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How American Corporations Transformed from Producers to Predators

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By William Lazonick, professor of economics and director of the UMass Center for Industrial Competitiveness. His book, “Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States” (Upjohn Institute, 2009) won the 2010 Schumpeter Prize. Cross posted from Alternet

Corporations are not working for the 99 percent. But this wasn’t always the case. In a special five-part series, William Lazonick, professor at UMass, president of the Academic-Industry Research Network, and a leading expert on the business corporation, along with journalist Ken Jacobson and AlterNet’s Lynn Parramore, will examine the foundations, history and purpose of the corporation to answer this vital question: How can the public take control of the business corporation and make it work for the real economy?

In 2010, the top 500 U.S. corporations – the Fortune 500 – generated $10.7 trillion in sales, reaped a whopping $702 billion in profits, and employed 24.9 million people around the globe. Historically, when these corporations have invested in the productive capabilities of their American employees, we’ve had lots of well-paid and stable jobs.

That was the case a half century ago.

Unfortunately, it’s not the case today. For the past three decades, top executives have been rewarding themselves with mega-million dollar compensation packages while American workers have suffered an unrelenting disappearance of middle-class jobs. Since the 1990s, this hollowing out of the middle-class has even affected people with lots of education and work experience. As the Occupy Wall Street movement has recognized, concentration of income and wealth of the top “1 percent” leaves the rest of us high and dry.

What went wrong? A fundamental transformation in the investment strategies of major U.S. corporations is a big part of the story.

A Look Back

A generation or two ago, corporate leaders considered the interests of their companies to be aligned with those of the broader society. In 1953, at his congressional confirmation hearing to be Secretary of Defense, General Motors CEO Charles E. Wilson was asked whether he would be able to make a decision that conflicted with the interests of his company. His famous reply: “For years I thought what was good for the country was good for General Motors and vice versa.”

Wilson had good reason to think so. In 1956, under the Federal-Aid Highway Act of 1956, the U.S. government committed to pay for 90 percent of the cost of building 41,000 miles of interstate highways. The Eisenhower administration argued that we needed them in case of a military attack (the same justification that would be used in the 1960s for government funding of what would become the Internet). Of course, the interstate highway system also gave businesses and households a fundamental physical infrastructure for civilian purposes– from zipping products around the country to family road trips in the station wagon.

And it was also good for GM. Sales shot up and employment soared. GM’s managers, engineers and other male white-collar employees could look forward to careers with one company, along with defined-benefit pensions and health benefits in retirement. GM’s blue-collar employees, represented by the United Auto Workers (UAW), did well, too. In business downturns, such as those of 1958, 1961 and 1970, GM laid off its most junior blue-collar workers, but the UAW paid them supplemental unemployment benefits on top of their unemployment insurance. When business picked up, GM rehired these workers on a seniority basis.

Such opportunities and employment security were typical of most Fortune 500 firms in the 1950s, ’60s and ’70s. A career with one company was the norm, while mass layoffs simply for the sake of boosting profits were viewed as bad not only for the country, but for the company, too.

What a difference three decades makes! Now mass layoffs to boost profits are the norm, while the expectation of a career with one company is long gone. This transformation happened because the U.S. business corporation has become in a (rather ugly) word “financialized.” It means that executives began to base all their decisions on increasing corporate earnings for the sake of jacking up corporate stock prices. Other concerns — economic, social and political — took a backseat. From the 1980s, the talk in boardrooms and business schools changed. Instead of running corporations to create wealth for all, leaders should think only of “maximizing shareholder value.”

When the shareholder-value mantra becomes the main focus, executives concentrate on avoiding taxes for the sake of higher profits, and they don’t think twice about permanently axing workers. They increase distributions of corporate cash to shareholders in the forms of dividends and, even more prominently, stock buybacks. When a corporation becomes financialized, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards for all. They become focused instead on generating financial profits that can justify higher stock prices – in large part because, through their stock-based compensation, high stock prices translate into megabucks for these corporate executives themselves. The ideology becomes: Corporations for the 0.1 percent — and the 99 percent be damned.

The 99 percent needs to understand these fundamental changes in the ways in which top executives have decided to make use of resources if we want U.S. corporations to work for us rather than just for them.

The Financialization Monster

The beginnings of financialization date back to the 1960s when conglomerate titans built empires by gobbling up scores and even hundreds of companies. Business schools justified this concentration of corporate power by teaching that a good manager could manage any type of business — the bigger the better. But conglomeration often became simply a method of using accounting tricks to boost earnings in the short-run to encourage speculation in the company’s stock price. This focus on short-term financial manipulation often undermined the financial conditions for sustaining higher levels of earnings over the long term. But the interest of stock-market speculators was (as it always is) to capitalize on short-term changes in the market’s evaluation of corporate shares.

When these giant empires imploded in the 1970s and 1980s, people began to see the weakness of the model. By the early 1970s the downgraded debt of conglomerates, known as “fallen angels,” created the opportunity for a young bond trader, Michael Milken, to create a liquid market in high-yield “junk bonds.” By the mid-’80s, Milken (who eventually went to jail for securities fraud) was using his network of financial institutions to back corporate raiders in junk-bond financed leveraged buyouts with the purpose of extracting as much money as possible from a company once it was taken over through layoffs of workers and by breaking up the company to sell it off in pieces.

Wall Street changed the way it made its money. Investment banks turned their focus from supporting long-term corporate investment in productive assets to trading corporate securities in search of higher yields. The great casino was taking form. In 1971, NASDAQ was launched as a national electronic market for generating price quotes on highly speculative stocks. The Employee Retirement Income Security Act of 1974 encouraged corporate pension funds to get into the game since inflation had eroded household savings. In 1975, competition from NASDAQ led the much more conservative New York Stock Exchange, which dated back to 1792, to end fixed commissions on stock transactions. This move only further encouraged stock market speculation by making it less costly for speculators to buy and sell.

In 1980, Robert Hayes and William Abernathy, professors of technology management at Harvard Business School, wrote a widely read article that criticized executives for focusing on short-term profits rather than investments in innovation. But in 1983, two financial economists, Eugene Fama of the University of Chicago and Michael Jensen of the University of Rochester, co-authored two articles in the Journal of Law and Economics which extolled corporate honchos who focused on “maximizing shareholder value” — by which they meant using corporate resources to boost stock prices, however short the time-frame. In 1985 Jensen landed a higher profile pulpit at Harvard Business School. Soon, shareholder-value ideology became the mantra of thousands of MBA students who were unleashed in the corporate world.

Proponents of the Fama/Jenson view argue that for superior economic performance, corporate resources should be allocated to maximize returns to shareholders because they are the only economic actors who make investments without a guaranteed return. They say that shareholders are the only ones who bear risk in the corporate economy, and so they should also get the rewards. But this argument could not be more false. In fact, lots of people bear risks of investing in the corporation without knowing if they will pay off for them. Governments in the U.S., funded by the body of taxpayers, are constantly making investments in physical infrastructures and human capabilities that provide benefits to businesses, but without a guaranteed return to taxpayers. An employer expects workers to give time and effort beyond that required by their current pay to make a better product and boost profits for the company in the future. Where’s the worker’s guaranteed return? In contrast, most public shareholders simply buy and sell shares of a corporation on the stock market, making no contribution whatsoever to investment in the company’s productive capabilities.

