Later On

A blog written for those whose interests more or less match mine.

Who broke capitalism?

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Judd Legum’s interview of David Gelles is a strong reminder that most people will be swayed by incentives even when the incentivized behavior is destructive, immoral, or illegal — and most people find it difficult to act now toward long-term objectives — cf. climate change, and as I note in my post on Coveys method:

Perhaps as a result of evolutionary pressures, we are highly sensitized to urgent situations (whether important, like that bear coming toward us, or unimportant, like an itch we can’t quite reach), whereas situations that lack urgency are easily postponed and ignored from one day to the next even when they are important (for example, making a will [or climate change – LG]).

Legum writes:

I recently finished reading “The Man Who Broke Capitalism,” a new book by New York Times business reporter David Gelles. The book describes how Jack Welch, while he was CEO of GE in the 80s and 90s, fundamentally changed the way corporations operate. I reached out to Gelles because his book provides essential insights into corporate behavior today. This conversation has been edited for length and clarity. I hope you enjoy it. — Judd


.
LEGUM:
 You lay out in the book that Jack Welch introduced a new style of management, which involved financialization (getting out of the business of making stuff and into the business of moving money around), making jobs much more precarious (either by firing people, or making people worried that they might be fired), and a relentless focus on quarterly profits. But you describe how, especially after Welch left, this didn’t work out for GE over the long term. And it didn’t work out for some other companies that followed Welch’s model. But today, Welch’s management style continues to be influential. Why do you think, despite the objective failures of this over the long term, Welch’s approach to corporate management endures?

GELLES: I think the reason his views hold sway, when, as you say, the evidence over the long term is clear, is that business school students aren’t taught to think about the long term, and our economy isn’t set up to incentivize long-term performance. And so what he was able to do at GE undoubtedly worked, as long as he was getting away with it. And then when the music stopped, things started to fall apart. During that time, he got enormously rich, and his deputies got enormously rich. People who were smart enough to invest in the stock and get out at the right time got enormously rich. And there are very few consequences in corporate America for long-term failure. The incentive structures in our economy are simply not set up to really enhance true long-term performance, let alone take care of people or communities.

LEGUM: One of your colleagues, Andrew Ross Sorkin, recently interviewed the CEO of Starbucks, Howard Schultz. Sorkin asked Schultz about Starbucks’ own anti-union efforts. And in response, Schultz said that unions were important in the 40s, 50s, and 60s because people were working in coal mines and companies were abusing their workers. But today companies treat their workers well. That is the exact was the exact opposite thesis of your book. You refer to the 40s, 50s, and 60s as the “golden age” of capitalism where companies had a more equitable relationship with workers.

GELLES: Listen, Howard Schultz talking about coal miners is a classic red herring. The reason that Starbucks baristas are unionizing is because even though Starbucks may pay above the minimum wage, the reality is that most frontline workers in the United States don’t make enough money to take care of their families. And the reason that is, is because the minimum wage hasn’t kept pace with inflation for the past 40-plus years.

It was definitely true that at big corporations, the Dow and the Fortune 100 in the postwar decades, there was a clear effort to let everyday workers share in the wealth that was created by these companies. I cite the 1953 GE annual report where they’re so proud to talk about how this was their biggest payroll in history, and how great that was, and how great it was that they were paying their suppliers so much money, and how great it was even that they were paying their taxes. They were proud to do all these things because there was this implicit understanding that what was good for big companies, could be good for the country, and vice versa. That, obviously, painfully, isn’t the world we live in today.

The book covers this transition from, call it the golden age of capitalism, which, of course, was not perfect, to this era of shareholder privacy, where workers are really treated as expendable labor. They’re treated as expendable. When Howard Schultz scratches his head and wonders why people want to unionize at Starbucks shops, I encourage him to really do the work of understanding what a Starbucks barista’s life is like, and that’s probably hard for a billionaire to do. But if he were to do so, I suspect he might come away from that exercise having a bit more empathy for what it’s actually like to make less than $20 an hour in this country without the promises of real and enduring job security and steady benefits. It’s not a pretty picture.

LEGUM: Your book describes GE’s dominance in the 80s and 90s. Today, many of the most powerful companies are tech companies, like Google, Amazon, and Microsoft. One of the things these companies are famous for is creating these sort of lavish campuses to attract talent. And they are paying their top talent quite a bit of money. Do you still see Welch’s influence in modern tech companies?

GELLES: The answer is . . .

Continue reading.

Written by Leisureguy

12 July 2022 at 4:24 pm

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