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As regular readers know, I believe that the discipline known as "Economics" is in need of major reconsideration. As best I can tell without having studied the subject, mainstream economic theory focuses on transactions - on buying, selling, and the costs of completing a transaction, which may or may not be factored into the bargain. These are obviously the principal concerns of businessmen, but perhaps for that very reason economists ought to take a broader, corrective view. Insofar as they leave employee quality of life issues off the table, they're pretending to be "scientific," but they're also failing to assess the whole world of business, which, to the extent that most people have to work to support themselves, includes almost everybody, not just managers and other decision-makers. Economists ought to develop the yardsticks that will tell us how we're really doing as an economy. Because we're doing really poorly, all folks considered. The unprecedented, obscene wealth that a few well-placed players have accrued over the past decade is not synonymous, or even congruent, with true prosperity.
In the current issue of The New York Review of Books, John Lardner looks at three very different books about the sorry state of American business. ("The Specter Haunting Your Office.") Louis Uchitelle, a reporter at The New York Times, has followed up The Downsizing of America (1996) with The Disposable American: Layoffs and Their Consequences. Here is a book that ought to explode, once and for all, the notion that displaced workers can, by dint of learning new skills, regain their footing in the job market. In fact, they rarely do, even with the benefit of advanced degrees. The rude fact of the matter is that layoffs permanently insult the well-being of most workers. You can read Mr Uchitelle's book, or you can collect stories from your extended family, but one way or the other you will discover that the worker who lost his job but subsequently found an even better one is extremely rare, and certainly a fantasy figure so far as supporting sound economic policy goes.
Uchitelle sees Jack Welch as a pivotal figure. Before he came along, a CEO was expected to manage the existing enterprise. Welch enlarged the job description: lifting a page from the corporate raider's playbook, he promised to manage the shareholders' capital as well, by maintaining a steady lookout for more profitable places to put it. There is a case to be made for his approach. It may be better for a company—better even for its workers, and for the economy—to have layoffs spread over time rather than deferred until a moment of crisis. What today's managers like to call a "flexible workforce" has arguably helped American corporations seize opportunities they would have missed if the US had the kind of employment protection that exists in, say, France. Uchitelle is not dogmatic on these points. He simply wants it acknowledged that we are going through something more than a few bumps on the road to "a new equilibrium at the high end of innovation and production." Permanent disequilibrium, he argues, would be a more accurate picture of where we're headed.
"Permanent disequilibrium" may be where we're headed, but it's obviously a destination with little political appeal. The answer is not, perhaps, to regulate for equilibrium, as the French do, but to recalibrate economic analysis so that the costs of chaos are brought into the equation.
We're all familiar with the unfortunate consequences of fixating on the bottom line of a quarterly report. Short-term methods for improving stock price are ancillary to good business practices at best. But short-term results are prized by a stock market that increasingly resembles a gambling casino. This is the brunt of the argument made by John C Bogle's The Battle for the Soul of Capitalism. Mr Bogle has made himself very wealthy by changing his investments as infrequently as possible; to him, high market volatility is a sign of inefficiency and underperformance. Any given attempt to outperform the market will fail to work at some point; perhaps it would be wise to sacrifice "getting lucky" to more deliberate investment strategy. If markets put less pressure on issuers, in turn, businesses might be run more intelligently - without the fandango of "managers' capitalism."
"Managers' capitalism," then, is Bogle's shorthand for a system of rules, practices, and standards of behavior designed to bring quick and sure rewards to a few at long-term cost to many. Executives are not the only suspects here, and shareholders are not the only victims. Often, Bogle observes, workers and shareholders get defrauded together. That is obviously true when managers cook the books; it can also be true when they cook up dramatic "restructuring" plans entailing mass layoffs. As Uchitelle points out, these plans often generate smaller-than-anticipated savings and bigger-than-anticipated costs—in morale and trust, especially. The point of many recent layoffs has been to free up capital for the repayment of debt incurred in mergers and acquisitions; those deals have a notably bad track record of their own. To understand why so many mergers continue to occur—$3.79 trillion worth in 2006—Bogle suggests that we consider the consequences for the executives who arrange them: not just the bonuses and the increased pay and power, but the ability to "take huge writeoffs—largely ignored by market participants —and create 'cookie jar' reserves"—paper assets created through mergers —"available at the beck and call of management to inflate future earnings on demand."
The third book on Mr Lardner's list is The Great American Jobs Scam, by Greg LeRoy. Its subject is "economic development," the policy of waiving taxes and subsidizing construction in order to lure businesses to towns and regions. It is practiced at every governmental level, and in Mr LeRoy's view it is hardly ever justifiable. "Most companies, LeRoy shows, enter the process with their minds made up. Site selection experts, when they are not off helping companies stage their elaborate 'searches,' acknowledge that business fundamentals, such as access to key customers and suppliers, generally carry more eight than subsidies do." So the subsidiaries are unnecessary. If only the damage stopped there!
Beyond the injury to city, county, and state treasuries—and the services they fund—the economic development process "demeans" and "degrades" public officials, LeRoy writes. He means not only the officials who participate, but also those who are cut out of the process—such as the school board members who get "no say in property tax abatements that will corrode their budget" or the revenue director whose "sober advice is upstaged by the frothy projections of an economist rented by the Chamber of Commerce." The rules are designed to bestow the biggest rewards on the companies least likely to show any true attachment to workers or communities. New businesses are subsidized at the expense of existing ones. Big-box retailers gain while independent merchants lose. Commercial and social life is pulled away from Main Streets and downtowns toward malls and strips. Local and state leaders have been known to grovel before telemarketing firms, gambling casinos, and the operators of private prisons.
All three of this books call for something that I think can be called "humanist economics." Humanist economics would evaluate economies from a far broader perspective than anything taught today. Operating on the axioms that economic activity is good and that many people derive satisfaction as well as wealth from engaging in economic activity well, humanist economics would look for ways of making these benefits accessible to more people. This is not the redistributive policy that it might seem to be, because the benefits in question are open-ended: my job-satisfaction is your loss only if you're my sadistic boss. We certainly need economic models that diminish, instead of concentrating, the impact of personal power upon job performance; we need a theory of corporations that deflects, instead of magnifying, aggressive egotism in business hierarchies. Asking people to behave themselves is not enough. We ought to know what the costs of bad behavior are and charge them accordingly. I'm failure sure that the American economy's balance sheet would be much less rosy if we took everything into account. But we would know where we were, and we would see how to improve. We wouldn't need consultants to tell us the obvious.
Copyright (c) 2007 Pourover Press