In the name of this misguided philosophy, major U.S. corporations now channel virtually all of their profits to shareholders, not only in the form of dividends, which reward them for holding shares, but even more importantly in the form of stock buybacks, which reward them for selling shares. The sole purpose of stock buybacks is to give a manipulative boost to a company’s stock price. The top executives then benefit when they exercise their typically bountiful stock options and cash in by selling the stock. For 2001-2010, 459 companies in the S&P 500 Index in January 2011 distributed $1.9 trillion in dividends, equivalent to 40 percent of their combined net income, and $2.6 trillion in buybacks, equal to another 54 percent of their net income. After all that, what was left over for investments in innovation, including upgrading the capabilities of their workforces? Not much.

Falling to the Challenge

Big changes in markets and technologies since the 1980s have given U.S. corporations serious competitive challenges. Confronted by Japanese and then Korean competition, companies closed plants, permanently displacing blue-collar workers from what had been middle-class jobs. Meanwhile, the open systems technologies that characterized the microelectronics revolution favored younger workers with the latest computer skills. In the name of shareholder value, by the 1990s U.S. corporations seized on these changes in competition and technology to put an end to the norm of a career with one company, ridding themselves of more expensive older employees in the process. In the 2000s, American corporations found that low-wage nations like China and India possessed millions of qualified college graduates who were able and willing to do high-end work in place of U.S. workers. Offshoring put the nail in the coffin of employment security in corporate America.

In response to these challenges, U.S. corporations could have used their profits to upgrade the capabilities of the U.S. labor force, laying the foundation for a new prosperity. Instead, the same misguided financialized responses have meant big losses for taxpayers and workers while the top 1 percent has gained. Instead of rising to the challenge, they’ve fallen into greed and short-sightedness that chips away at our chances for a prosperous economy.

Yet properly governed, corporations can be run for the 99 percent. In fact, that’s still the case in many successful economies. The truth is that it’s possible to take back the corporations for the 99 percent in the U.S. if we can really wrap our heads around the problem and the solutions. Here are three places to start:

1) Ban It. Ban large established companies from buying back their own stock, and reward them instead for investing in the retention and training of their employees.

2) Link It. Link executive pay to the productive performance of the company, with increases in executive pay being tied to increases for the corporate labor force as a whole.

3) Occupy It. Recognize that taxpayers and workers bear a significant proportion of the risk of corporate investment, and put their representatives on corporate boards where they can have input into the relation between risks and rewards.

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96 comments

  1. Afternoon

    Hmm, no mention of the Vietnam War, conducted by ‘Murican corporations. As for the middle class, they’ve been under attack since at least the final season of the Brady Bunch, (70s)

  2. jake chase

    Who is this guy kidding? The idea that American corporations used to be benign job creators concerned about the welfare of workers is so much hooey. Until 1941 they cared about nothing so much as busting unions. From WWII until 1970 they were making so much money on the devastation of that war and the global reconstruction (not to mention the military industrial partnership in fear mongering and Soviet containment) they could well afford to hug big unions and rely on inflation to perpetuate their profits, while the unorganized labor force paid for the cushy sinecures of union deadwood. The only thing that changed was technology. Once it became possible to export jobs they began doing that. When they mastered the public relations aspects of stock option looting they went full spead ahead after the stockholders. I could go on about this but my longer comments tend to be refused. Let’s see if the censor takes this one.

    1. Sufferin' Succotash

      I totally agree that corporations never did have any tender regard for the help, now or 70 years ago. What they did realize up until about 35 years ago was that decently-paid and job-secure help was good business. What happened, starting roughly in the early-to-mid 70s, was a change in the professional and academic backgrounds of the corporate overlords. “Engine Charley” Wilson may have made an ass of himself as Ike’s Defense Secretary, but they didn’t call him Engine Charley for nothing. People like him actually knew something about the industry they were running. But when the number-crunchers and litigators began to take over it was the beginning of the end for productive industrial investment and for treating employees as anything other than liabilities.

    2. Yves Smith Post author

      How old are you?

      Companies DID once care a lot more about their workforces, and it wasn’t altruism, it was good business. Hiring people is really time consuming and costly and not all new hires are a good fit, and they have to be trained. So any semi-comepent manager will prefer to hang onto decent staff even in downturn unless things become desperate. And to motive staff, it also makes them feel more part of the enterprise if they do better when the company does better. Some firms did that with bonuses, others with wage increases, but regardless, the pattern until the 1990s was that workers shared in productivity gains.

      We worked in mill towns, and for two different employers, were were provided with company housing, and it was very nice. The first company house I remember living in in had a big living room, separate dining room, a finished basement with a bar in it, three baths, and three (arguably four, my grandmother spent a lot of the year in a bright, airy finished attic) bedrooms. Big yard too. That was a LOT of house for the 1950s. Later houses were more glam.

      1. jake chase

        This is just pretense. Corporations have done everything possible to dumb down work so that any idiot can do it. Have you heard of Frederick Winslow Taylor? The idea is to make employees terrified of losing the job, willing to do anything to keep it. What you are saying is just business school and management consulting bs.

        1. run75441

          Well Jake:

          I have to agree with Yves, the corporate contract with labor existed for years until Reagan fired the controllers and corporations figured out they could break union and employee contracts and they did.

          If you were hired into a company, your job was relatively secured. You earned a pension (what the hell is this???), the security of a job till retirement, and the gold watch at the end. Corporations were interested in people.

          You cite Taylor who main interest was to increase throughput by studying people. In any case those gains were passed on to Labor and not solely capital. Since the eighties productivity gains were skewed towards Capital over labor.

          1. skorn

            Jake,

            Eastman Kodak is a great example. My Father earned a very comfortable middle class wage, and retired in 1987 with a pension and paid insurance for the rest of his life. He also received annual bonuses. Not bad for a guy with a 10th grade education. Kodak had a sophisticated training program allowing high school drop outs to thrive and encouraged advancement for motivated staff members. Fair wages and worker investments equaled loyal and productive employees. I could go on about countless other material perks, but my Father felt something I’ll never feel toward my present and future employers. PRIDE. Sure miss the beauty of Kodachrome.

            I know what function I serve for my Fortune 25 employer, that is until I don’t: MAXIMIZE SHAREHOLDER VALUE, and nothing else. Present day employment status is assessed on a quarterly basis enslaved by Wallstreet metrics. Corporate worker bee status today = anxiety, dread, and psychotopics.

        2. Lucy

          HP once had a reputation for never laying off anyone. People spent their entire careers at HP, and their kids did too. Carly Fiorina changed all that.

      2. Man Down

        Unions – much more of the labor force was unionized back in the 50s and 60s. this is how slaughter house workers could afford a decent living. Today, immigrant labor is paid less the 10 dollars an hour for some of the most dangerous work.
        These unions were fought for, literally. Companies fought these changes tooth and nail. Isn’t it overly simplistic to conclude corporations ‘cared’ for workers
        when they were basicaly forced to do so? Time and again, corporations will crush Democracy in their work places. There is limited job security these days, no company wants people to be around for too long – it cuts into their bottom line. There are however, individuals in the work place who applaud the status quo, hoping both to inhabit the corner office where they too can be ruthless. Sociopaths generally harbor the delusion that their work is superior, somehow validating their own aggression, you find them in HR, and you find them defending corporations as if one time their benevolence was unquestionable.

