Same Old

by on September 21, 2017 in Economics

Allow me to break my silence for a moment and comment on David Brook’s latest apology for the status quo. I realize others have already done so, but I feel compelled to add to the discussion.

First: by way of explanation for my absence. I have been busy elsewhere, and especially busy looking at the future of the workplace.

Second: it is because of this detour that I want to take a shot at Brooks.

Let’s recapitulate Brook’s argument. He takes a look at the last couple of years and extrapolates. He wants to debunk that argument that the American economy faces a crisis of distribution, and replace that problem with another: America has a productivity problem.

Why is this important?

Because has become a totem of both right and left sided populists that the economy is failing to generate opportunity, income, and security for the vast middle class. It has become commonplace for us to read about the decline and/or disappearance of that famous center of economic and social gravity. This is especially true in the aftermath of the Great Recession of 2008, and the subsequent glacial pace of recovery.

If it is true that the economy has been rigged in favor of a few — the much criticized 1% and big business — then populists of all stripes have a good case and the debate becomes one of how to divide the spoils of growth more equitably.

If, on the other hand, distribution is not the issue, but the problem is the deeper one of growth itself then the debate can be shifted by the likes of Brooks back onto their preferred territory.

Brooks goes to great lengths to describe our economic problem as being a lack of productivity growth. He tells us that the recent uptick of 1.1% is miserable in any decent historical context. And indeed it is. But to focus on recent years is to miss the larger and much more historically important point: the last four decades have seen a growing chasm open up between the pace of productivity growth and the pace of wage growth. A divergence has emerged that belies the traditional and orthodox view in economics that productivity growth inevitably filters down [or up?] into wage growth. As David Ruccio points out in his own critique of Brooks labor productivity has risen 76.1% since 1987, whereas wages have grown only 5.5%.

During this time the share of our national income going to wages has shrunk whilst the share going to capital returns has increased.

Of course these two trends are linked.

And this is my point:

The early 1980’s saw a sea change in corporate management technique. In particular various ideas that had been marginal throughout the post-war period suddenly emerged as central to modern management. Primary amongst these techniques was the idea of “shareholder value”. This is a doctrine based upon the same sandy foundation as mainstream economic theory, and it is no accident that the infamous Milton Friedman was a cheerleader for its adoption.

The main thrust of shareholder value is that a corporation must be managed to maximize returns to shareholders and that other goals are distractions.

This was, at the time, a revolutionary redirection of the purpose of management. Up to that point managers were regarded more as administration specialists and were presumed to take into account a wide range of targets for their efforts. They were not expected to narrow their focus so radically as to exclude all but shareholders from their concerns. Indeed the most successful books on management prior to 1980 scarcely mention shareholders at all. More to the point: very few, if any, companies have internal by-laws dictating that shareholder value is the aim of the business’s existence. Their is no legal injunction urging management on. It is all an ideological construction.

But, along with the radicalization of economics itself, the doctrine of shareholder value swept to victory in management suites across the country. It became necessary for management to pursue ever higher returns to capital even if this implied an obsession with short term investment and the sacrifice of a longer term perspective.

Inevitably business strategists trying to make a name for themselves developed an entire panoply of ideas that supported this quest for returns on capital. A key one being the notion of core competence, which simple though it sounds, led to a revolution in the workplace and whole litany of subsequent ills.

Managers compelled by the incessant urging of Wall Street to increase profits sued the idea of core competence to shed, first layers of middle management, second peripheral activities such as IT, and then to ship entire parts of their companies abroad in search of lower cost labor and thus higher returns on capital. So the 1990’s became a decade of downsizing, outsourcing, and offshoring, and we end up with sone of our largest companies in terms of sales being slivers of what their predecessors once were. Apple, as an example, tells us that “is responsible” for about 750,000 jobs, but only around 75,000 of those workers are employed directly on Apple’s books. The rest are scattered around the globe and are subject to work and wage conditions that Apple blithely ignores.

Along the way, also in order to bolster shareholder value, corporations did away with a whole slew of benefits, they altered their retirement plans from “defined benefits” to “defined contribution” and thus placed the burden of financial planning on the shoulders of their workers. They reduced or eliminated costly training programs and preferred, instead, to rely on workers taking on the responsibility to train themselves.

The list of corporate activities that were re-invented in the service of shareholder value is too long to do justice to here, but the malevolence of the consequences are easily seen in the divergence of the rewards going to wages as opposed to those going to capital. Most of this shift could not have taken place without the revolution in information processing that obviated the need for middle management, and allowed the development of worldwide logistical arrangements that bolstered productivity, but far from likewise bolstering wages actually inhibited wage increases.

So Brooks could not be more wrong.

Apart from the onrushing threat of automation, which is constantly sold by its apologists as a boon for productivity, the distribution of the manna produced by all that productivity is our number one economic issue. The data¬†simply doesn’t support his contention otherwise.

One last thing: even were Brooks to have a good argument his solutions remain firmly in denial of reality. In order to shake up a moribund economy that is struggling to generate much growth he suggests all the usual right of center policies such as the reduction of regulation and so on. What he appears to miss, or is ignorant of, is that our economy has become steadily more subject to oligopolistic control. In almost every industry oligopoly stifles precisely the kind of entrepreneurial activity he advocates. Such is the dominance of our largest companies that they act to slow down innovation which they see, rightly, as a destabilizing threat to their longevity. When Brooks and his ilk start advocating the break-up of our biggest banks, or the empowerment of the anti-trust part of the SEC, we will know he takes his own ideas seriously.

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