspect the product quality and price. Another group of cadres, the Neuererbewegung, propagates an innovative attitude among the workers. And the Rationalisatoren further efficiency in the workshop. The workers are even encouraged to maintain their own bookkeeping with regard to their use of materials! Thanks to the bookkeeping they can test their performance with the plan normatives (for the use of material and the like)24. One could say, that the plan introduces a threshold d, which must be exceeded. The tournament for premiums becomes the common way of acting25.

Poto of Lenin bust
Figure 4: V.I. Ulianov
     (alias Lenin)

An interesting hallmark of Leninism is the propagation of competition for both the individual and the collective. It is common that the workers are a member of a workers collective or brigade. Such collectives also get a plan target d. Therefore the collectives will mutually compete. Thus it becomes possible to grant collective premiums. At the same time, within such a workers collective there is an atmosphere of cooperation. Moreover, several Leninist propagandists of the party or trade union are included in each collective, who must contribute to the Leninist formation of the workers. The workers must learn to think economically. When necessary, moral pressure can be exerted within the collective. It may now be clear to the reader, that Leninism (just like for instance christianity) believes in a radical pliability of the human nature26.

In principle Leninism maintains the norm of a material reward for efforts. But the input of the Neuerer and Rationalisatoren has a rather organizational or qualitative character. Then the merits can not be measured by an increased production. Therefore it is difficult to determine the fair height of bonuses and premiums. The Leninists try to resolve this problem by composing such premiums for special merits of a material (monetary) and ideal (homage) part. It is even believed, that the performance motive and the public recognition are more stimulating than the income motive27. Therefore in Leninism a large collection of ideal premiums has been developed.

For instance, material premiums must preferably be paid out in public28. Sometimes a title, charter or medal is connected to the gain, such as "deserving activist", "Hero of labour" or "Brigade of socialist labour"29. The concerned person feels recognized by this. An important goal of such ceremonies (and incidentally of tournaments in general!) is the transfer of best practices to less performing collectives. Sometimes the workers and collectives bind themselves in public to reach a certain target30. Colleagues are asked to decide about the granting of premiums, as "arbiters" (peer review)31. An enterprise can agree to make the granting of holidays dependent on the performance. The material premiums are paid from the entrepreneurial profit, which gives the workers an additional incentive to perform. A yearly share in the profit is common. The goal is always to make the workers feel responsible.

Perhaps the reader believes, that a system based on homage is somewhat childish. However, the approach is based on solid insights from social psychology:

This list could easily be extended with other scientific support for the used incentives.

On paper the Leninist system looks promising. Nonetheless, it must be concluded, that in the end Leninism was abolished from within the system. Despite the many attempts of the Leninist elite and its state apparatus it was insufficiently able to connect with human nature. Its anthropology is unsound. Let this be a warning for idealists: it is true that the tournament can be influenced by means of immaterial incentives (value rationality), but their effect remains uncertain.