      3. gepay

        I think Yves is thinking of the 50s and 60s. A unique situation for American Corporations in that their major competitors (not so much in the 60s) in Europe and Japan were still recovering from WWII. There were unions and raises could just be passed on. A large part of the workforce was in unions then unlike now. The stagflation of the 70s was caused because unions did get cost of living raises > leading to a concerted effort to bust the unions and outsource manufacturing (Nixon and Kissinger opened up China so there could be 1/2 a billion disciplined workers available. Now there is no wage/price inflation even though the Central Banks are creating trillions of dollars and Euros and yen tho we do see inflation in commodities.
        Also Yves describes positions that were not line manufacturing but of considerably higher pay grade. What has changed is that corporations do not care about this level anymore much less lower paygrade positions.
        This is not to say that some corporations weren’t run by people that could see the value in retaining valuable employees and having a viable community to live in. In a better world than the one we live in, the suggestions by the author would be useful.
        The evidence as mentioned is that corporations have more and more been traveling in the wrong direction. I think some tipping point has been reached and the system is broken. At some point soon the Central Banks kicking the can down the road with their created trillions of created dollars, Euros, and yen will come to a bad conclusion.

      4. Paul Tioxon

        WALLY: [Quieter:] Well, why…why do you think that is? I mean, why is that? I mean, is it just because people are lazy today? Or they’re bored? I mean, are we just like bored, spoiled children who’ve just been lying in the bathtub all day just playing with their plastic duck and now they’re just thinking: “Well! what can I do?” [Cough in the background.]

        ANDRE: Okay! Yes! We’re bored! We’re all bored now! But has it ever occurred to you, Wally, that the process that creates this boredom that we see in the world now may very well be a self-perpetuating, unconscious form of brain-washing, created by a world totalitarian government based on money? And that all of this is much more dangerous than one thinks? And it’s not just a question of individual survival, Wally, but that somebody who’s bored is asleep, and somebody who’s asleep will not say “no”? See, I keep meeting these people, I mean, uh, just a few days ago I met this man whom I greatly admire, he’s a Swedish physicist, Gustav Björnstrand? And he told me that he no longer watches television, he doesn’t read newspapers and he doesn’t read magazines. He’s completely cut them out of his life, because he really does feel that we’re living in some kind of Orwellian nightmare now, and that everything that you hear now contributes to turning you into a robot!

        And when I was at Findhorn, I met this extraordinary English tree expert, who had devoted his life to saving trees. He just got back from Washington, lobbying to save the redwoods? He’s eighty-four years old and he always travels with a back-pack ’cause he never knows where he’s gonna be tomorrow! And when I met him at Findhorn he said to me: “Where are you from?” And I said: “New York.” He said: “Ah, New York! Yes, that’s a very interesting place. Do you know a lot of New Yorkers who keep talking about the fact that they want to leave but never do?” And I said: “Oh, yes!” And he said: “Why do you think they don’t leave?” I gave him different banal theories. He said: “Oh, I don’t think it’s that way at all.” He said: “I think that New York is the new model for the new concentration camp, where the camp has been built by the inmates themselves, and the inmates are the guards, and they have this pride in this thing they’ve built, they’ve built their own prison. And so they exist in a state of schizophrenia, where they are both guards and prisoners. And as a result they no longer have, having been lobotomized, the capacity to leave the prison they’ve made, or to even see it as a prison. And then he went into his pocket and he took out a seed for a tree, and he said: “This is a pine tree.” He put it in my hand and he said: “Escape, before it’s too late.”

        You see, actually, for two or three years now Chiquita and I have had this very unpleasant feeling that we really should get out. No, we really should feel like Jews in Germany in the late thirties? Get out of here! Of course, the problem is where to go, ’cause it seems quite obvious that the whole world is going in the same direction. You see, I think it’s quite possible that the nineteen-sixties represented the last burst of the human being before he was extinguished. And that this is the beginning of the rest of the future now, and that from now on there’ll simply be all these robots walking around, feeling nothing, thinking nothing. And there’ll be nobody left almost to remind them that there once was a species called a human being, with feelings and thoughts. And that history and memory are right now being erased, and soon nobody will really remember that life existed on the planet!

        From the Movie:”MY DINNER WITH ANDRE”.

      5. Brian Sierk

        Yves- I think Matthew Parker’s book, Panama Fever, looks at this issue in both developed and less developed American contexts. Caribbean and South American growers were explicit in their efforts to maintain their excess labor forces in their countries for the express purpose of keeping labor costs down to increase profitability. The American companies doing the work under John Stevens and later Gen Goethals were intentional about bringing in competing groups of workers to keep any group from gaining any potential work stoppage leverage, and keeping wages down. The high status (read White) workers were paid high wages and given good benefits, but were unable to criticize the work in any way, and the low wage workers were explicitly, and specifically chosen for their willingness to be exploited. Chinese and Japanese labor was rejected, because their respective governments wanted checks on worker conditions. Spanish and Italian work crews were phased out when they tried to improve working conditions and wages. This became the model for american industry in the 20′s and 30′s- break the unions,. keep workers competing for jobs, don’t let companies compete for workers.

        This only changed when there was an existential threat to the system. Companies have to be scared to take care of workers. The period you cite as Companies trying create good jobs for workers was an aberration, arising out of a concerted effort by the government and industrial elite to prevent the increasingly educated and technologically savvy workforce from destroying the framework of the elite political structure. If things are going to get better for workers, corporations and the political and economic elite have to get nervous again.

        1. reason

          There was another reason it was an aberation – demographics. The labour force was very slow growing and reduced by the toll of the war, and the high fertility rate keeping women out of the workforce.

    3. diptherio

      As we all know, there’s a lot of fuzzy thinking in economics. One of the most misleading aspects of this fuzziness is the easy conflation of executives, stockholders, and non-executive employees, with “the corporation.” A corporation is a legal instrument, literally a piece (or pieces) of paper. A corporation has no interests. The executives, stockholders and regular employees all have interests, however, and the corporate instrument can be and is used by these groups to further their individual interests. Up to this point in our history, the corporate instrument has been controlled mainly by (and for the benefit of) owners, stockholders, and executives. This is why we usually think of these actors as synonymous with the corporation. But it is also clear that executives can use the corporate instrument in a way that is detrimental to stockholders.

      We would do well, I think, to remember this and not to talk so much about corporations engaging in union-busting or war-mongering, but rather focus on the actual individuals who are using the corporate instrument to do these things. Thus one can avoid the problem of offending the regular employees of these corporations when discussing corporate malfeasance with them. It will also help us to remember who is really causing the problems. The majority of individuals making up GM, for instance, are great; it’s the minority at the top that are the problem.

      I do agree that this man’s view of the past is a little on the rosy side, and his recommendations a little milquetoasty. Except, that is, for his third recommendation. Occupy corporate boards. If done aggressively, this could be a real game-changer. Imagine how differently Exxon or Cargill might behave if their board was composed of two stockholder reps, two worker reps and two community reps.

      The problem isn’t corporations per se, it’s who’s running them. Democratize corporate structure and a lot of our social problems will solve themselves, imho.

      1. Rcoutme

        I agree only partially. The first and most important part of dealing with corporate malfeasance is to make all corporations that operate in more than one state have to be registered with the Federal Government. I can not for the life of me figure out why Congress has not done this. If ever there was a purpose for the interstate commerce clause, this would have to be one!

        Once these corporations are subject to federal regulation (instead of Delaware non-regulation), we can begin talking about how to ensure that they benefit the people of the USA.

    4. scraping_by

      A lot of it is the difference in “corporation” over time. In the earlier days, small businesses with few employees were more the norm. Part of the conglomeration wheeze was buying these up and rolling their businesses into larger units. Some guy with an idea, building a shop, then selling out to the money guys.

      Those were the days economic activity was less abstract, less on paper, more real goods and real services for real people. The distance between the ultimate decision-makers (C level executives vs the boss in the office off the factory floor) and the real world of material needs has inflated, along with the surreal assumptions about what business consists of.

      Our grandfathers were producers: today’s CEO is poser. The producers are today here in the ranks of the blue collars, the clericals, the hands-on workers. But nobody’s financing that sort of business.

