Tuesday, January 31, 2012

Dividing the Spoils

In response to the last post, commenter 5371 asks, "An anti-managerial counterrevolution which the managers themselves ended up leading?" Fair question, here's my answer: 

I think there is a very convincing story in which the emergence of the modern corporation in the early decades of the 20th century, and then the vast expansion of the federal administrative apparatus in the New Deal and (especially) World War II, created a class of professional managers with substantial autonomy from the notional owners of capital. (Not as cohesive as the enarques in France, but the same kind of stratum.) As managers of firms they pursued a variety of objectives, of which providing a satisfactory (not maximal) flow of payments to shareholders was just one among others.

At some point (in the late 1970s, let's say) this arrangement broke down, with conflicts both between managers and owners over the fraction of surplus flowing to the latter, and between owners and workers, over the size of the surplus, with mangers basically on the side of owners. The second of these conflicts was, in some sense, more fundamental, but the first one was also real and important.

You then had a series of institutional changes that were intended to realign the interests of managers with owners, in terms of both conflicts. During the period of realignment, these changes took the form -- at least at times -- of open conflict, with recalcitrant managers forcibly removed by LBOs, etc. But over time, top management was effectively absorbed into the capitalist class proper, and stopped seeing themselves as the social embodiment of the firm as a social organism or representatives of society as a whole. At the same time, there does have to be continuous policing to ensure that management doesn't deviate from the goal of maximizing payments to shareholders. That is finance's other function, along with intermediation, and it's this second function that has been responsible for finance's growth over the past decades. (Along with the rents that financial institutions and asset-owners claim in the course of doing their enforcement work.)

So in terms of overt conflict between owners and managers, the shareholder revolution is over; the shareholders won. The fly in the ointment is that no one is policing the police, and unlike other institutional supports of the capitalist system (the actual police, say, or the legal profession or academia) they don't have the right internal norms to make them reliable servants.

That's how it looks to me, anyway. I realize this is just a set of assertions, which would need to be backed up with evidence/examples to convince anyone who's not already convinced. As usual, I recommend Doug H.'s Wall Street (especially chapter 6, which I'm having my students read this semester) and Dumenil & Levy's Crisis of Neoliberalism to see the argument developed properly. One of these days maybe I'll write something substantive on it myself.

I should add, an interesting aspect of the counterrevolution of the rentiers is the way that the claim of shareholders on the maximum possible payments from "their" firms has become an accepted moral principle. There are lots of educated people, even liberals, who unquestioningly believe that it is morally wrong for managers to have any objectives except maximizing future dividend payments. E.g. look at this old Baseline Scenario post on Goldman Sachs' relatively low 2009 bonuses, with the unironic title Good for Goldman:
Goldman did the right thing here.We all know that Goldman made a lot of money last year. ... Many people think that it made that money because of government support, but that’s beside the point here; right now, this is purely a question of dividing the spoils between employees and shareholders.

Historically, investment banks have given a large proportion of the profits (here, meaning before compensation and taxes) to the employees. For example, in 2007 Goldman gave $20.2 billion out of $37.8 billion to its employees, or 53%. There are undoubtedly many reasons for this. ... More insidiously, investment banking executives tend to see their employees as younger versions of themselves, which creates a sense of solidarity... Contrast this to, say, Wal-Mart, where top management has very little in common (socially, educationally, economically, politically, etc.) with the vast majority of their employees. As a result, investment bankers are overpaid. ...
Goldman should reduce its per-employee compensation expenses even further, and should try to push the industry to a new equilibrium where the payout ratio is in the 30-40% range and average compensation for investment bankers is in the $300-400,000 range. And Goldman’s shareholders should apply pressure to make this happen; basically, they should try to squeeze labor.
I find this sort of thing fascinating. James Kwak is a liberal, one of the good guys. But it's awfully hard not to read him here as saying it's a good thing that Wal-Mart execs have nothing in common with the proles to distract them from serving their true masters, and that where a sense of solidarity does exist between managers and workers, it's an "insidious" problem that needs to be stamped out. There's nothing ironic in those "should"s.

Of course I'm no fan of traders, financial engineers, and the rest of the pirates, but as Kwak himself says, this is "purely a question of dividing the spoils." So I don't see why the silent partners who finance the privateers have any better claim than the guys with flintlocks and cutlasses, or why we should treat it as something to celebrate when the financiers get a bigger share of the take. [1] What's strange is how many people, many not especially rich or conservative, have been somehow convinced that the biggest problem with businesses is that they aren't run purely enough for profit, and that employees still have too much control over their work and pay. That in any conflict between owners and workers or managers, the social interest is obviously -- obviously -- on the side of the owners. It's nuts.

[1] Ok, yes, about 15 percent of corporate equity is owned by pension funds. So yes, salaried workers (including me and probably you) do in some sense confront employees, at both Goldman and Wal-Mart, as owners. We can't just say "the capitalist is the personification of capital" and be done with it, as Marx did; capitalist as economic function and capitalists as sociological category don't coincide as nicely as they did in his day. But why should we let our little interest as junior capitalists dominate our much larger interests as workers, citizens, and human beings? Why should we assume that the claims on business exercised by virtue of capital ownership, are the only ones that are morally legitimate?


