In the decades after World War Two, Berle’s vision reigned supreme. Lemann describes how General Motors’ 1950 contract with labor unions, dubbed the “Treaty of Detroit,” granted line workers company pensions and retirement healthcare. It ushered in a golden age of stability and security for blue-collar workers. While labor costs were high, some other economic costs were astonishingly low. In 1970, Morgan Stanley , then responsible for a third of the nation’s capital markets issuance, employed just 230 people.
The paradigm began to shift in 1976 when Michael Jensen and William Meckling published “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” This paper, and Jensen’s “CEO Incentives: It’s Not How Much You Pay, But How,” published in 1990, reversed the intellectual foundations laid by Berle. The new thinking postulated that companies should be run solely for the benefit of shareholders, that managers should be given stakes to align their interests with those of owners, and that an active market for corporate control would weed out ineffective management.
The result, Lemann argues, has been much higher stock prices and rewards for top executives, but also greater corporate instability, less job security, lower wages and fewer benefits for ordinary people. He offers good examples of neighborhoods where comfortably prosperous high school graduates have been replaced by casual employment and urban blight. Other costs have soared, notably the proportion of national income absorbed by finance.
This era has also ushered in a period Lemann calls “Network Man,” when communication networks allowed a handful of companies to establish monopolies in their sectors. While these giants employ many highly skilled engineers on lucrative terms, they have also fostered a “gig economy” of casual employment which has further increased economic instability for ordinary workers.
What’s the solution to these problems? Lemann suggests greater pluralism, by which he means enabling ordinary people to join forces and reverse political decisions that affect them. He has great faith in interest groups that can exert political pressure.
However, he also accepts that the prosperity and comfort of the Berle-model economy owed much to the uniquely favorable global competitive conditions for U.S. companies in the post-war era. He is presumably also not advocating a return to the predominantly male workforce of that period.
Yet there are two additional factors that have worsened conditions for ordinary Americans. Decades of low interest rates have enriched the wealthy by raising asset prices, rewarding leverage and financial risk, and increasing inequality. Second, the collapse in global communication and logistics costs, assisted by economic policies that aggressively removed barriers to competition from low-wage economies, have undermined stable high-wage jobs in traditional manufacturing.
Tilting economic policy towards smaller companies, by reining in or breaking up entrenched monopolies, would increase the range of opportunities available to ordinary people. Raising interest rates and eliminating the federal budget deficit could also help by lowering asset prices and shrinking finance. Above all, reducing unproductive economic overhead would increase American competitiveness and thereby raise wage rates. Even then, however, the 1950s are never coming back in their full glory.
Lemann’s book is a useful reminder of the benefits that ordinary people have lost. Its greatest value, though, is in prompting us to question the inevitability and desirability of the shifts of recent decades, and to think of ways to mitigate those changes that made things worse.
- “Transaction Man: The Rise of the Deal and the Decline of the American Dream” by Nicholas Lemann was published by Farrar, Straus and Giroux on Sept. 10.
- Martin Hutchinson is a former investment banker, journalist and Breakingviews columnist who writes a weekly column on economics and finance, “The Bear’s Lair,” and contributes to various publications. Martin is the author of “Great Conservatives” (Academica Press, 2004) and, with Kevin Dowd, of “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System” (Wiley, 2010).
(Editing by Peter Thal Larsen and Oliver Taslic)
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