    5. nonclassical

      Jake,

      accurate summation..it should be mentioned, when studying the entire history of Wall $treet=U.S. corporations, this was ever true. (Geisst-”Wall $treet-A History”)

    6. burnside

      Jake, I think you would benefit from reviewing the texts, pundits, authors you’ve relied upon in forming your ideas of corporate culture in the 20th century. No doubt, your sources are convincing and are themselves convinced of their perspective, but you fail to account for the compensation, benefits, profit-sharing trusts and a host of phenomena which argue very well against the predatory picture you impose on the working environment of those middle decades.

      We are already too removed from the twenties or thirties to get firsthand perspective on conditions – pundits rely on published accounts and are of a generation now sufficiently young never to have known relatives who worked, much less managed or owned privately-held companies, partnerships or incorporated businesses. It would behoove you to crank up your critical sense: to look beyond the quality or seamlessness of their arguments

      1. burnside

        (continued)

        . . . and consider they’ve constructed their take on conditions at one or two (or more) removes and sometimes have settled on a view they’d like to substantiate, rather than delving into real detail to see what may emerge.

        You seem to me the recipient of received opinion.

  3. F. Beard

    They increase distributions of corporate cash to shareholders in the forms of dividends and, even more prominently, stock buybacks. Yves Smith

    Dividends and stock buybacks are often financed directly or indirectly with corporate access to cheap credit – loans from the counterfeiting cartel, the banking system.

    Without the counterfeiting cartel to borrow from then isn’t it likely that corporations would have had to pay their workers with common stock and thus “share” wealth and power with them? And would those empowered workers have voted their shares to outsource or automate their jobs away? I think not.

    We don’t need banks! Between honest interest rates for savings, generous infrastructure spending by government and common stock as a private money form what the heck do we need with a counterfeiting cartel for the sake of the so-called “credit-worthy”?

    1. Elizabeth

      A great observation. They just borrow the money, and pay it out as dividends; it’s not money they “made” in a productive sense. Credit analysts have a bit to say about how much they can do that, but they do the barest required math on how that affects share prices in turn, perpetuating the cycle — in fact, calculating shareholder value isn’t their job. Just become a big money-laundering machine, basically, and you, Big Corporation, can become “profitable” and touted as “a good dividend bet” on Mad Money. If you’re not actually profitable, the problem is that costly workforce, of course, and we repeat the cycle of lending-spending.

      It’s why someone once lectured a bunch of us in our neighborhood on why “monetary policy” was nonsense. There’s as much money in the economy as corporations care to borrow.

      All you really need to be in business these days is a logo and a stock ticker symbol.

    2. Rcoutme

      Well…therein lies one of the great frauds, right? If the corporation buys back stock, then the quantity of stock options should automatically have to be adjusted down. The only problem is, Delaware is not about to require that! Meanwhile, even the stockholders don’t have the capacity to prevent it.

      Thus: If I am CEO and have been offered 100,000 shares stock option. If I engineer a stock split, I will get an automatic jump to 200k shares (since I will insist on that before allowing the stock split).

      However, if the same situation as above is going on and I have the corporation buy back stock, I have just unilaterally changed my compensation package. My stock options were offered on the basis of the total outstanding stock (plus whatever options had already been offered to others). If I change that quantity down–that is fraud. There is no other rational way to look at it.

  4. I Like Asians

    We have had at least 30 years, maybe 50 years, of Asian mercantilism.

    Dealing with it is now in US corporate DNA. Darwin warned that would happen.

    It will take more than banning stock buybacks and other micro measures.

    This is an area where Macro-Economists can really dazzle us with their stuff !?!

    Hint from a non-economist – Buffet suggested using a trade voucher system to force balanced trade rather than current the ideology of “free for all” trade.

    Anyone who says the US should and can weaken the World Reserve Currency is banned from the discussion.

    Anyone that says the Chinese should and are raising their peg against the dollar should butt out and go back to their job of not running the US Treasury.

    Anyone who says the US economy belongs to the world and we can’t protect it with tariffs should butt out and go back to their worthless job at the WTO. Radioactive Japanese exports need protecting.

  5. Damian

    we are thirty years into this extraction process – within another 20 years the standard will be the elimination of the american worker and 160 million redundant people…..”not” their education or development.

    the WTO and GATT treaties created the downward slide of this system without any brakes – there was no restictions on comparable trade partners from wages or environment or regulations – therefore the pursuit of comparative advantage to the least cost locale is the only criteria for like, kind and quality. The decision makers have no flag and it pays to be a sociopath

    everything that happened to the consumer was financial games for extraction objectives which is almost over.

    with the hyper-concentration of wealth now you can buy the politicians, judges and regulators to make the rules, regulations and laws for every corner of commerce for a pittance coupled with the funding of propaganda to sell what is necessary to the sheeple.

    the republican arrogance today whether towards women, retirees, students or the workers are a recognition that they cant be stopped. The organized left (read ALEC equivalent) doesnt exist.

  6. digi_owl

    1. Adam Curtis covers much the same from a UK angle in his Mayfair Set series.

    2. My impression is that most of the share trade is in the secondary market, meaning that the company issues said shares do not see any of the profits from the trades beyond what the share price was at time of issue. If so, why should these traders be rewarded at all? They are contribution nothing to the company.

  7. jsmith

    Seriously, this guy needs to watch the documentary, “The Corporation” in that only at the very emergence of corporations could they have conceivably been considered benign entities.

    They had very specific charters – usually for a public project – for a limited time and those charters were subject to revocation.

    Since those long-gone early days, corporations have been nothing other than super-human monsters intent upon exploiting every resource – both human and natural – in an unending pursuit of profit to the detriment of common public gain.

    One has to look at the failed species – homo sapiens – in that it has become entirely enthralled to a fiction of its own imagination/consciousness.

    Nothing in the modern world can be done against the corporation even though they aren’t real and mankind created them.

    We are prisoners of our own intellectual entities.

    Pygmalion murdered by the sculptured demon of his own device.

    1. F. Beard

      I see nothing inherently wrong with corporations; they are a way to consolidate capital for economies of scale in a democratic (per share anyway) manner.

      The problem is, and has been for hundreds of years, the banks:

      “Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.” – Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time. from http://www.themoneymasters.com/

      1. Daniel

        Banks are corporations and they’re still TBTF, something that used to be said about the British Empire.

      2. jsmith

        Corporations are inherently bad and detrimental to humanity because even after more than hundreds of years of documented, tangible damage that the corporation has done to our planet, our societies, our civilizations, we as a species still largely cling to the belief – promulgated by a corporate media that owns nearly all avenues of our reciept of information – that corporate efficiency, consolidation and extraction are ideas which we as a species should admire and promote.

        Catastrophe after catastrophe be damned.

        We have seemingly learned not a single thing and this is my main point.

        Corporations are inherently evil because they now disallow us from functioning as optimally as our species should – i.e., due to corporations and the propagandistic world we are mired in, we no longer seem capable of promoting the very survival of our species above the call for profit.

        To say that an entity that has the demonstrated power to take away a species’ – even the species that created said entity – ability to survive long-term is not evil somehow escapes me.

        1. F. Beard

          The common stock company and central banking are about the same age so we really don’t have a period of time in which to study the common stock company by itself.

          Central banking violates quite a few moral and ethical principles. What principles does the common stock company violate?

          1. jsmith

            Corporations have conistently shown that there is not a single humanistic precept that they will not violate.

            From claiming that a intellectual construct can somehow be considered a person, to the calculations as to how much a human life is worth, how much life-giving elements such as water and air can be valued at, corporations will and have sought ways in which to turn ideas basic to humanity’s survival into terms which can then blithely be debated as somehow exterior to our existence.