  1. See for a discussion of the repeated tournament paragraph 4.1.2 in Labor economics (2004, The MIT Press) by P. Cahuc and A. Zylberberg. (back)
  2. See p.339-342 in Political economy in macroeconomics (2000, Princeton paperbacks) by A. Drazen. The previous column contains several references to this model, albeit without explanation. (back)
  3. Namely, that gives the result u33) = π3 + (ε3/Δπ2) × (1 − Δπ2/Δπ1 + ε3/Δπ1) × Δπ3 − ε3 = π3 + (1 − Δπ2/Δπ1 − Δπ2/Δπ3 + ε3/Δπ1) × ε3 × Δπ3/Δπ2. Now one has Δπ2/Δπ3 > 1 and Δπ2/Δπ1 > Δπ3/Δπ1 > ε33, so that the term between brackets will be negative. Therefore ε3>0 must always decrease the utility u3, which was to be proved. Thus the circle 3 chooses u3(0) = π3. Note that the circle 2 also has in its optimum u2= π2, but for all values of ε2. Therefore the circle 2 can yet make an effort and participate in the tournament. (back)
  4. This is a fascinating conclusion, and the question rises whether such behaviour can indeed be observed in reality. Here the abstract character of the model is an obstacle. It is notably difficult to estimate, what is the subjective valuation of the premium for the various participants. Imagine: does this model perhaps explain why in the Netherlands the trade union federation RKWV has been founded so much later than the NVV and the CNV? On p.342 in Political economy in macroeconomics several nuances are already made with regard to the truthfulness of the model. For instance, in advance the height of the premiums can be uncertain. In such a situation the behaviour of the possible participants under risk (aversion, seeking, neutrality) becomes relevant. This is called an imperfect discrimination by the organizer of the tournament. (back)
  5. See paragraph 4.1 in Labor economics. Cahuc and Zylberberg apply their model to the explanation of the structure of wages in a hierarchy. The wage scales are not based on the productivity, but on the relative performances of the workers. However, your columnist addresses with the tournament also (especially) the more general situation of competition. (back)
  6. In the simplest interpretation of the tournament πj and Δπj are money sums. On the other hand, Euj(ej) is unmistakably a utility. The consequence of the formula 3 is, that the expected (weighed with the probabilities) money sums are proportional to their utility. This will only be the case, when the circle j is neutral with regard to risk. Incidentally, your columnist prefers to allow for the possibility, that πj and Δπj represent quantities of utility, such as in the preceding example of the tournament for rent. In that case their values are not objective, but they are characteristic for the preferences of j. The wider interpretation of πj and Δπj as a subjective utility makes many social transactions accessible for the model. For instance, your columnist can imagine, that the transaction consists of the entrance of persons in a private club or association. The d is the ballot or ragging by the club. Romantics can think of the behaviour of persons who want to marry, with L=1. Note that here actually a tit-for-tat rule is needed in order to make the various categories in the threshold d concrete. The model of Foa and Foa states, that there is no free exchange between categories such as information, status, love, services, goods, and money. (back)
  7. Your columnist has checked this by drawing Δπ × exp(-(d − ej)² / (2×π × σ²)) and 2×β × ej in the same figure. The π in the exponent is the number 3.1415... . Note that not all types of distribution functions Fj have per se an optimum eo,j. For instance the uniform distribution limits the range of ε to such an extent, that in the case of a low Δπ the participant will perhaps never exceed a high threshold d, not even for extreme values of ε. (back)
  8. Here the model interprets ψ as a money sum, as well as π and Δπ. In principle one could assume, that all these variables represent a utility instead of money. However, that implies that the utility of the organizer is calculated from the utility of the circle j. That is a dubious method, because utility is subjective. Perhaps this can sometimes yet be justified, for instance when the organizer and the circles together form a homogenous group. (back)
  9. On p.336 in Labor economics it is remarked, that L/N = 1 − F(d − eo) holds. Your columnist interprets this in such a manner, that here all N circles have (almost) the same cumulative distribution function. (back)
  10. See p.237-242 in Het Economisch Getij, bijdrage tot de verklaring van het conjunctuurverschijnsel (1929, J. Emmering) by S. de Wolff. Incidentally, he again refers to the German socialist Karl Kautsky (see p.240). According to De Wolff the social influence of the economic situation is visible both in the normal conjuncture and in the long cycle movement (economic tide, ebb and flood). (back)
