Economist William Lazonick; Myths about Corporations that Feed the War on the Middle Class

Broadcast 4/11/2012 at 4:48 PM EDT (55 Listens, 45 Downloads, 710 Itunes)
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William Lazonick

Bio Sketch

William Lazonick is Professor in the Department of Regional Economic and Social Development at University of Massachusetts Lowell and Director of the UMass Lowell Center for Industrial Competitiveness. He is also affiliated with the CNRS Groupe de Recherche en Ã"degreesconomie Thà ©orique et Appliquà ©e of Università © Montesquieu Bordeaux IV. Previously, he was Assistant and Associate Professor of Economics at Harvard University (1975-1984) and Professor of Economics at Barnard College of Columbia University (1985-1993), and Distinguished Research Professor, INSEAD (1996-2007).  He has also been on the faculties of the University of Tokyo (1996-1997), Harvard Business School (1984-1986), and University of Toronto (1982-1983), and was a visiting member of the Institute for Advanced Study in Princeton (1989-1990). Numerous governmental agencies and private foundations in Europe, the United States, and Japan have funded his research. In August 2009, his book,Sustainable Prosperity in the New Economy?: Business Organization and High-Tech Employment in the United States, will be available from the Upjohn Institute for Employment Research.

In 1991 Professor Lazonick was the first economist to serve as president of the Business History Conference, the main professional association of business historians in the United States. His work through the early 1990s was the subject of a chapter in the volume, American Economists of the Late Twentieth Century (Elgar, 1996).  He was the youngest of 36 economists selected worldwide to write an autobiographical essay in Exemplary Economists (Elgar 2000). He is the author or editor of twelve books, including Competitive Advantage of the Shop Floor (Harvard University Press, 1990) and Business Organization and the Myth of the Market Economy (Cambridge University Press, 1991), and some 100 academic articles. In recent years, much of his work has been translated into Chinese, among a number of other foreign languages. With funding from the Upjohn Institute for Employment Research, he is currently completing a book, Sustainable Prosperity in the New Economy?: Business Organization and High-tech Employment in the United States.  He is regularly invited to speak at academic conferences, research institutes, universities, government agencies, and corporate associations throughout the world. 

Very VERY rough interview notes

Rob: Please define Middle class. 

that you have a degree of economic security where you can basically do the things you need to do. You don't have a lot of money to waste, live in a home, be secure in that, have a job that's not going to disappear tomorrow, or if that job disappears, you have skills so you can find another job, and  you have security for retirement". and finally, that this can be passed on to the next generation. The notion that people could aspire to this kind of security really started setting in in the post war two decades, at least for whites. In the sixties and seventies, aided by the war on poverty, African Americans began to also enjoy" They were also among the first to experience the disappearance" in the 1980s. 

Over the last three decades a lot of that has been disappearing for a lot of people. 

Since the 1980's there's been an erosion of this middle class population. 

Rob: Are there stats on the percentage of people in the middle class at the peak and now?

Union jobs are down from 23% in eighties to 7%.  That drop started in the eighties. Companies started closing whole plants intentionally, with no intention of re-opening them. 

Rob: You write that Japanese companies had  Hierarchical integration vs American  hierarchical segmentation between "management" and  "labor"

Japan took college educated people, put them into large organizations, gave them careers that they expected to stay in for a lifetime. Give them employment security and promotion opportunities. That's organizational integration-- integrated into the general goals of the organization. This is important for knowledge intensive and capital intensive. if you don't get a high utilization of those resources, which requires a large market share, you're not going to be able to be" competitive. You need people who can build the products and push them through the door. We call those workers blue collar workers. 

in the US, there was a process of embedding of thinking and learning amidst managers and not on the shop floor. There was a division between the managerial organization and the shop floor. managerial people were employees, not capitalists. They were entrusted with part of the learning process. it was much more top down. It worked as long as they didn't have Japanese competition.

The Japanese integrated blue collar workers into the learning process much more. At the end of the  19th century, Japan didn't have skilled workers-- so companies played a larger role in training workers and integrating them into the workplace. 

In the US manufacturers would develop a technology and would ask, how can we make the least use of workers, how can we be least reliant on their skills. In Japan, they asked how could they develop workers so they'd contribute to their productivity. 

Even before the seventies, there was recognition that there was a problem with productivity, that workers were alienated from repetitive work. 

Rob: what about the education system that is based on Prussian model that is designed to create obedient factory workers and soldiers. 

There were 200,000 school districts in the 30s, now there are are around 30,000. 

One of the things about the US education system-- since the early 1900s-- because of influx of immigrants, and the need for "americanization." 

If you look at the whole history of American education, the higher education is developed before secondary education is complete. 

By the 1910's, 1920's you have an education that prepares engineers and managers to go into the corporate economy, and then primary and secondary education that prepares people for jobs that are not particularly challenging in terms of a lifelong career. You can see this polarization in most large corporations-- between the salaried worker and hourly, white collar and 

Since the beginning of the 1980s employment relations in US industrial corporations have undergone three major structural changes  -- which I summarize as "rationalization", "marketization", and "globalization"  -- that have permanently eliminated middle-class jobs. From the early  1980s rationalization, characterized by plant closings, eliminated the jobs of unionized blue-collar workers. From the  early  1990s marketization, characterized by the end of a career with one company as an employment norm, placed the job security of middle-aged and older white-collar workers in jeopardy. From the early 2000s globalization, characterized by the offshoring of employment, left all types of members of the US labor force, even those with advanced educational credentials and substantial work experience, vulnerable to displacement. 

the 1% and Outrageous Pay of Top Executives

What we have here is not "market forces" at work but an exclusive club that promotes the interests of the 0.1%. All too often executives allocate corporate resources to benefit themselves rather than to invest in innovation and job creation. It is time that the 99% see through the ideology, break up the club, and get the U.S. economy back on track.