            As seen throughout the history of capitalism, the corporation will inevitably – given time – devise ways in which to exploit every aspect of the world we live in without a thought to the effects of said exploitation.

            Right now, people are patenting genes.

            The very blueprint of humanity has been reduced to that of yet another commodity yet no one raises a murmur as to the insanity of said idea.

            I could on and on and on about how regular and commonplace the vile machinations of corporate malfeasance seem to us now as we swim in a near inescapable ocean of propaganda but all one really needs to know is that any construct – i.e., corporatism – that would deny that we exist on a finite planet in order to flourish is not the type of construct humanity needs be adopting/supporting.

            Corporatism is about growth forever, reality be damned.

            Right now, corporations:

            Make you and your family drink poison.

            Make you and your family eat poison.

            Make you and your family breathe poison.

            Yet, we just walk around like it’s no biggie and THAT above all is why corporations must end.

            They are killing us yet have infected our minds so that we don’t even seem fit to care.

            What religion or political ideology ever had the power to overtly kill its own adherents and have them passively accept that fact?

          2. jsmith

            Lastly, for those who think my posts too radical/overzealous, I ask this:

            Why shouldn’t there be room at the table for those who want corporations eliminated entirely?

            There are no more valid points than the well-documented harm that corporatism has done to mankind.

            In addition:

            Wouldn’t it be a clever way to frame a debate – having two “sides” but both of which agree that corporations above all must survive and dominate our social landscape, huh?

            Much like two “parties” that disagree about trifles but who act as a concerted protectorate of the elite classes, huh?

            Must keep the debate “confined” to reality, doncha know!!

            I wonder what kind of system would promote such a “debate”, huh?

            Only by allowing the frame of the debate to include the non-existence of corporations does the exercise not entirely smack of a pre-approved corporatist distraction.

            If nothing else, it attempts to force people out of the pre-approved debate zone the American society has become.

          3. F. Beard

            Corporatism is about growth forever, reality be damned. jsmith

            It’s the money system that requires exponential growth – to pay the compound interest.

            But imagine there were no government privileges for the banks. Would not interest rates tend to be much higher? Might not the corporations be forced to issue their own common stock as money? Do you think Monsanto might have to behave more responsibly or else have the population refuse to accept its money? Or if the population did accept Monsanto’s common stock as money wouldn’t they become co-owners of Monsanto and thus able to influence corporate policy?

            It all goes back to the banks. Our money is based on both usury and counterfeiting. It is no wonder that we have so many difficulties.

          4. Maximilien

            @F. Beard: “Central banking violates quite a few moral and ethical principles. What principles does the common stock company violate?”

            If by “common stock company” you mean the modern corporation then, umm, how about the ethical principle of individual responsibility? (“The CEO didn’t do it! The company did!”)

          5. F. Beard

            If by “common stock company” you mean the modern corporation then, umm, how about the ethical principle of individual responsibility? (“The CEO didn’t do it! The company did!”) Maximilien

            Relevant point. The officers of a corporation should be individually liable.

          6. Skippy

            How much corporate history have you read, its acts, do not support your opinions. You never have facts, just off the cuff opinion.

            Skippy… Hinze was a fairly good actor in his day, although things changed…

          7. F. Beard

            How much corporate history have you read, its acts, do not support your opinions. Skippy

            Like I said, corporations and central banking were invented about the same time so that confuses the issue. However, from an ethical viewpoint, central banking is inherently evil and corporations are not.

          8. Rcoutme

            @jsmith: You are welcome to deny this all you want, but corporations are the reason that we have enough food to feed the population. They are the ones who 1) facilitate the transport of goods, 2) facilitate the processing of said goods, 3) facilitate the manufacture of appliances for making us more efficient. So…there are a few good things to say about corporations.

            Having said that, I am not a huge supporter of what many corporations have become.

  8. Ed

    To respond to Jack Chase, by any metric you care to use corporations have been much more exploitative vs. Americans in the last two decades than before World War II.

    I’m responding to the comment because some of the narratives being pushed are profoundly anti-reform in tone. One is some version of “its always been this way.” The second is that “well non-Americans have been getting the boot so its time Americans started getting a taste of their own medicine.” One induces despair and I suspect the other will be increasingly employed by the 1% of a justification as they increase their exploitation of the U.S. One consequence of becoming a third world country is that the U.S. will be increasingly treated like one by its own elites.

    1. Clam

      In the past it was more violent and bloody. Corporations are much more sophisticated and have largely pushed for privatization of services that once were provided by the Government. Ford had Harry Bennet to bust heads open in the 30s and 40s, corporations had Clarence Thomas capture the EEOC as an example from recent times. And so it goes with capture, this relentless unchecked privatization, profit over people.

    2. Daniel

      “What’s happened is that, almost overnight, we’ve switched from democracy in real-property recording to oligarchy in real-property recording. There was no court case behind this, no statute from Congress or the state legislatures. It was accomplished in a private corporate decision. The banks just did it.” -Christopher Peterson (MERS)

      1. Susan the other

        i follow Prof. Peterson too. And this is the main thing, about our present economy-botttleneck, which has me so disconcerted. It’s a virtual takekover.

    3. Carla

      @Ed: “One consequence of becoming a third world country is that the U.S. will be increasingly treated like one by its own elites.”

      This has already occurred. The point is, what is our response?

      Has anyone noticed that people in “third world” countries sometimes revolt?

  9. Hugh

    Modern corporations are major engines of kleptocracy. You can’t reform corporations unless you overthrow the kleptocracy first. Otherwise you are just advocating changes that will never happen.

    Back in the 1970s starting with Paul Volcker, increases in workers’ wages were taken to be inherently inflationary and to be suppressed at all costs. The result was that the economy shifted from being labor driven to being investor driven. Productivity gains/profits went to investors, that is rentiers, not workers. Those flows need to be reversed.

    I realize this is the first of a 5 part series. I hope to see more on the issues of corporate personhood, lobbying, taxation, offshoring, and union busting as well as bigness. Once most corporations establish a certain market share they act as monopolies raising prices, suppressing innovation, and lowering quality. They cut back on research finding it cheaper simply to buy up other companies. They aren’t just predatory toward their workers but their customers.

  10. Roquentin

    While I would agree with the general theme of this essay, I would also disagree that there was a sort of “pure” time we could go back to when corporations were innocent. No such time exists and what is happening now due to financialization is a direct result of the prosperity achieved in the 50s and 60s. I understand that there’s a critique being made about current trends in economics verses how production was organized in the past, but the conclusions being drawn from it are somewhat misleading. We need to accept that our current system, failings and all, is capitalism and not a deviation from it.

  11. Matthew Saroff

    You leave off the less than benign reason that corps used to think about something other than their next quarter.

    Until 1991, there was the Soviet Union, and until it fell, people were legitimately afraid that there would be a communist uprising, and that they and their families would go to the Gulags.

    The USSR never provided prosperity to its citizens, but it die for the Western middle class.

    1. SqueakyRat

      It’s hard to believe you’re serious. People were afraid of the Soviet Union, yes, but a communist uprising in the United States, not so much.

      1. Mark P.

        The historical facts are that there were serious homegrown communist and socialist parties during the 1920-50s in the U.S. , however much this is papered over now or forgotten because of ignorance or deliberate revisionism.