  11. Your columnist must definitely study Stakingen in Nederland (2000, Stichting beheer IISG) by S. van der Velden. Van der Velden analyzes among others the fluctuations of the strike activities as a function of time. Your columnist once bought this thesis in the Utrecht bookshop De rooie rat, which had an enormous pile, marked down, waiting for potential buyers. Unfortunately De rooie rat went bankrupt several years ago. (back)
  12. See hoofdstuk 18 in Foundations of social theory (1994, Harvard University Press) by J.S. Coleman. In this chapter much attention is paid to the riots at the American universities in 1968, under the influence of the New Left. Your columnist suspects, that these riots have made a deep and lasting impression on the then still young Coleman. Or is this a psychic projection? An impression of the riots is given in the films Getting straight, Strawberry statement, and Revolutions per minute (available as a Spanish DVD). Make no illusions: they are emphatic but condemning. (back)
  13. According to the social psychology, frustration creates a favourable atmosphere for aggressive actions. See p.440 and further in Sozialpsychologie (2008, Spektrum Akademischer Verlag) by L. Werth and J. Mayer, and furthermore p.265 and further in Les concepts fondamentaux de la psychologie sociale (2015, Dunod) by G.-N. Fischer. (back)
  14. Loyal readers may note the similarity between these arguments and the theory of the decision and experienced expectations by the psychologist D. Kahneman, or the theory of the preference drift by the economist B.M.S. van Praag. (back)
  15. See for these nuances and comments p.490-491 and p.499 in Foundations of social theory. The revolt of the New Left led to the formation of the so-called rainbow coalition. It is united by the shared rejection of the existing order, but otherwise has little in common. (back)
  16. In principle the book Sociale economische ordening (1947, Van Loghum Slaterus Uitgeversmaatschappij N.V.) by Ed. van Cleeff is a good candidte for studying the protestant rent seeking and tournament. However, Van Cleeff was never very popular, and nowadays his ideas one live in the withering circle of the Woodbrookers. A renewed discussion of his ideas as a bit too much honour. (back)
  17. See De economie van de eer (2007, Ambo) by D. Pels. Your columnist read it nine years ago. Pels is active in the political party Groen Links, which emerged from the merger of the tiny christian (PPR, EVP) and marxist (CPN, PSP) parties. There he was the director of the scientific bureau for three years. But he is mainly known for founding in 2004 the Waterland Stichting, a left-wing thinktank. (back)
  18. On p.128 in De economie van de eer Pels cites the classical liberal F. von Hayek, who denies that rewards on the market are related to merit. The market price is formed by the incomprehensible interaction between demand and supply. The individual incomes are not determined by talents and efforts. Thus Pels and Von Hayek conform to the model of rent seeking. On p.136 Pels mentions family care, voluntary activities, and domestic work as meritable activities, which do not have a monetary price. (back)
  19. Here Pels clashes with the ethics of protestantism, which rejects pride, and preaches the humble diffidence and respect. Respect must mainly be paid to the Church. Incidentally, note that Pels with his plea for homages yet supposes the presence of respect. And the christian does have the obligation to follow his calling. So perhaps the disagreement is less than it seems. (back)
  20. Your columnist especially worries about the distinction between elite and popular morals. It is naturally without doubt, that the top disposes of better human skills than the basis, at least on average, and therefore can take somewhat more risks. But the human nature is equal for all. At present the top is mutually mainly so competitive, because it is covered against risks by the large incomes and wealth. When these would be removed, then this will weaken the competition. Incidentally, Pels is more moderate in the execution than this summary may suggest. He wants to allow a spread of a factor of 10 in the income distribution (p.174). Only the wages above this scale, namely above €160.000, must be taxed progressively (176). A weak point of the model is the assumption, that the peer and expert reviews at the top truly lead to objective evaluations. The hallmark of rent seeking is, that actors are led by their personal interest. Besides, the obligation to pay homage may easily cause irritation. The public debates about merits can become exhausting, and irritate anybody, who is not a moral purist. (back)
