Raising of the Middle Class

In a recent research report (Addressing the Problem of Stagnant Wages) Frank Levy and Tom Kochan note: “In the three decades after World War II, a central feature of the American economy was a mass upward mobility in which each generation lived better than the last, and workers experienced earnings gains through much of their careers. In short, the American Dream was alive and well.”

 

The report explains that following the end of World War II government—both democrat and republican administrations—and organized labor played an active role in enabling the correlative movement of worker productivity and wages—a rise in productivity is accompanied by a rise in wages.  Also important is the fact that America was the only one left standing with an intact manufacturing base.  And so, by default, America became the world’s producer.  Demand was high and work was plentiful; the production-consumption cycle was at work.

 

Moreover, a critical element to the rise in the middle class following WWII was the Servicemen’s Readjustment Act of 1944 (i.e. the GI Bill). The GI Bill afforded education, training, loan guarantees for home, farm and businesses and unemployment pay thus significantly contributing as a cause of the rise of a middle class life style. It should be noted that the post World War I era had corporations managed with 20^th century management practices but it did not have the GI Bill and there was no rising middle class.

 

 

Self-Interest Usurps Viability

As Levy and Kochan noted, “since the 1970s, large corporations have dramatically increased their economic power and political influence”. Consequently the role of government and organized labor began to diminish as corporations sought deregulation as a way to enable socially riskier activity in their efforts to maximize profit.  Levy and Kochan claim, “the results have been substantial legislative changes that deregulated major industries, liberalized banking rules, undercut labor-law enforcement and reform, prevented increases in the federal minimum wage, and fostered an ideology of free-market liberalism and the “maximization of shareholder value” at the expense of other stakeholders”…and hence “ ‘the focus of investment activities has shifted—from investing in productive, value-added enterprises to extracting money from companies for re-investment in higher-yielding activities.”

 

Clearly if the business of business is profit, then corporate management will choose those activities and employ assets of the company in a way that offers the greatest (monetary) return in the short-term, without too much regard for unintended consequences and collateral damgage. Recent dramatic evidence of this orientation can be seen by the record profits realized along with exorbitant levels of CEO compensation (reaching up to 1000 times that of the lowest paid employee) in the post-2008 Great Recession while unemployment increased in an anemic economy.  Why? Not only where corporate executives squeezing the most out of labor they were also employing the instrumental value of the enterprise in financial transactions to make profit—the interest was not in making things, just making money.

 

According to Levy and Kochan  “prior to these changes, American business practiced a managerial capitalism that shared the returns on investments in new goods and services among the firms’ investors, science and engineering professionals, managers, and other employees. Today, American business emphasizes a form of financial capitalism that rewards financial innovations, transactions, and restructuring.”  In the former productivity and wages are strong correlates but in the latter they are not.

 

Over the course of the 20^th century, the business enterprise in America, which began with the founder/owner and management being synonymous, transitioned to professional managers overseeing the operations of the enterprise (managerial capitalism) in the 1940’s and then beginning in the 1980’s (to what we now have) where the executive elite leverage corporate assets in support of the goal of maximizing return to shareholders.  This transition in corporate management correlates with the transformation from industrial capitalism to financial capitalism—from making things to making profit.

 

Within the former system the business enterprise earns a profit as a by-product of producing goods and services, while within the latter the enterprise seeks to make profit—anyway it can—for the benefit of shareholders.  With increasing shareholder value the focus of the corporate executive no longer serves the business of the firm as much as they serve the (short-term) interests of the shareholders.  In a 2007 presentation at the Conference on Entrepreneurship and Capitalism Mark Mizruchi claimed this change represents “a resurgence of stockholders and investors that calls forth a new era of shareholder power.”  With the greatest portion of an executive’s compensation coming in the form of stock, options and other incentives, serving shareholders translates into serving oneself.   Accordingly, the corporation’s value is strictly instrumental to the selfish interests of the executive elite.  We now have self-interest maximizing corporate executives of our largest corporations with considerable power and influence acting as society’s overlords.

 

It’s Predictable

All of this was quite predictable considering the precept of our system of economics.  That is, financial capitalism is a logical development from the notion that material self-interest maximization among independent individuals is the way to greater societal wealth.  The material self-interest dynamic leads to a self-reinforcing cycle whereby societal culture mediates the development of the necessary traits by favoring those who exhibit the behavior reflective of these traits.  More to the point, the words individualistic, competitive, materialistic, and self-interested are quite descriptive of what Western society favors.  Thus not surprisingly most Americans believe themselves to be independent individuals who are unashamedly competitive with a desire to amass great personal wealth.  This perspective is quite evident among most, especially top corporate executives.

 

If the aim is ‘to maximize your material self-interest’, then why wouldn’t those in authority—those with the greater influence—leverage the system and seek to perpetuate it to their advantage?  Left unchecked—yes, unregulated—self-interested behavior becomes unencumbered behavior serving only the wealthy. A system in support of self-interest will unavoidably become self-serving.  With the inherent interdependence of people in society such behavior is ultimately self-destructive behavior.  Hence by cooperating with this system, in the end we all lose.

 

Everyone, Not Select Ones

Some might argue that the weak and impoverished among us shouldn’t be guaranteed benefits from the government; that the weak link in the chain is weakening the strength of society.   A policy of entitlement is a drain on society and it must be eliminated.

 

But there will always be a weakest link!  What are we to do, follow the misguided practices of business management and periodically cast out the bottom 10% from society like they rid their organizations of the past year’s low performers?

 

As Gregory Bateson asserted evolution follows the path of viability.  The implication being that the viability of a society depends on the viability of all its citizens, not just a select few.  If this viability is not sustained then the prospect for society’s evolution, its continued progress, is unlikely.

 

As Richard Wilkinson and Kate Pickett credibly present in their book The Spirit Level, as income inequality increases in industrialized societies so too do health and social problems.  As Yogi Berra might say these results may be too coincidental to be a coincidence.

Clearly we are subverting progress.  With almost everything framed in terms of a market, the auto-correlative nature of competition ensures that the ‘haves’ will always have more and more, and the ‘have nots’ will get less and less.  It is not that opportunity for most is lost it’s that it is never revealed—you can’t lose what you don’t have.

 

According to the self-interest maxim of our economic system, economic order emerges when each individual seeks to better his/her condition. This is precisely what the executives are doing—looking out for No. 1. What’s in it for me is our battle cry. When there is a choice between we and me, choose me!

 

The belief is if each selfishly strives to improve materially, then it stands to reason that society will also be better off. The well-engrained belief is, seek your own gain and the invisible hand will see to it that your actions will contribute to the welfare of society. Unfortunately this is a logical fallacy!  Proven fallacious by what we are now experiencing, have experienced before and will likely experience in the future.

 

In our current situation it appears the invisible hands are tied. So, who is in-charge of keeping those hands free to help? Might they be focused on their self-interests?

 

Therefore instead of cutting away the weak link to strengthen the chain it would be an improvement if we changed the system so that we cause less of us to become weak and impoverished.  If dealing with problem people is costly we ought to stop creating so many problem people!

 

What do you suspect 90% of the people would prefer, leaders who focus on making money or leaders who focus on making progress?