We know that there's been a huge concentration of income at the top, not just the 1%, but the .1%. This has been getting worse and worse. 

The problem of executive pay has been talked about since the 1990's. 

If you look at what's driving, it's been going on since the 80s. 

There's a view that there's supply and demand for the market, and that's how the market values you and you must be worth it. 

It's not market forces. 

Before the 1980s, there were a number of things that kept top executives in check. One, top executives saw themselves as members of large organizations. There was a sharing"  post-war there was a tendency towards more equal distribution of income. 

IN the 1950's the top income bracket was 91%. Top executives got congress to allow them to take stock options taxed at the 25% rate. Congress wasn't in the pockets of top executives then. By 1976, congress had eliminate this privilege for top executives. 

What changed from the late 1970s was a transformation of Wall Street away from long term investment to trading in corporate securities-- and new market, NASDAQ, for more speculative investments. All of a sudden, people, both in wall street and start ups, in the 1980s were making lots of money and the executives started saying "we should be making a lot of money." Boards started giving it to them. 

The biggest single component of executive pay comes from exercising stock options. 

When stocks go down companies give extra perks and stocks and buy back stocks to raise value. 

In the 80's stock prices appreciation was 12% a year and 15% a year in the 90s. Executives were cashing in stock options, making millions. Over last decade, market has not been as good. So corporate executives started using stock buyback. A company re-purchases their own stock. Over last decade they've repurchased about $3 trillion. That just goes to raise stock price. it's a short term boost. 

When companies do buybacks, executives are more likely to exercise their options" since it helps to get the stock price up. I think a lot of people think that's how you run a company, that's what a good top executive does is how to manipulate a stock price. These top execs are not doing their jobs. We need to figure out how to reproduce revenues and employment opportunities and invest in new ideas and opportunities. 

This is a massive phenomena. For Exxon Mobile, it's $175 billion. 

powerful myths of corporate governance as part of a movement to make corporations work for the 99%. To start, we have to recognize these corporations for what they are not.

They should not be run to "maximize shareholder value."shareholder-value ideology. 

The only people who make an investment in the corporation and therefore a risk on whether it will be successful are public shareholders. The problem with this is, first of all the notion of who bears risk in the corporation.  What you find is, if you go back to history, we the tax payers provide investments-- infrastructure, educated workers. We then should get a return on investment when they are successful-- 

Rob: the biggest corporations, like GE either don't pay taxes or get corporate welfare. 

If you are a worker in a company, you go to work on any particular day, it's possible that you're going to get paid a wage" you'll come in do what you're supposed to do-- you'll contribute nothing to the future of this company. That's not what most managers expect from workers. They want people who exercise with initiative. That's what produces successful companies. Why do they do that? Partly because they think that if the company is successful that they'll be rewarded" through promotion, higher pay, promotion, etc. That's how things were through the 1980's where people stayed with a company" This changed in the 1990s to the point now where it's totally gone. 

If you look finally at who the shareholders are, they are the people who do the least for the success of the company. They have very little risk because in an instance they can sell their shares and they often do. 

The stock market does not supply money to the market. Companies supply money to the market. Companies are supporting the stock market. This ideology that companies should be run to maximize shareholder value-- I'm quoting Jack Welch, CEO of GE, "This is insane." It's just absurd. People who are losing out are the 99%. 

Rob: advocates of investor ideology claim that half of Americans own stocks, so they benefits them. What's your take

WL: in the long run, you have to invest in innovation" There's been this rise of impatient capital. In general we've become an economy where people are trying to extract value rather than create value. One of the results of this is a highly volatile stock market. 

They are not "private enterprise."

The mega-millions in remuneration paid to top corporate executives are not determined by the "market forces" of supply and demand.

What will it take to build a movement that can make the business corporation work for the 99%?

 First, cut through these myths. Then change the laws so you can't money out of the economy if you're not putting value into the economy. 

The third myth is that corporations are NOT private enterprise. Corporations go public. When these companies are public, they are no longer being run by people who can say that "this is my company" and we should regulate them much more stringently. We have to regulate these companies to work as public companies. it's not shareholder value, not executive pay. We have to change that by changing the laws-- how corporations operate. 

if we look across countries, we see corporations that are more regulated to create more good jobs. it's not by maximizing shareholder value, not by executive high pay. 

We need a movement that will elect legislators

It's not corporations that are controlling congress. 99% of the people in corporations have no control. It's the top executives who are controlling congress. 

Corporate board decide on top executive pay. 

Everybody knows it's a club. Corporations in this country have never been democratic, but at least before the 1980's were working under a set of norms that led them to work more in our benefit" and that started to change. 

Fama was the University of Chicago economist who said market

Person Michael Jensen-- harvard-- said disgorge the free cash flows--- take money out of companies, do buybacks, . 

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