By William Lazonick, AlterNet
Posted on April 1, 2012, Printed on April 15, 2012
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.
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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.
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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
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.
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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.
William Lazonick is professor of economics and director of the UMass Center for Industrial Competitiveness. He is president of the Academic-Industry Research Network. 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.- 2012 Independent Media Institute. All rights reserved.
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