  21. Consulted are especially Plan, Interessen und Aktivität der Werktätigen (1976, Verlag Die Wirtschaft) by R.A. Belousov, and Soziologie der Arbeit (1988, Verlag Die Wirtschaft) by R. Stollberg, both excellent books from a Leninist origin. Both books do not shirk from expressing criticism, and also give examples of system failures. Besides, information is taken from Moral und Gesellschaft (1968, Dietz Verlag) by B. Bittighöfer and J. Schmollack, Ökonomische Gesetze im gesellschaftlichen System des Sozialismus (1969, Dietz Verlag) by G. Ebert, G. Koch, F. Matho and H. Milke, Sozialistische Betriebswirtschaft (1973, Verlag Die Wirtschaft), edited by D. Graichen, Politische Ökonomie des Sozialismus und ihre Anwendung in der DDR (1969, Dietz Verlag), edited by G. Mittag, and Geschichte des FDGB (1982, Verlag Tribune), edited by H. Deutschland. All these books have been acquired over a period of ten years in the Berlin second-hand bookshop Helle Panke. (back)
  22. The rejection of pluralism is explicitly mentioned on p.364 in Ökonomische Gesetze im gesellschaftlichen System des Sozialismus. All groups and circles are reconciled by the plan (p.365). The same standpoint is mentioned on p.194 and further in Politische Ökonomie des Sozialismus und ihre Anwendung in der DDR, albeit in more Leninist-doctrinary terms: "Die marxistisch-Leninistische Partei gibt (...) mit ihrer wissenschaftlich begründeten Voraussicht allen sozialen Klassen und Schichten Klarheit über Ziel und Weg des sozialistischen Aufbaus". This book describes the competition on p.803 and further. (back)
  23. On p.152 in Plan, Interessen und Aktivität der Werktätigen it is concluded that it is difficult to avoid perverse incentives. For instance, the enterprises and the workers benefit from propagating low plan targets (p.171). The system has indeed collapsed under the human peculiarities, such as the principal-agent problem. (back)
  24. Innovation and rationalization are sometimes combined in the term intensification. (back)
  25. On p.159 in Plan, Interessen und Aktivität der Werktätigen Belousov wants to expand the part of the premiums in the income. On p.172 and 177 he notices, that sometimes the reductions in production are caused by external factors, for instance when suppliers fail. The "arbiter" must take this into account in the determination of the just outcome. (back)
  26. The TV series Hochhaus Geschichten (available on DVD) describes the life and the human relations in a construction brigade. The same theme is addressed in the film Spur der Steine. However, the brigade leader in this film (played by Manfred Krug) is so rebellious against the system, that the film was banned by the censure. (back)
  27. See p.118 in Soziologie der Arbeit. The problem of measuring efforts is mentioned on p.296 in Sozialistische Betriebswirtschaft. It concerns the activities of Neuerer and Rationalisatoren, but also the maintenance and goods made to measure. (back)
  28. On p.200 in Moral und Gesellschaft the authors are indignant about a case, where the premium was given during the lunch time, or even "in private". Moreover, in this case the colleagues did not have a say about the outcome of the "tournament". The furious authors mention the unfortunate manager by name! This is naming and shaming in optima forma. (back)
  29. See p.200 in Moral und Gesellschaft and p.492 and 672 in Geschichte des FDGB. This latter book sketches many initiatives by the basis, which aim at competition. Illustrative on p.494 is a letter from one workers collective to another: "Eure Normen sind nicht ehrlich! Unserer Meinung nach müßtet Ihr für euer Geld mehr leisten können". Look at the public debate of Pels in practice! The film Czlowiek z marmuru (Man of marble) by the director A. Wajda gives a striking example of a Polish bricklayer, who is sent on tour by the trade union as a hero of labour. (back)
  30. See p.642 and 646 in Geschichte des FDGB. On p.678 it is mentioned, that engineers oblige themselves to complete their research more quickly. The film Dewjat dnei odnowo goda (Neun Tage eines Jahres) describes how a nuclear physicist exposes himself to a lethal dose of radiation in order to advance his research. His deed is presented as dramatic but respectable. (back)
  31. See p.200 in Moral und Gesellschaft. (back)
  32. See p.499 in Sozialpsychologie or p.272 and further in Group dynamics (1990, Brooks/Cole publishing company) by D.R. Forsyth. On p.442 in Sozialpsychologie it is noticed, that some subgroups (say, dissidents) will value the public condemnation as a reward. (back)
  33. See chapter 12 in Sozialpsychologie. (back)
  34. See p.323 in Sozialpsychologie or p.367 in Group dynamics. (back)