The Occupy Wall Street (OWS) movement has seemed to tap into a deep-rooted sense discontent in the American populace over how capitalism has gone wrong. Criticism has not come just from the Left, but also from the right, as recently discussed on the excellent new MSNBC show Up with Chris Hayes:
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The discussion begins with a quote from Newt Gingrich asking “Is capitalism really about the ability of a handful of rich people to manipulate the lives of thousands of other people and walk off with the money, or is that somehow a little bit of a flawed system?” To which Chris Hayes cheerfully responds, “Well, yes, Newt it is.” The discussion that follows is typical of the many thoughtful exchanges that make this show such an absolute “must watch.”
Early in the discussion, Prof. Anne-Marie Slaughter of Princeton University, asks “What’s the opposite of ‘predatory capitalism’?” and chuckles about whether that means a kind of “kinder, gentler capitalism.” Alexis McGill Johnson of the American Values Institute frames the issue as a sort of nostalgia for something lost, and David Roberts of Grist opines that “democratic nostalgia is for a set of laws and regulations that used to restrain capitalism; the republican nostalgia seems to be for nicer corporate titans, to an era of public-spirited rich people.” Vincent Warren of the Center for Constitutional Rights, questions whether the system has adequate benefit for workers, noting that the only thing workers get out of capitalism is jobs, but they don’t get economic benefits or any control of the direction companies take.
It all begs the question: What changed?
My immediate thought on that question came from having listened to the book The Betrayal of American Prosperity by Clyde Prestowitz. In the book, Prestowitz offers the following account that struck me as simply extraordinary:
Excerpt from pages 198-199 of
The Betrayal of American Prosperity by Clyde Prestowitz
THE HARVARD BUSINESS SCHOOL CREED
At the founding of Harvard Business School in 1908, Dean Edwin Gay said the purpose of the school was to teach business leaders how to “make a decent profit by doing decent business.” That was McCabe’s creed and what thousands of future business leaders learned at Harvard for many years. But in 1970, the University of Chicago’s Milton Friedman sounded a different note. Said he, “Few trends could so much undermine our free society as the acceptance by corporate executives of social responsibility other than to make as much money for shareholders as possible.” This tune was quickly picked up and elaborated by Harvard’s professors and especially by Michael Jensen, who became the dominant American voice on corporate architecture and the proper role of a board of directors and a CEO.
In a hugely influential 1976 paper and subsequently, Jensen propagated Friedman’s doctrine of shareholder sovereignty and of increased returns to shareholders as the sole purpose of the CEO. His argument was grounded in the view that the shareholder is the corporation’s final risk bearer and therefore also its final claimant. He added the notion that, as agents of shareholders, the corporation’s managers do not necessarily share the interests of the shareholders. Indeed, the managers and the shareholders may be at war because the way for the CEO to maximize his/her private gain may be at odds with maximizing shareholder gains. For instance, a CEO may like corporate jets or want to be part of the society scene, but the costs of such indulgence may be a burden to shareholders. Thus, the central problem is how to align the interests of managers and shareholders and to establish a monitoring mechanism that easily indicates whether the managers are acting properly on behalf of shareholders.
Jensen’s solution was to grant gobs of stock options to CEOs to evaluate their job performance by focusing on the progression of quarterly earnings. This is a single, readily available, objective number upon which a CEO can concentrate all her attention and which the shareholder can readily use to determine whether a CEO is working for him. Jensen emphatically rejected stakeholder theories on the grounds that giving a CEO multiple objectives would be confusing, distracting, and make it impossible in the end to measure performance.
In effect, Prestowitz is noting that this is a recurrence of the old joke
“If you dropped your keys over there,
why are you looking here?”“Because the light is better here.”
If I’m hearing him right, Prestowitz is making the bold claim that the reason we stopped caring about people other than shareholders was it was just too messy to do the accounting of worrying about other stakeholders, such as employees, customers, and community. It was administratively simpler and cleaner to only worry about stockholders, and so one day business just quietly decided to do that instead.
Or that was the stated rationale, anyway. Let’s not overlook the outside chance that those pushing for this change fancied themselves the potential later recipients of “gobs of stock options” as CEO of some company operating under the newly proposed rules. No point in mentioning that rationale out loud during the debate when they could stick to the altruistic-sounding story of how this focus on clarity of measurement would just be good for business. “Let's give them gobs of stock” sounds so much more business-like and less self-indulgent than “Let's give ourselves gobs of stock.”
Imagine if we took that “clarity” approach toward our justice system, saying it was too hard to measure justice so why not just measure, let’s say, cost? That wouldn’t fix old-fashioned Justice but it would create a form of NeoJustice that was so much easier to measure, allowing us to be sure we were being successful at it. But to what end?
Really that’s what happened, too. Not with criminal justice but with economic justice. We just let it go, without even knowing it. Without any real notice to or approval by the large community of American citizens affected by the change, American Business just quite literally stopped caring. It’s pretty obvious, at least to me, that this timeline Prestowitz mentions dovetails precisely with the downfall of American society so evident all around us.
A war was fought in a “quiet room” somewhere, without anyone firing a shot, and we’re now living in the aftermath of our unwitting capitulation. No wonder we’re confused about how we got here.
Possible Follow-up Actions
Putting things to right could begin by undoing the Supreme Court ruling in Citizens United, and eliminating from the law any notion of corporate personhood. Senator Bernie Sanders is pushing for a Constitutional amendment doing so. You can sign his petition supporting this amendment.
Another concrete action is to learn about stakeholder theory and start to ask questions about why it’s there and whether we could change it. It was changed before, and it seems to me it could change again. I don’t know the process by which that would happen. But I think it needs to.
Further Reading
The Betrayal of American Prosperity by Clyde Prestowitz covers additional issues, particularly those of US trade policy, in addition to the matters I’ve discussed here. In some ways, this was just a peripheral aspect of his main point. But it’s an excellent book either way and I very much recommend it. I listened to it as an audiobook from audible.com.
A basic overview of some of these issues can be obtained from Wikipedia articles titled “Stakeholder (corporate)” and “stakeholder theory.”
I also highly recommend Naomi Klein’s excellent book The Shock Doctrine: The Rise of Disaster Capitalism, in which Milton Friedman and the Chicago School (a.k.a. the “Chicago Boys”) play a critical role. I listened to it as an audiobook from audible.com.
And, finally, my other articles Fiduciary Duty vs. The Three Laws of Robotics and Sociopaths by Proxy may also shed some additional light in why this all matters.
Author's Note: Originally published January 22, 2012 at Open Salon, where I wrote under my own name, Kent Pitman.
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