PRANEETH UDATHU (U6)
Rational economics has failed to explain a lot about what is happening around us, from the aftermath of the 2008 financial crisis to consumers buying mountains of toilet rolls during the COVID-19 pandemic. Traditional classical economics does not take into account the irrationality of human decisions as well as how humans are social creatures. This mix of psychology, biology and many other subjects have led economists to believe we are not fully rational.
This rationality can be seen in many areas, but one that firms may be particularly interested in is how humans have a massive differentiation between Social Norms and Market Norms. Social Norms refer to a standard behaviour shared by members of a social group. Often, these are not rigid rules enforced by law but rather societal expectations that are commonplace. Meanwhile, the Market Norms refer to actions that imply comparable benefits and include a payment. These include wages, contracts, prices and interest – things that are seen everywhere in the modern economy.
An interesting case-study of mixing social and market norms can be seen at the Sunnyside Daycare. Researchers in Israel implemented a fine every time a child was picked up late as there was a problem with parents picking up their kids late causing workers to work late. While this sounds like a good strategy, it led to the opposite effect to what was intended – parents were prepared to pay the fine and come even later than previously. Even after the scheme was discontinued, parents kept picking their children up as late as with the fines in place. This shows how people behave differently in social or market norms. Parents without the fine may have felt guilty for breaking social agreements to be on time and so would want to arrive earlier but paying the fine works as a moral cleanser – due to the fine, parents who are prepared to pay feel no problem coming late.
So how does this relate to firms? Companies have been mixing social and market norms in ways seen above and this has led to terrible consequences. Firms who are fostering a sense of community between workers are switching market norms to social norms, meaning workers feel more comfortable cancelling family plans to work longer hours and hit deadlines. However, firms are not reciprocating the added work. Social norms mean that employees expect the firm to act in good faith and support them with healthcare, pensions, and other benefits. What we are seeing is firms enjoying high profits and paying shareholders more returns but paying employees as low wages as possible and giving very few benefits. This can be seen happening right now with Starbucks who have had profits of 33% over last year, and yet, have since proceeded to increase prices due to inflation. Meanwhile Starbucks have been fighting successful unions forming in 17 locations in the USA including in Manhattan. The recent unionisation pushes in many firms across the USA is due to the lack of healthcare and paid sick days and general working conditions, leading to worker suppression. If firms wanted to truly foster a sense of family in between workers in order to gain productivity, they have to start giving workers benefits – not just monetarily but give paid sick days and better working conditions - in order to attract workers but also to ensure that they remain productive and prepared to spend their time working for long hours. For firms, keeping workers satisfied is beneficial in the long term as it allows for long term profits as unions will demand higher wages; these non-monetary benefits as well as small wage increases can keep firms paying fairly low wages.
Social norms do work – a study in MIT where students had to drag and drop small boxes from one side of a computer screen to another found that students who were paid $2 did as well as those who were given nothing. Meanwhile, those who were paid 50 cents ended up doing more than 10% worse. Firms don’t need to offer extravagant wages to appeal to workers – a change in non-monetary benefits and a change in working culture from the firms will lead to the effect seen in the experiment; employees will work for longer hours and still be satisfied if firms can reciprocate with better non-monetary benefits. By simply ensuring that workers are happy, they can enjoy the benefits of social and market norms and ensure that the firms can make more profits and both firms and workers both benefit.