Campus News

Horst Albach, Baccalaureate Talk,
Friday, May 28, 1999 "On the Economics of Civil Disobedience, Loyalty, and Trust"

Story posted May 28, 1999

This is the last year of the second millennium. One thousand years ago, in 999, many people In the Christian World were sure that that would be the last year of the world, and at its end Judgment Day would be held by the Lord Almighty.

This year, many people hope that the third millennium will be a better and a more peaceful one than the second, and I do hope that you share with me in these hopes. Why else would we all be celebrating your graduation from Bowdoin?

When I came to Bowdoin in the fall of 1952, It had been just seven years since World War II had come to an end, and General Eisenhower, who had had command of the Allied Forces during the landing in Normandy an4 the final months of the war, was running for President and had barely escaped being drafted at the age of 13 to defend the army of Breslau which is now Vroclaw In Western Poland, and while being personally innocent, I had a hard time coping mentally with the atrocities and the harm that the Nazis had inflicted on the world, and had a hard time also because many people from other enemy countries held my generation responsible because we were Germans. I was the only German student on campus When I came to Bowdoin, I had two dreams for the future:

First: I wanted to help bring about German Reunification

Second: I wanted to prevent a united Germany from ever again becoming a nation that could wage war on her neighbors.

Today, these dreams seem to be fulfilled.

  • German unification became effective on October 3, 1990, and
  • Germany is fully integrated into the European Union with a Common European currency since the 1st of January of this year, and German armed forces are under NATO-command.
I would like to share with you some of my experiences on the way to fulfillment of those dreams. I would like also to show you that my year at Bowdoin had a considerable Influence on my attempts to contribute to the fulfillment of those dreams. In a nutshell, my experiences amount to two

1. You have to work in institutions that deserve your loyalty 2. You have to work with people whom you can trust.

What are the institutions that you should be loyal to?

And who are the people whom you can trust?

Let me look at the first lesson first. At Bowdoin I took a class on American literature given by Professor Herbert Brown. In that class I came across the writings of Henry David Thoreau. Exactly 150 years ago, In 1849, he wrote his famous essay "On the Duty of Civil Disobedience." Thoreau says: "All men recognize the right of revolution, that is the right to refuse allegiance to and to resist the government when its tyranny or inefficiency are great and unendurable". Thoreau, of course opposing a government that tolerated slavery, did not pay his poll tax, was sentenced to imprisonment and spent some time in the jail of Concord, Mass.

That men should have the right, and indeed the duty, to disobey not only a tyrannical, but also an inefficient government, was an Idea that has had tremendous impact on my thinking. When has the time come to renounce loyalty to the State and to start to disobey it? Clearly, the German experience shows that the Germans had missed that point. This is brought out very clearly in a book by Alexander Stahlberg. In the book he tells of a visit of Hitler to headquarters on the Russian front in 1943. A few days later. One of his friends, Henning von Tresckow, like Stahlberg in the opposition movement, asked him; "Did you have a chance to kill Hitler?" Stahlberg answered: More than one! Whereupon the friend asks the question: "Then why didn't you shoot the bastard?" And the author gives the answer which became the title of his book: "That damn duty to obey"!

Disobedience, if necessary, is not only a responsibility of the individual. It can be organized. Institutions that organize opposition are obviously more efficient than institutions that do not allow dissenting opinion or even disobedience. Federalism is such an efficient Institution. When, exactly fifty years ago, in 1949, West Germany was rebuilt as a state, the German politicians wanted to sat up a state again. The French Government, however, was of the opinion that a federal state would be a weaker state and insisted on Germany forming the Federal Republic of Germany. That has meant that resistance to the central government, if necessary, has been organized in the Second Chamber, and this has proved Thoreau, by the way rejected the view that one should treat civil disobedience in the framework of a cost benefit analysis. This is, of course, a challenge for an economist, and therefore I would like to discuss with you "the economics of disobedience, loyalty, and trust".

The economics of disobedience is the analysis of the relationship between the institution and the individual. When, after graduation, you enter a firm or sign a labor contract with any kind of institution, you promise to fulfill your duty under the contract, and the company promises to treat you fairly and pay you your salary. Disobedience would be a breach of contract. But if you feel that the company does not treat you fairly, you have three options: seek another employer, change the situation, or stay with that disobedience. This is, of course, an economic decision between alternatives, and you will weigh the trade between the three alternatives of exit, voice, and staying.

First result: The more alternatives on the labor market, the greater is likely to be the net benefit from exit, but there is a cost involved, the cost of search, and also, at least if the process is repeated, the cost of income lost due to toss of reputation as a loyal as well as determined employee.

Voicing criticism is a way to change the situation, but the probability of success depends on whether you are alone in your criticism or find supporters for it. Voicing criticism is not without cost; time lost for work, time spent in search of supporters, maybe reduced productivity not only because of unfair treatment by the firm, but because of the distraction from work caused by planning the course of events after raising criticism, and finally, time of the boss spent In dealing the criticism.

So we have a second result: Voice is less costly if the firm institutionalizes and even welcomes criticism. Firms with an institutionalized system of evaluating bosses and with co-determination reduce the cost of voice and make disobedience unnecessary. Firms which are faced with potential whistle blowing as a farm of legal voice will try to avoid whistle blowing by staying may take two forms: shirking or strategic disobedience.