  1. I was intrigued by the idea, rather than suspicious (which I may not have succeeded in conveying), and I like how you develop it. The implicit claim of Kwak et al. that social interest always coincides with maximum productivity in terms of the monetary unit is true, no doubt, but only tautologically, in terms of their own definition.

    1. Somewhere in the story, I would like to suggest that Management Information Systems (MIS) have used network computers to replace a vast body of middle managers that existed in large corporations in the 1960s. (I don't necessarily want to be technologically determinist here. Developments in Information Systems were introduced in an existing system.) And perhaps that streamlining of middle managers resulted in a loss of a source of aggregate demand. Maybe it also resulted in tighter identification by the surviving managers with the owners. I think of this story as speculative, too.

  2. I personally believe that the idea that managers should care about workers is really ambiguous, and I don't like it.

    I think that we can use the term "should", in relation to economics, in two very different meanings:
    1) One can refer to the social usefulness of something, for example banks "should" provide financing to new business;
    2) We can refer to norms and laws, as in people "should" pay taxes, workes "should" adhere to the contracts they signed to.
    The general idea of the "invisible hand" is that individuals who act for their selfish interest, as long as they don't break a set of legal constraints, "should" (first meaning) produce outcomes useful to society.
    Thus shareolders "can" invest in banks or whatever for their own selfish interest, workers (including managers) "should" (second sense) adhere to their contracts (which, in the case of managers, means squeezing the surplus for the benefit of shareolders).
    Obviously worker "can" negotiate better contracts, if they have enough bargaining power.
    This whole process "should" (first sense) produce benefits to society, and if it doesn't (for example because workers don't have enough bargaining power), the set of legal constraints "should" (second meaning) be improved by lawmakers, for example by including minimum wage clauses or by empowering unions.

    One cannot say that managers "should" (second sense) care of worker's wage, unless this is effectively written in their contracts or into law.
    One could say that managers "should" (first sense) care of worker's wages only if applying a "moralist", non "invisible hand", approach to economics, in which various actors don't seek selfish gains but "should" act out of their good hearth - this is "rerum novarum" economics, where owners care for peasants and peasants care for owners, and I tend to see it as a usually "rightish" approach to "political economy".

  3. RL-

    Very thoughtful comments.

    So on the one hand, we can say that under capitalism there is an irreconcilable conflict between owners of capital, and workers. Most directly, the output of the firm is divided between profits and wages, and since there is such thing as calculable marginal factor products, this division is inherently a bargaining process, an arbitrary (from the point of view of the production process) division of the social product. More broadly, workers actually live in the firm, we spend our best hours there, form strong social ties, gain a sense of stability and social worth from our work, develop our skills and capacities, etc., whereas for the capitalist it's a source of profit and nothing more. So workers are always trying to strengthen the social embedding of the firm, while capitalists are always trying to tear it down, to keep the firm flexible and purely instrumental. (You could say that the need to dis-embed production is what most pop management books are about.) So there's a deeper struggle between the worker trying to remain a human being and the capitalist trying to make them into a thing, a tool. To me, this is the heart of the case against capitalism. (Yes, I'm an early-Marx guy.)

    Now, in the context of this fundamental conflict one could say -- and I guess you are saying -- that any concessions to workers on moral grounds are just a kind of paternalism at best, it's a way of reconciling people to an organization of production in which they still lack any power or autonomy. The only genuine improvements in the position of workers are ones that they win themselves, either directly in the workplace or indirectly via the state. To say that managers *should* care about something other than profit maximization is to say that workers *shouldn't* have to worry about improving our own lot through collective action, but should hope our benevolent masters will do the right thing for us.

    Is that more or less where you're coming from? If so, I think it's true in a lot of very important ways. And in other settings I've made -- and I'm sure will continue to make -- similar arguments. But right now I'm going to push back against it a little.

  4. (continued)

    First, if managers' objectives have changed over time, that's an interesting historical fact, whatever its normative or political significance or lack thereof. It's something we can analyze as social scientists. (It's true that this particular post does have some "should" in the second sense in it. But it's not about what managers should do, but it's more in a negative sense, that we -- the non-owning, non-managing majority -- should not automatically take the side of owners when they are in conflict with managers.)

    Second, the inherent conflict in capitalism, as I see it, is between workers and owners. managers are a somewhat ambiguous group and at least potentially a terrain of struggle. If you read historical accounts of labor movements, you'll see that a leading role has almost always been taken by relatively privileged groups of workers, those with craft skills or particularly strategic positions in the production process, etc. If you go back to the 19th century, you'll find a lot of the leadership in organizations like The Knights of Labor actually came from self-employed artisans rather than wage workers in the strict sense. This is true in Britain too. (I believe you're Italian? I don't know the history there, maybe it's different.) So I don't see anything wrong in principle with the idea that, at least potentially, some managers could identify themselves with the nonsupervisory workers in the same firm or industry, rather than with owners. There was a similar issue with the professional technical workers in Russia immediately before and after the October Revolution, I believe, and Veblen talked about a "Soviet of Engineers". So I think it's worth at least considering the idea that the political valence of the top stratum of employees could be somewhat contingent, and that managers could treat workers as something other that sites of surplus extraction out of solidarity and not just paternalism.