        See, for example the late great Murray Kempton’s book, PART OF OUR TIME: SOME RUINS AND MONUMENTS OF THE THIRTIES, first published in 1955 when the revisionism had already begun –

        http://www.amazon.com/Part-Our-Time-Monuments-Thirties/dp/1590170873/ref=sr_1_1?s=books&ie=UTF8&qid=1333441888&sr=1-1

        This is a great book, incidentally. It proceeds via compassionate portraits of individuals well known (e.g. Alger Hiss, Whittaker Chambers, Walter Reuther, Paul Robeson) and unknown (central figures in the Brotherhood of Sleeping Car Porters, then one of the only politically significant African-American labor organizations))

        You would be amazed by how many illustrious Americans who are now in their 80s and 90s were once members of the American communist party.

        1. Susan the other

          funny how we as a country have fought for what we thought we knew and wanted and then the world changed, because of us, and we now seem to be fighting for the opposite of what we knew and wanted and so we are blindly searching for a new definition…

  12. Zlati Petroff

    This seems so disjointed, it’s hard to decide where to begin.

    First, the article seems to suffer from serious Golden Age syndrome. To say that somehow in the 50s corporations were all about “society” and hope to prove it by giving two anecdotal examples is unscientific and, frankly, unserious.

    How could it possibly be that what a former CEO says at a confirmation hearing serves as valid evidence of such a big and overarching claim??

    Second, what exactly is the moral, economic, and sociological justification for demanding that corporations take responsibility for the skills of workers? Why is it that workers are not responsible for their own skills?

    Third, if corporations tried to act in “the best interests of society” how are they to decide whose best interest to act in first? If raising wages benefits a small subset of workers but harms consumers, which party should the corporation care for first? If dumping toxic waste in a river helps workers by reducing costs and thereby allowing the firm to retain more workers on payroll, should the corporation dump toxic waste?

    Why are corporations these mythical creatures that are responsible for everyone and everything all the time in all countries?

    And why shouldn’t corporations give jobs to desperately poor people in Asia and Africa? Who are we to demand that those jobs be given to us instead?

    In short, there is almost no truly realistic question addressed here.

    1. Jackoff Smirnoff

      Get real – jobs aren’t given to the desperately poor as some sort of welfare, rather, exploitation is sought for the bottom line. Your argument specifically obfuscates profit motive, for it is here that malignant behavior routinely surfaces. No one is asking that corporations vanish, but rather, face serious reform. Your questions aren’t realistic, unless you believe their is no alternative to predation. Which is quite common.

      1. Zlati Petroff

        You typed a lot of things but said almost nothing.

        I still don’t know how any of my concerns are to be ameliorated. Why should corporations be responsible for workers’ skills instead of the workers themselves? What does it mean to “upgrade” workers’ skills? Which skills? How should corporations decide which skills to upgrade?

        If corporations try to maximize value for everyone in society, how should they decide which party to care for the most when making decisions that affect different parties differently? Should they raise prices to increase wages if it hurts consumers? Should they dump toxic waste to save on costs and pass the savings on to workers?

        What reforms exactly do you propose? How do these reforms work in the real world, outside of the comfortable confines of overzealous ideology?

        1. Heritage

          Who is suggesting what you are asking? Overzealous ideology in the real world – now there’s a problem.

        2. Jackinoff Worsenis

          Government used to realistically solve the enviromental issue by “leveling the playing field” with regulation so competitors had the same costs to deal with.

          If you were in good graces as an employee the company may send you to night school for training rather than search the global labor pool to find somebody who was lucky enough to have completed training in just the right thing while you were busy doing your job. Now they lock in an indentured servent with an H1B visa. Probablity math of effective self directed training gives you a snowball’s chance in India of doing well with that scenario.

          Instead the game is now global arbitrage of everything and everything.

          Oh yes, and headquarters should be in a nice safe place payed for by taxes of a developed country’s population, but the company will continue to fight poverty in a 3rd world county.

          Ha! Good one.

          1. Heretic

            Mr Zlati Petroff, are based on your line of questioning, are you implying that society should attempt to regulate the actions of business?

            We in society have important interests that sustain the health of society… Corporations are free to act as they wish, as long as their actions do not harm the interests of society. Training people is beneficial… Give corporations positive incentive to invest in training. Dumping pollution is harmful; therefore use strong enforcement and large negative personal and corporate level incentives to prevent this. Society benefits when there are many middle lass people who enjoy a decent lifestyle, which can. E only achieved if they are productive (which is only completely through a combination of person al skill, business Capitol, government provided soft an hard infrastructure ) And have a decent income so to enjoy a share of their productivity. So it is useful for a nation to encourage its industries to increase real productivity and increase real wages. If a company does wants to use cheap Asian labour and undermine employmen in the USAt, and take advantage of lax pollution laws, we could not stop them from moving to Asia, but we do not have to tolerate the sale of that company’s produce in the USA either.

          2. SqueakyRat

            Heretic — don’t “encourage” them, compel them. It’s really the only way.

    2. reason

      “Second, what exactly is the moral, economic, and sociological justification for demanding that corporations take responsibility for the skills of workers? Why is it that workers are not responsible for their own skills? ”

      What a joke. You clearly have no experience of the real world. How exactly can a full time worker with a family invest his own time and money in getting skills that are only recognised when they are used in practice? (And that need upgrading every few years, given the rate of technological change.) Firm do often employ people AT A PREMIUM to bring the latest skills and dump workers with “outdated skills”. It happens and it is pernicious (and ultimately from the point of view of the firms themselves self-defeating).

      1. reason

        In Germany firms are compelled (under threat of financial penalty) to invest in the training of their workers. If every firm is under such compulsion, there is no reason it can’t work.

    3. Susan the other

      There is only one realistic question to be asked here. How to achieve well being for all people. In the USA our well being is more “expensive” than it is in Africa, but it is still well being we are talking about, not corporate profits. If Africa can achieve well being cheaper than we can, for a while, fine. But we should not be impoverished by it. There are all sorts of taxes to adjust these imbalances.

  13. Pat

    This is an important subject.
    While Lazonick has correctly identified the problem, financialization and the obligation to maximize shareholder value, his solutions are vague, unrealistic and unenforceable.
    We need specific solutions that are possible to enact and likely to work.

    Where does the dictum “maximizing shareholder value (or profit)” come from? It is read out the fiduciary duties that officers and directors owe to the corporation and its shareholders. Apparently the basic duty is something like “promoting the value of the corporation for the benefit of its stockholders”, but this has subsequently been taken to mean maximizing value and/or profit.
    So the solution would be to change Delaware corporate law so that some other standard applies, such as “promoting the long-term value of the corporation”, or “preserving the value of the corporation and its shareholders.”

    Other partial solutions include:
    - banning clauses that indemnify corporate directors and officers from shareholders derivative and other civil lawsuits. Such clauses should be declared “void as a matter of public policy”. When officers and directors are personally liable, they are much likely to act responsibly.
    - changing the standard for reasonable compensation to a “real” reasonable level, such as twenty times average salary in the corporation. This should include stock options.
    - tightening or enforcing conflict of interest laws for compensation boards
    - allowing holders of funds to sue the officers of funds that fail to monitor companies whose stock they hold. This would help with the problem of lazy, passive pension funds.
    - change the timeframe when options are exercisable, such as 10-15 years
    - do not allow insiders to hedge against stock options with related trusts

    So, how do you change things like this? Mostly by trying to change specific sections in states’ corporate codes, starting with Delaware (which is the trend-setter in corporate law). It wouldn’t be easy, but at least it’s possible.
    You can’t just ban stock-buybacks or dividends, as Lazonick suggests, nor can you put taxpayers on boards of directors. It would be great to have workers’ representatives on the boards, as they do in Germany, but I don’t know how you could do that under existing law. If you ask for too much, or for generalities, you get nothing (except disappointment).