If you know that your boss cannot observe your behavior, you may be tempted not to commit all your time and effort to the task as stipulated in the labor contract but to put in effort only up to the point where you are not fired for breach of contract. This is called "shirking" in modern economics and "minimum behavior" in the theory of bureaucracy. Minimum behavior is a very subtle form of disobedience.

Your boss will, of course, know from insight into human nature that this form of disobedience may have very detrimental consequences for an organization in a turbulent environment. He will therefore introduce costly control systems to prevent shirking. The company may, on the other hand, introduce a hiring and career system that checks for loyalty as much as for knowledge and skills, and the firm may offer to share with the, employee the savings if it does not need elaborate control systems. You will realize, that it is, therefore, good economics to be loyal to the company and to invest in the reputation of being a loyal employee or associate of the firm.

Thus, we have a third result: it pays to be loyal to the organization which you have chosen as long as you can be sure that your employer trusts you.

Let me give you a wonderful example of shirking as a form of disobedience that brings down a tyrannical and inefficient government.

In 1988 I was asked to serve on the Government Commission for the privatization of the German Railway-System. I was tempted to decline, because I was convinced this would be a mission impossible because it meant a change of the German Constitution. But then I thought of my classes with professor Edward Kirkland on the 19th century economic history of the United States and what he called the "railroad age". I accepted to serve on the Commission. November 1989, when we were just about ready to write our report to the government, the Wall in Berlin came down, and we were faced with having to make recommendations also on how to merge the East German state-owned railroad with the West German state-owned railroad and then to privatize the two. We analyzed and visited the German railroad and found it in horrible shape. The East German government had not spent money on maintaining the railroad tracks. Every tie was fixed to the track with only one instead of four spikes on each side. As a consequence, the maximum speed of the trains was only 25 miles per hour. When I asked one of the East German managing directors for the reasons of this physical bankruptcy, he told me the following true story: "My neighbor is a worker in one of the factories in the city. He rarely shows up for work. He raises rabbits instead. He fed them with bread that he bought at the local bakery. The price of the bread was very low because in a socialist society food prices are subsidized. When the rabbits were grown, he slaughtered them and sold the meat to the local butchery. He got a very high price for the meat. In socialism there are high incentives for producing food. The butcher then sold the rabbit meat at highly subsidized and, therefore, low price to my neighbor. In addition my neighbor made money for not working: The factory could not fire him because in socialism there is a full employment policy. My neighbor thus profited from four subsidies on bread, on the production of rabbit meat, on purchasing his rabbit meat from the butcher, and from the factory. Obviously, the man was exploiting institutions of a tyrannical government without breaking the rules. Since there were many opponents of that hated system that shirked one way or another, the socialist system in East Germany finally collapsed.

The second form of staying is strategic disobedience. This means you disobey the ruling strategy of your institution and take action on the basis of what you understand to be a more adequate strategy. A freed from student days once said to me when he was managing director of a banking outlet: "I am entitled to decide on loan applications up to an amount of 5 million Deutschmarks. If a customer asks for more. I have to get the approval of my CEO first. I do not obey that rule. I exceed my limit whenever a creditworthy customer asks me to do so. Otherwise I could not do business with competition being as it is. If the customer goes bankrupt, I will be fired but if the loans are repaid, I will become the CEO of my bank." He continued to break the rules, and he was fortunate enough to become the CEO of his bank.

Should you always follow his example? The answer is by no means obvious. 1f everybody in the firm does what he or she thinks is right strategically, the result will be chaos. Thoreau was, I think rightly, called a philosophical anarchist. So if you decide on the basis of what you think is right, and if you thereby disobey rules and regulations still in place in the institution, you have to be rather sure that eventually you find a majority that will back you after you have demonstrated that your strategy is successful.

Clearly, top management realizes that the cost of such disobedience is high for them. If the new strategy proves successful, the management will be discredited and hardly able to stay on if the outside directors of the company do their job well. Therefore, an efficient institution will set up a system of strategic management that maximizes the chances of voice and minimizes the risks of disobedience. It's and entrepreneurial system.

Our fourth result is: Join an organization or help build organizations that institutionalize strategic voice. These are institutions that justify your loyalty. They do not require you to be strategically disobedient.

Do we have such institutions? The answer is yes, if we hasten to add that it is our responsibility constantly to help make them better Institutions. Let me mention Just one; the university.

The freedom of thought has been institutionalized in the universities.

Opposition to established theories is the very essence of university life. Scientists according to Karl Popper set out to falsify hypotheses. They try to convince colleagues and gain a majority for their new theories or to follow Thomas S. Kuhn, for their new paradigms. This institution has survived the centuries because it has been open to opposition from within and to new ideas from without.

Just think of Bowdoin College. When I came here, Bowdoin was a small men's school with a very strong fraternity element. The statutes of some of the national fraternities on campus did not allow African Americans to be initiated. In these 46 years that have elapsed since then, the College has responded to criticism. It has gone co-educational, forced fraternities to go co-educational and, if necessary, local and has now banned them altogether.

Let me summarize my observations: The economics of disobedience, loyalty, and trust has a clear message to offer. Loyalty to efficient organizations is better than disobedience to inefficient institutions. It is our responsibility to help maintain efficient organizations, organizations which, to quote Thoreau one last time: "encourage its citizens to be on the alert to point out its faults and do better than it would have them". It is our responsibility to keep them open to opposition and to remain innovative by encouraging voice and criticism. This is the essence of loyalty towards institutions in a dynamic environment.

I hope that in your life you will think of Concord and Weimar simultaneously whenever you have to define your relationship to the Institution and to the people you work for.

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