    Third, even if the idea of a moral order in the firm is a delusion under capitalism, I think it's still important to talk about what it would look like. It's important for us to have an idea of how production could be organized "for use rather than profit." The world is full of people who identify with their jobs and really want to do them well, and I think we need to build on that and show how capitalism forces them to violate their "professional conscience." I mean, it's obviously mostly (or entirely) PR that Steve Jobs cared more about making great stuff than making money, but it's a very valuable myth because it affirms that those are two different and potentially conflicting goals.

    Finally, I don't quite agree with you that the idea of a moral economy is distinct to the right. It seems to me that the left has always had two strands, one a liberal left that joined anti-capitalist politics with support for the genuine liberation from older hierarchies that has accompanied capitalism -- feminism, the extension of liberal democracy, and so on. The other a kind of Polanyi left that joins broad anti-capitalist politics with the defense of particular communities or moral orders threatened by capitalism. I think we have to be able to think both.

  5. When one considers professions beyond that of butcher, it is obvious that people do services to each other neither because they are homines economici, nor out of mutual benevolence. They do it because they are constrained by the institutions they participate in. No institution, meanwhile, can be sustained by force alone for long. So human society is not the functioning of an economic mechanism, or the expression of moral sentiments.

  6. @JW

    I agree with you in general, and in some sense my problem is just a problem of "words", however words are important and I spent more than an hour to think through this answer, so I'll write it down (in two comments since it is very long).

    First of all, let me explain why, in my opinion, Kwak thinks that managers should side with shareholders and not with workers with a somehow stupidized "history of economic thought".
    Suppose that, in the country of A, there are just two professions, throusermakers and shirtmakers. However there are lots of throusermakers and few shirtmakers, so that there are lots of throusers, that sell for very cheap, and few shirts, that sell for high prices.
    As a consequence, throusermakers are much poorer than shirtmakers. Some throusermakers then realize that they can make more money by producing shirts, and change job. This goes on until the "marginal shirtmaker" makes the same money than the "marginal throusermaker".
    At first in the country of A there was an excess of throusers and too few shirts, but in the end there is the "correct" mix between shirts and throusers, so that the market produced an optimal result in terms of "utility".
    A consequence of this theory is that at the optimal equilibrium throusermakers make the same money than shirtmakers - in other words, this is a "labor theory of value", since the price of shirts and throusers is proportional, in the equilibrium state, to the labor time that shirtmakers and throusermakers have to put in (otherwise they would not make the same money).
    This is IMHO the LTV of Ricardo, and represents the state of economics in the 19th century (although not all economists connected the dots).
    A consequence of this theory is that, if in the real world some people make much more money than others, either the market is not working or you have to postulate unreasonable differences in "natural talent" between various people.
    Then came Marx and connected the dots and said that, if capitalist make much more money than workers, profits have to be a rent on anticipated capital (and as such a form of "inefficiency" of the market).
    Then came Lenin and actually staged a rather bloody proletarian revolution, asserting that "capitalists" were useless. [continues...]

  7. [...continues]

    As a consequence, economists in the non-soviet world changed the theory and said that the equilibrium is reached not when all workers make the same, but when capitalists make the same profits, so that you can't run a planned economy but need price signals, not on product prices in general, but on profits on products.
    Btw, Marx also believed that in a capitalist economy profits tend to be equalized, but this sounds less commie than the term "labor theory of value", although the LTV also was originally a "pro free market" theory.
    However, as far as I can understand, today the "utility maximizing" equilibrium is supposed to be that in which profits are more or less the same among the various fields of production, regardless of wages.
    As a consequence, if managers in a certain field lower profits (by keeping higer wages), they interfere with the market and disrupt the "optimal equilibrium", which is obviously a bad thing (the idea that financial markets are supergood at directing capital is a consequence of this theory).
    So as long as we live in a "capitalist" market economy, the idea that firms have to maximize profits is not "a problem", is actually the way "optimal equilibrium" of products is reached.
    The problem in this theory IMHO is that "wages" are left out of the theory, or either workers are supposed to be able to negotiate "correct" wages, while in reality workers are structurally at disadvantage and thus, without some sort of politic interference in the economy, tend to slowly lose ground indefinitely.

    The "word" problem I had with your OP was that, by using the ambiguous word "should", you put the question of management alignment as a sort of moral problem or personal choice, while in my opinion, as long as we think that "profits" are the signal that the market uses to reach equilibrium, it is necessarious that management tries to maximize profits.

    It is a "word" problem because, in reality, I also believe that in an ideal world workers should have more weight against capital, but I don't think that this should be seen as a moral choice of management.