    1. For Public Consumption

      “Where does the dictum “maximizing shareholder value (or profit)” come from? ”

      I had a friend a long time ago who told me the president of his medium sized company always liked to say that their are eight groups trying to put him out of business:

      competitors

      suppliers

      employees

      government

      insurance companies

      lawyers

      bankers

      and shareholders

      He said it wasn’t a bad place to work, which is kinda a “balance” story I guess.

      1. reason

        But all of those groups, with the exception of competitors have a direct interest in his firm’s survival (indeed in it prospering).

    2. SqueakyRat

      Stock buy-backs and dividends are entirely different things, and I don’t see where the poster recommended banning the latter.

    3. Ex;pat

      As I recall from my corporate law class, the notion that the role of a corporation was to eschew the eleemosynary (specifically, a living wage for Ford workers) in favour of alleged “stockholder value” came from taxpayer-paid judges. Like corporate personhood, this judge-made law has become a battering ram against common sense legislative attempts to reform corporations for the good of the public.

  14. F. Beard

    How can the public take control of the business corporation and make it work for the real economy?

    If the counterfeiting cartel, the banking system, was abolished then wouldn’t corporations have to issue more common stock to finance themselves? And if the corporations had to issue more common stock, wouldn’t they tend to be more broadly owned? And if the corporations were more broadly owned wouldn’t they behave in a more socially acceptable manner?

    1. Skippy

      Banks and corporations are cut from the same ideological cloth. You like / favor corporations, so its end the banking system and hand over *that power* to the corporations.

      Basically you could interchange the sort of human that works at the higher echelons for both and not bat an eye, find any indiscernible difference, new boss same as the old boss thingy.

      How about reforming the liability laws, LLC et al or making that provenance available to every one?

      Skippy… Ethics? Without responsibility for all acts, intentional or other wise, its all a sham.

      1. F. Beard

        You like / favor corporations, so its end the banking system and hand over *that power* to the corporations. Skippy

        Correction: Hand over that power to the stockholders which eventually would be nearly everyone as the corporations were forced by economic necessity to “share” more wealth and power.

        How about reforming the liability laws, LLC et al or making that provenance available to every one? Skippy

        Hopefully, broadly owned corporations would make that unnecessary but if not then sure, why not?

        1. Skippy

          Stock holders is a vacuous term, it could mean any individual or group with out regard to concentration levels. Corporations exist to crate profit (power), all other considerations are moot.

          Skippy… Your OK with every one having LLC powers? Yet up thread you say… “Relevant point. The officers of a corporation should be individually liable.”

          Which is it?

          1. F. Beard

            Corporations exist to crate profit (power), all other considerations are moot. Skippy

            The Bible has an interesting (no pun intended) take on profits. Profits are good but profit taking is bad. This implies that dividends are bad too not just usury. OTOH, common stock as money requires no usury or dividends. The profit accrues in the value of the stock which would normally be split to keep the value per share from appreciating. (Money should neither lose nor gain purchasing power).

            Skippy… Your OK with every one having LLC powers? Skippy

            I don’t know enough to have a serious opinion. Probably not though since we should be responsible for our actions.

            Yet up thread you say… “Relevant point. The officers of a corporation should be individually liable.”

            Which is it? Skippy

            I’ll go with “The officers of a corporation should be individually liable”. Why not? With great power should go great responsibility.

        2. F. Beard

          Stock holders is a vacuous term, it could mean any individual or group with out regard to concentration levels. Skippy

          Without the counterfeiting cartel (the banking system) to steal their workers’ purchasing power with, I reckon that the corporations would long ago have had to “share” wealth and power with their workers and probably with their customers too.

  15. Joe S

    Have just returned from Japan where I spent some time explaining to my fiancée parents the difference in career employment. Basically in Japan the culture of “job for life” still exists. In simple terms, corporations in Japan still make decisions taking into account the interests of their workers. This model is coming under pressure in the face of competition from lower wage economies in nearby countries. Newly appointed CEOs of some of Japan’s large corporations attempting to change this model complain of resistance to weakening job security coming from their own director boards. The contrast with the west is quite stark

  16. Maximilien

    Could it be that the problem with the modern corporation is that it is usually publicly-traded? And therefore “in play”, subject not so much to the forces of the consumer and labor markets as to those of the stock market? And that therefore stock price must be protected at all costs, as a hoard to fund buyouts of other companies or prevent takeovers by them?

    Is the publicly-traded corporation the most efficient way of aggregating and deploying capital? Can privately-held ones—undistracted by stock price—do as well, or better? Many great companies are or were once successful private companies. Why must earnings be capitalized, ie. sold on the stock market? What happened to owning and running a business, living off its income, and then selling it or handing it over to a partner? (I
    recognize that if all companies were private, in due course a quasi-public market in their shares would probably spring up.)

    Is it a problem of size? Do public corporations have a tendency to grow too large, using their currency—their stock—to finance the acquisition of too many other companies? Private companies have no such currency, a natural limit on their growth. Should the size of public companies be capped in some way?

    I don’t have any answers, just questions. Musing of a midnight….

    Is the problem with the modern corporation

    1. reason

      Actually, your musing are very good questions. It used to be that public companies had an advantage in their cost of capital. Shareholders funds contained an element of speculation and freed them from the constraints of banks. But since interest rates have declined and they have discovered that interest payments (unlike dividends) are a tax deduction, they borrow more than they used to anyway (but often directly from the public not through banks). I suspect now it simply has to do with size (see issuing their own bonds above). I would like to ban hostile takeovers (I’m not convinced at all by the arguments for them, and they tend to result in a uniform (aggessive) management culture). But that doesn’t stop voluntary mergers.

  17. Gundar

    This is interesting stuff and, as always on this blog, the commentary is equally enlightening. So, thank you commentators. You’ve enriched my understanding of this subject.
    At this juncture, I find myself at the very bottom of the paradigm. That is, unemployed. Am I disenchanted? Yes and no. I remain steadfast and confident, although God only knows how deep that reservoir is. News fills the void and when I come across an interesting tidbit or cross-posting like this my pluck is restored momentarily. Educated, but without place in the current economy, I scan the internet for opportunities that could draw my disparate skills into a new career. Every day brings a re-imagining of what I could be. But so far it has been just that, a re-imagining. My experience professionally has thus far been interesting, ill-compensated and instructive.
    The first set of values outside of the homestead I learned as a U.S. Marine reservist in the late 90s and early 00s. As a U.S. Marine, we were taught values (or indoctrinated, if you like) for our life and work that seem inconsistent with those of the private sector. Selflessness, team work and strengthening our force from the bottom up were of paramount importance as were continuing education and guidance. These values made perfect sense to me because I could see very easily how embodying them would improve me as well as the organization. They were the foundation upon which everything else we did rested. This is not to say that the Marine Corps is perfect. It is not, but the culture and values the Marine Corps promotes and instills are, in my opinion, the best templates for human organization available. There are careerists in the Marine Corps, but careerism is recognized as anathema to morale and inconsistent with our core values. Our core values, as you may know from the television advertisements, are Honor, Courage, Commitment. There was even required classroom instruction for us about careerism and how detrimental to the Marine Corps careerists are. Imagine such a thing at Goldman Sachs!!
    For some reason, back then, I thought most corporations maintained this same value system or something closely resembling it. A naïve Marine I was. It could have been all that hooey the Marine Corps told us about how all these Marines went on to become great CEOs and how advantageous it is to have military experience on a resume. I could not have been more wrong.
    The second set of values I refused to fully adopt, with heart and soul, and thus explains my current status. I had the opportunity to work in the debt collections industry during the Bush boom-bust cycle and it was most educational. Reading credit reports was interesting, recovering the debt was mildly exciting and the work environment was at times corrosive. .
    Friends, debt collections is a dirty business but somebody has to handle the bank’s garbage. And there is no shortage of willing handlers in this burg where economic winter arrived early and the faintest signs of spring are not yet in the air. The companies are always hiring and firing, the revolving door always revolving. Some companies pay lip service to team work and professionalism, but the subtext is perform or die. You’re given three months to “hit a number” or you’re out the door. Fair enough. Once you hit your number your number goes up. The environment itself, with all its attendant unpleasantries, usually causes about a third of new hires to bail out in the first month. There is now a crippling shortage of debtors able to pay their bills, so competition is fierce for a decent share of the business or access to “high-propensity” accounts. I’m sure you can imagine the thievery and folly that ensues.
    Friends, I call this an opportunity because it allowed a bird’s eye view of the future of uncut capitalism. Normally, I would think the people who work at Goldman Sachs or anywhere else on Wall street have a better view of where it’s all going. But the prestige of their position and their access to the Holy Grail of financial knowledge blinds them to the more pedestrian transition that’s taking place on Main street. That is, we are all becoming employees of the banks and, therefore, must adopt their value system to remain employed.

    1. Keenan

      Gundar:

      RE: Careerism
      You may be interested in Robert Corram’s bio of Col John Boyd. ( Boyd – The Fighter Pilot Who Changed the Art of War )Boyd, an Air Force officer whose “Fighter Mafia” clashed with the careerists in the military & defense industry, was recognized by Marine general Al Gray as the thinker whose ideas helped in his transformation of the Corps.

      Several of Boyd’s old associates – Chuck Spinney, Pierre Sprey, Chet Richards – remain active in the blogosphere advancing Boyd’s philosophy.

  18. vlade

    Any society which equates status with wealth will experience growing inequalities.
    A religious society which equates lack of wealth with disfavour-from-the-divine (and vice versa) will experience growing inequalities.

    The only fix – and it’s a long long term fix – is to change the value of the society so that status is not determined by one’s wealth. I’d posit that the larger the society, the harder this is, for the mechanisms for checking this (shame, ostracization etc.) are much less efficient in a large, anonymous, society than a smaller one with lots of interpersonal connections. Also, ironically, rigid societies are better at this than liberal ones (for in rigid ones the effort is focused and concentrated on one given goal, but the liberal is fractured). Note: I don’t advocate rigid societies, but they do have some advantages. Liberal societ is not costless society – in fact, I’d posit that working liberal society takes the most effort to maintain. You get what you put in.

    1. reason

      The natural world solves this problem by making the maintenance of status costly. Propertarian society, uniquely in the natural world, protects this status for people, basically for free. We should make it more costly again.

  19. ep3

    remember, owning stock is going to be the new form of democracy. anyone can be an owner and have a say in a corporation. It rewards hard work. People who don’t work still get to vote currently. But with corporations running things, acting as our new gov’ts, those that don’t work and don’t invest their monies in stock won’t have a vote that could potentially interfere with the desire of hard working americans. people can let their dollars show their support for certain policy objectives and companies by investing dollars in companies they feel are good for america. Like Apple. We can all invest in apple and support it’s abuse of employees in china for the sake of giving us the best ipad possible.

    Watch the movies Robocop and Robocop 2. See how “OCP” operates and how it treats the city of detroit.

  20. George

    There have been quite a lot of changes in many aspects of the world over the last 100 years. Identifying one, or even several, of them as the reasons corporations appear to have changed their strategy is quite likely wrong. Correlation != causation.

    Everything is changing all the time. Rules and regulations == programming for an open environment.

    In my technical life, nobody would plan on releasing even a small program for general use without extensive testing and the use of the best tools we programmers have.

    Yet 2000-page laws are released with no testing.

    That approach cannot possibly work. It doesn’t work.

    Corporations don’t scale either : corpations can’t write rule books for external reality any better than government.

    I think it is likely that we have conglomerates and veyr large corporations because we have a Fed that made borrowing easy.

    In any case, we can’t know much about our economic, social and political reality until we take everything back to neutral and let the system sort itself our for a while. E.g. take away the gov life support of the 0.1%-owned entities, let the big banks go broke, let all of the conglomerates go broke, …

    Break up all the cartels : the medical cartel, the legal cartel, the insurance cartel, the banking cartel, …

    Then we can have some idea of what things actually cost, and then we can have some idea of what to do about them.

    Until then, we are lost at sea, no compass, no sail, no oars. And all of the ‘this might have caused that’ essays like this one are of nearly zero use.

    1. reason

      Borrowing being easy is not necessarily wrong in itself. Borrowing for speculation is another matter. But I agree in general we need a world with less private debt – but the only way we can square that with public demand for safe financial assets, is more public debt (of one form or another). I think when we moved in the 90s to a policy mix of fiscal tightness and monetary looseness it was a mistake. The other way around is better.

  21. Susan the other

    I wish this title were “From Producer to Predator and Back Again.” A la Bilbo Baggins. But it never is back again to what we once knew; it is always back again to our own good sense to where we can redefine our future. I’m beginning to reconsider the idea of going back to the land, or the neighborhood. In a new and modern way. For a form of living as small farmers or manufacturers that is green and basic, but not one of poverty. And to redefine living in the run-down parts of cities the same way. Inner-city back- to-the-land. For those that choose to live basically but not in deprivation. Why can’t each neighborhood, or county, have its own little industry and its own “subsistence,” on a level to produce a high degree of well-being? Then who will be in a position to exploit the desperate? No one, that’s who.

  22. Robert Asher

    These lying dudes always were profit-oriented. When unions were strong enough to disrupt production, thus threatening profits, the top corporations accepted their presence (and fought them over every grievnce).Technological change has produced new situations for US manufacturing corporations. Historically they could afford to pay higher wages than European competitors because US factories were more productive.By the end of the 1970s the rate of technogical convergence was so advanced (new technologies could be deployed anywhere outside the US) that US manufacturers faced a real challenge to their earnings from competitors using equal technology (and often using it more intelligently, e.g., the Japanese)and paying workers less and CONTROLLING workers more. Japanese car companies busted their unions with aid from finance capital in 1954 (Nissan strike). They then controlled their labor force in ways that Apple’s subcontractors do today…see not so much new under the sun. I believe that the inability of US manufacturers to compete with foreign manufacturers led the investment banks on Wall Street to pursue the speculative approach to money making. I also agree with Lazonick that when executives started getting more stock compensation (ironically because income tax rates for the top brackets were appropriately twice the rate they are today)the priorities of all managements were distorted.

  23. bsmi021

    People it seems that quite a large number of the people who have taken to time to post on this piece need to realize that they need to go back to school! Big business and small business or for that matter any business, is in business for only one reason and that is to make a PROFIT! Now for some unknown reason it seams beyond so many people to fully understand this point. But when you try and tie this idea back into this piece is very simple, YES companys big and small pre 1970 did care about their employees many times more than they have after 1970. The trouble started at this time because of many issues, [gas prises,unions,inflation education] to name a few. And also we must not to forget that computers were starting to make in roads to these larges corps, and with this ability came with it a sense because of schooling that had changed back in the 60′s, that if we can up profits, then i can up my bonus! So life was much different and better in many ways in the past, people were not treated like cattle, there was a sense of want and need. I have spoken to many different people in the last 10 years, they are from different back grounds and financial ability’s, but there is one thing that always stands out, [things and people are not better today,there is to much greed,to much stress,to much so called self interest] and with all that comes the mess this world is in today!

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